Plane Wreck: The Airline Industry in 2001 - 2004

Between 2001 and 2003, players in the global airline industry lost some $30 billion, more money than the industry had made since its inception. The losses were particularly severe among the big six airlines in the United States (American Airlines, united, Delta, continental, US Airways, and Northwest). In 2002 these major airlines lost $7.4 billion and another $5.3 billion in 2003. Both US Airways and United were forced to see Chapter 11 bankruptcy protections. Although forecasts suggest the six major airlines will break even in 2004, a return to the boom years of 1995-2000, when the airlines posted record profits, seems unlikely anytime soon.

The dramatic slump in airline profits began in early 2001 when business travel started to fall off in the wake of the rapidly deflating technology and dot-com bubble of the 1990s. Then, in the aftermath of the terrorist attacks of September 11, demand dropped through the floor. The airlines began cutting prices to try to maintain their passenger loads in the face of declining demand. However, the tactic didn't work. When one airline serving a particular route cut its prices, its competitors, desperate to cover their fixed costs, quickly followed. The result was a downward price spiral. In the fourth quarter of 2001, prices fell by 15 percent as airlines tried to induce people to fly. Despite this effort, passenger traffic fell by 19 percent, and revenue at major airlines fell by over 30 percent.

Even though demand and profits plummeted at the big six airlines, some carriers continued to make profits during 2001-2003, most notably the budget airline Southwest. In addition, other newer budget airlines, including AirTran and JetBlue (which was started in 2000), gained market share during this period. Indeed, between 2000 and 2003 the budget airlines in the United States