Airline industry economics

Before a single KPI, understand the disease. Warren Buffett has made the point in two famous forms. First, he pointed out that the airline industry, from the Wright brothers to the late 1990s, had made zero cumulative money for its owners despite enormous revenues. Second, in his 2007 letter, he quipped that a far-sighted capitalist at Kitty Hawk would have done aviation investors a favour by shooting Orville down. He called airlines a "durable competitive disadvantage."

Why is the airline industry structurally unprofitable?

Why is the disadvantage durable? Run Porter's five forces and watch every one of them point the wrong way:

1. The product is a commodity. To the buyer, a seat from Delhi to Mumbai at 8am is identical whoever's logo is on the tail. When products are identical, buyers choose on price, and price competition is a race to marginal cost. There's essentially no brand pricing power. Frequent-flyer schemes and lounges soften this only slightly.
2. Inventory is perishable, even more so than a hotel room. A seat that's unsold when the door closes is worth zero, forever. That one fact creates a permanent temptation to discount the last seats to anything above marginal cost, and once the plane is flying that's almost nothing. Perishability + commodity = chronic price wars.
3. Costs are high and largely fixed, so operating leverage is savage. The plane, the crew, the gate, the fuel to fly the route cost nearly the same whether it's 60% or 95% full. So a few points of load factor or yield swing the whole P&L from profit to loss. Operating leverage is a wonderful thing on the way up and a bankruptcy engine on the way down.
4. Suppliers are powerful, on every side. The aircraft come from a Boeing/Airbus duopoly. Fuel comes from the oil market, uncontrollable and volatile. Airports and slots are monopoly infrastructure that extracts landing and parking charges. Labour means pilots and engineers. They're often unionised and hard to replace. And then there are the lessors, the financiers who own much of the fleet. The airline is sandwiched, with weak power against all of them.
5. Entry is easy, exit is hard. You can start an airline by leasing planes, so it takes little capital to get in. Failed airlines rarely remove capacity cleanly, though. They enter bankruptcy protection, restructure, and keep flying, especially in the US under Chapter 11. Or their planes and slots are simply re-leased to the next optimist. Capacity that should exit doesn't, so overcapacity and low fares persist.

Then add fuel and FX. For an Indian carrier, jet fuel (ATF) is 30 to 45% of operating cost. It's priced in dollars off a volatile global crude benchmark and heavily taxed at home. Meanwhile a large slice of costs (leases, maintenance, fuel) is in dollars, while revenue comes in rupees. So the carrier is short oil and short the dollar, and both exposures are largely unhedgeable in size. Across the global industry and across cycles, the result is an average ROIC below WACC. That's the textbook definition of a value-destroying industry.

Why do airlines keep failing, and who survives?

The graveyard isn't a metaphor. India alone has buried Kingfisher (grounded 2012) and Jet Airways, India's largest full-service carrier until it collapsed in 2019. Go First went into insolvency in 2023. Before them came Air Deccan, Sahara, Paramount, Kingfisher-swallowed Deccan. The US has run dozens of carriers through Chapter 11. Pan Am and TWA are gone entirely. American, United, Delta, US Airways have all been bankrupt at least once. That's the base rate, the outside view you'll meet properly in Phase 6: the prior probability that any given airline is a good long-term business is low. Your job is to remember that when a shiny one appears.

So why study it, and why does IndiGo exist? Because even in a structurally bad industry, a tightly run operator with the lowest cost can still earn its cost of capital, and occasionally more. The one moat the sector permits is a cost advantage, reinforced by efficient scale on dominant routes. That's the survivor thesis. The airline KPIs are there to tell the rare survivor from the many casualties, and to do it fast.