Book Why Can't We Make Money in Aviation Research Paper

  • Length: 6 pages
  • Sources: 6
  • Subject: Transportation
  • Type: Research Paper
  • Paper: #30293011

Excerpt from Research Paper :

Aviation Book

According to Pilarski (2007), "the financial situation of the airline industry, especially in the U.S.A., has been between disaster and catastrophe," (p. 3). Financial wizards like Warren Buffet have made "bombastic pronouncements" related to the economic illnesses of the airline industry (9). Dynamic entrepreneur Richard Branson, himself seduced by the desire to own an airline, has likewise stated, "How do you become a millionaire? Start as a billionaire, and then buy an airline," (cited in "In-Depth Drilldown Of The Airline Industry - Part 1, 2012). Airline companies operate with razor-thin profit margins, if any at all. Moreover, the situation was bad enough befofre but has grown worse since September 11. "Since 9/11, we've seen tremendous changes surrounding the airline industry: security, regulations, and operational costs. Overall, these variables have had tremendous, and far-bearing, negative impacts on the industry," ("In-Depth Drilldown Of The Airline Industry - Part 1," 2012). In his book Why Can't We Make Money In Aviation? Pilarski (2007) claims that "the airline industry is notorious for losing money," but not for the reasons that are commonly beleived (Pilarski, 2007, p. 5).

For example, Pilarski (2007) claims that one of the greatest myths in aviation is that overcapacity is the real problem and that mergers are the best solution. Not so, according to the author, who has spent decades as a financial analyst for aviation companies. In fact, there are a host of interconnected problems that cause the economic sicknesses plaguing the global airline industry. These problems are felt in nearly every corner of the globe, but according to The Economist, "the prognosis for European carriers is grimmest of all," ("Struggling to Take Off," 2012). This is due in large part to the sovereign debt crisis haunting the European Union.

In Why Can't We Make Money in Aviation? Pilarski (2007) cites information regarding underperforming airline company stocks, which he differentiates from their profit structures. In fact, Pilarski points out the painful paradoxes inherent in the airline industry business models. The irony is that while statistics show clearly a "long history of losses for the airline industry," air passenger traffic continues to rise (13). Airlines are running at full capacity. Worldwide, airline traffic has increased especially in emerging markets. Pilarski's claims are substantiated by industry analysis that has occurred subsequent to the publication of Why Can't We Make Money in Aviation? For example, profitability is improving in key markets around the world; just not in Europe ("Global airline industry profits to falter at $3bn in 2012," 2012). For many carriers, particularly low-cost ones, a rosier picture is being presented. The operating profits of many airlines, for example, Southwest, remain decent if not robust.

Most analysts understand that in general, "the industry is characterized by intense competition, threat of substitution, threat of new entry, and strong buyer/supplier power which lead to dangerously low profit margins," ("In-Depth Drilldown Of The Airline Industry - Part 1," 2012). In Why Can't We Make Money in Aviation? Pilarski adds depth and nuance to this argument to present a more thorough version of the state of affairs than the mainstream media tends to report. Although tongue in cheek, Pilarski (2007) goes so far as to propose the possibility for "massive government help," based on the fact that it has seemed nationalization might be the only way to help the failing industry (p. 5). In general, however, Pilarski (2007) retains a firm neoliberal, capitalist point-of-view. The author's scathing critique of the European model of state-run aviation companies proves that Pilarski is seeking an American solution to the problem. Plus, the author is quick to criticize the "seven weeks of vacation travel" for being standard in Europe as if that is to blame for the airline industry's struggle (p. 88). Pilarski is also eager to lay thick criticism on Airbus for being "not a stellar business venture," (p. 14).

However, Pilarski (2007) is correct. If the airline industry "inherently cannot produce adequate returns to investors, it cannot continue to exist under our economic system," (5). This signals if not a crisis, a certain need for introspection to determine the future of aviation. Pilarski (2007) focuses the argument of Why Can't We Make Money In Aviation? not on stock valuation but on profit of company because stocks too susceptible to short-term fluctuation. This is an important point, as many analysts will confuse profitability with stock value; or else focus on the latter at the expense of the importance of the former.

The stakeholders in the aviation industry are varied, further complicating an already complex issue. Airline manufacturers, engine producers, maintenance providers, travel agencies, and financiers all have a stake in the success or failure of an individual aviation sector or the industry as a whole. In Why Can't We Make Money In Aviation?, furthermore, Pilarski points out how some of these stakeholders (namely aircraft manufacturers and financiers) actually take part in the causal factors determining profitability. In other words, financiers and manufacturers could be partly to blame for the low profit margins.

Pilarski (2007) is correct to point out that business strategies cannot themselves be the problem. When Boeing attempted horizontal and vertical diversification into areas such as maintenance provider, modification, finance, air traffic control, the organization eventually scaled it down when those ventures did "not generate anything close to decent returns," (Pilarski, 2007, p. 31). Thus, Pilarski (2007) correctly rules out stagnation and lack of innovation as reasons why we can't make money in aviation. Pilarski (2007) most emphatically rules out overcapacity as a reason. Writing several years after the publication of Why Can't We Make Money in Aviation? Pilarski (2010) states, "I do not believe we have excess capacity. I believe we have many other problems, one of the main ones being pricing."

Thus, Pilarski (2007) turns his attention to what he believes are the causes for the razor-thin profit margins. "Airline industry's profitability balancing on a knife's edge," as Upadhyay (2012) describes the very fragile situation. Having ruled out excessive capacity as the problem and placing that issue aside, Pilarski (2007) can turn attention on other core reasons that are accountable for aviation losses.

Some of these reasons are endogenous, and some are exogenous. As an exogenous reason, Pilarski (2007) focuses on the cyclicality of the aviation industry. The author points out that flight patterns fluctuate during the day but that there are only certain times of day airlines can operate their equipment due to various factors including consumer demand but also constraints on landing times at destination vis a vis time zone differences and local airport regulations. There are other cyclical issues such as weekend vs. weekday demand fluctuations, holiday peaks, and monthly flux. What's more, these same issues pertain to cargo flights. Cargo flights have the added financial burden of their being uni-directional. Thus, cargo flights are not reaping aa profit on their return. Furthermore, Pilarski (2007) notes that general economic or market fluctuations may cause differential demands for business and leisure travel.

Two other exogenous causes of the low profit margins in aviation include, ironically, ease of access to capital and underpriced airline equipment. As Pilarski (2007) points out, ease of access to capital leads to "lack of accountability" among management (p. 97). With investment capital too easy to obtain, management is "not subject to the discipline necessary in order to run an efficient operation," (Pilarski, 2007, p. 97). This leads to overcapacity. Pilarski (2007) is careful not to contradict himself by admitting that overcapacity might be a problem, though. This is because the author claims that it is not overcapacity per se that is the problem, but rather, incorrect pricing structures that mitigate the problem.

Moreover, the ease of access to capital causes airlines to make strategic decisions based on competition for market share instead of making decisions that maximize profitability. Airlines have made poor purchasing decisions, which are based on status or reputation instead of sound economic sense, something that the budget carriers are careful to avoid. This situation is fueled by the fact that "aviation is a sexy industry" that "draws people and capital together…in an irrational way, (Pilarski, 2007, p. 98). Pilarski (2007) devotes an entire chapter of Why Can't We Make Money in Aviation? To the sexy allure of the airline industry and how globally, the investments in airlines are done more for the ego of a few billionaires (like Branson) than for the calculated cause of making money. In spite of this, it has been shockingly easy to obtain financing for an airline. This is therefore one of the strongest arguments made in Why Can't We Make Monehy in Aviation? Pilarski (2007) points out the structural issues that are impacting the industry, and not just the internal decisions made by individual companies, such as buying too many aircraft.

Indeed, though, buying too many aircraft has been a problem. It is as if airlines make money only to buy more toys. Some believe that airline equipment is being sold and leased too cheaply because manufacturers are…

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