Why can't we make money in aviation: Critical analysis of Pilarski's position

¶ … Money in Aviation

In the book "Why We Can't Make Money in Aviation," Adam Pilarski addresses a perplexing, and costly, business problem: why are airline companies so consistently unprofitable? This question is important not only for investors and students of business management, but for American taxpayers as well. The airline industry is one of the most highly subsidized industries in the United States.

Pilarski surveys the various explanations offered for the poor financial performance of the airline industry to variety of factors. He splits these explanations into three categories: factors caused by the airline industry itself, factors caused by the airline companies, and factors that are caused by government. Pilarski critically evaluates each explanation and rejects most of them. The only explanations which Pilarski finds convincing are those which assign culpability to the airline companies themselves.

Thesis: Pilarski's critique of the explanations is very incisive. It reveals widespread misconceptions about the airline industry and of basic economics in general. Pilarski shows that many explanations sound plausible, even reasonable, on the surface but collapse under even the most cursory investigation.

Background

Pilarski attributes the poor performance of airlines to a number of different factors. Pilarski devotes a chapter to each individual factor. He splits these factors up into three categories: exogeneous factors (originating outside companies), endogeneous factors (originating within airline companies), and overregulation.

Exogeneous Factors

Pilarski reviews the explanations that claim that the problems are caused by certain industry realities. He terms these problems "the nature of the beast" factors, meaning the nature of the industry. Because they are out of the control of airline companies, he calls them exogeneous factors. These factors are: cyclicality, ease of access to capital, cost of aircraft, too much competition, and the naivete of market entrants in the airline industry.

Pilarski rejects the explanations based on cyclicality, cost of aircraft, and too much competition. Regarding the argument that there is too much competition, Pilarski notes that even if the number of competitors were reduced from 6 to 3, the remaining 3 companies would still use the same ineffective business practices, which would lead to the same poor financial performance.

Pilarski, however, accepts that ease of access to airplane financing may be eroding financial discipline among airline companies.

It also floods the airline industry with weak players who would normally be weeded out at the financing stage in most other industries. Also, Pilarski considers the possibility that the prestige and cache of the airline industry is attracting a lot of naive market entrants, or "dreamers and suckers" as he calls them.

Endogeneous Factors

Pilarski reviews the explanations that claim that the problems are caused by the airline companies themselves. He refers to these "self-inflicted" problems as endogeneous factors. These factors are: labor relations, bad management, and pricing. Pilarski is particularly focused on the pricing factor. He believes that most airline companies are simply charging too much for the product they are providing to their customers. He points to the low-cost carrier Southwest Airlines, one of the only carriers to achieve profitability, as an example of effective pricing. Indeed, the rise of boutique low-cost airlines that actually provide more amenities at a lower price proves that something is seriously wrong with the traditional carriers.

Overregulation

Finally, Pilarski reviews the explanations which blame airline underperformance on onerous government-imposed restrictions and obligations. Many observers, especially deregulation-fanatics, claim that airline companies are inhibited by excessive government regulation and public ownership of airlines. Pilarski rejects these explanations which attribute financial performance to government interference, stating that airline carriers outside of the U.S. subject to much more regulation have performed better than unregulated airlines.

Analysis

Overall, Pilarski seems to agree that it is difficult to be profitable in aviation. What Pilarski is saying is that, for this very reason, only serious, competent players should enter the aviation business. The airline industry is a high-risk, high-overhead business, a point which appears to be ignored by the financiers, lawyers, and business consultants who help the foolhardy set up airline companies.

From a methodological perspective, Pilarski does a good job of refuting dubious claims through sound economic reasoning and historical evidence. For example, he refuted the claim that there is excessive supply in the airline industry by citing statistics that show that airplanes are running fuller than ever.

Another area Pilarski excels in is separating the truthful elements of an argument from the untruthful elements of the argument. The most resilient arguments tend to contain some element of truth along with some element of deception. Pilarski is able to extract the valid parts of the argument from the more specious elements of the argument. He does not throw the baby out with the bathwater.

Product Differentiation

Pilarski makes a particularly good critique of the argument that excessive competition in the airline industry is causing poor financial performance. However, he seems to overlook a very important factor in the underperformance of airline companies. The numerous competitors in the industry are underperforming not because there are too many competitors, but because there are too many competitors offering the same product.