Figures are illustrative. Pull A4A industry data, DOT/BTS T-100 and Form 41, the IATA/McKinsey value-chain studies (free at iata.org), and the 10-Ks of Delta, United, American, Southwest.
Define it first. This is US scheduled passenger airlines, domestic system. Notice straight away that the relevant market depends on the question. For pricing it's the city-pair route, and for costs and fleets it's the national industry. Run structure at both levels (see industry definition).
Why are airlines so unprofitable?
Here's what the structure delivered. From deregulation in 1978 through 2009, the industry's cumulative net result was approximately zero, slightly negative in real terms, with ~$55 to 60bn of net losses in 2001 to 09 alone (A4A data; check the series). There have been roughly 200 bankruptcy filings since 1978, and at some point they included nearly every legacy carrier: United (2002), Delta and Northwest (2005), American (2011), US Airways twice. Porter's 1992 to 2006 exhibit put airlines dead last among US industries at ~6% ROIC. Buffett's Kitty Hawk line in the 2007 letter reads like the industry's epitaph-in-waiting. Now explain it:
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- Rivalry: 5/5. The incendiary trio is at full strength. Fixed costs dominate: aircraft ownership, crew, gates. (You saw in the unit-economics work that CASK barely moves when a seat goes empty.) The marginal cost of filling seat 174 is a can of soda and a few kilos of fuel, and the inventory perishes at door close. Seats are a commodity, because a middle seat is a middle seat, and they're sold through perfectly transparent comparison engines. So the fight for the marginal passenger is always on price, and fares get matched within hours. Exit barriers are perverse. Chapter 11 recycles capacity at a lower cost basis instead of retiring it. A bankrupt carrier keeps flying on restructured leases, and its rivals get punished for their restraint. Rivals are diverse, too: ULCCs, legacies, a state-subsidized carrier in most international markets. Tacit coordination keeps breaking.
- Entry threat: 4/5. Aircraft are financeable and leasable, so the capital is recoverable and doesn't act as a barrier. Pilots, slots and gates constrain entry but rarely block it. Brands are weak at the point of sale, because the OTA sorts by price. The entry ledger proves it: JetBlue, Virgin America, Spirit, Frontier, Allegiant, Breeze, Avelo, a new cohort every cycle, each arriving with lower costs than the incumbents it undercuts. High incumbent returns can't persist when the response to them is this fast.
- Substitutes: 3/5. Cars compete for short haul and rail in specific corridors. After 2020 came a discovery: video-conferencing goes after the high-yield business traffic that used to cross-subsidize the back of the plane. Corporate travel volumes recovered only partly after COVID (check the current DOT data). Meanwhile the substitute's price-performance (free, instant, good enough) improved a decade's worth in two years.
- Buyer power: 4/5. Individually, travelers are powerless. But comparison engines and corporate-travel programs re-aggregate them into perfectly informed buyers of a commodity, with near-zero switching costs. Loyalty programs are the industry's counter-attack, a way to raise switching costs synthetically. They're so much better a business than flying that they now hold much of the industry's profit, as you'll see below.
- Supplier power: 5/5. It's the full parade. Airframes come from the Boeing/Airbus duopoly, whose seven-year backlogs set the terms. Engines come from an oligopoly whose aftermarket contracts escalate through the life of the asset. Unionized labor has strike leverage that resets the cost base each upcycle (the 2023 pilot contracts gave ~35 to 40% cumulative raises; illustrative). Monopoly airports charge regulated but rising fees. And fuel, at 20 to 35% of opex, is priced by a global market over which no airline has any power at all. Every upstream seat at the table takes its cut before equity sees a dollar.
Scorecard: 5 + 4 + 3 + 4 + 5 = 21/25, cursed. On that scorecard the average member earns below WACC across the cycle, and observed ROICs agree. IATA/McKinsey put airline ROIC at ~4% against a WACC of ~7 to 8% across 2004 to 11. Rivalry and suppliers bind jointly. Even a merger to monopoly among airlines would still face Boeing, GE, the unions and the fuel market.
Who keeps the profit in the airline value chain?
And now the profit-pool punchline. The IATA/McKinsey value-chain studies computed ROIC link by link (2004 to 11 vintage; a 2024 update exists, both are free, so pull both). Airlines earned ~4%… while GDS/CRS platforms earned ~20%, travel agents ~30%+ on minimal invested capital, lessors ~9%, MRO and catering ~11%, airports ~6% against a regulated (lower) WACC, and manufacturers ~7%, with the engine aftermarket richer still. The chain as a whole creates enormous value, and flying people is a miracle. But the center of the chain, the bit that owns the aircraft and takes the demand risk, captures the least of it.
So an industry can be indispensable, growing and technologically dazzling, and still be a terrible place to deploy capital. Structure decides who keeps the money. Importance has nothing to do with it.
Has the airline industry's structure changed?
There are two complications. First, structure changed, for a while. The 2005 to 13 consolidation wave (Delta with Northwest, United with Continental, Southwest with AirTran, American with US Airways) took the big four to roughly three-quarters of domestic capacity. Capacity restraint held seat growth below demand growth. Ancillary unbundling added a price-discrimination lever. And 2015 to 19 delivered the industry's first sustained stretch of ROIC ≥ WACC, with net margins of ~5 to 9%. Rivalry's score really did improve. Then COVID showed how fragile that was, and the post-2021 ULCC capacity surge eroded domestic fares again. Score forces as they are, note the direction they're moving, and never extrapolate one good stretch into a new permanent state.
Second, the profit pool migrated inside the firms. Delta's co-brand remuneration from American Express reached ~$7bn+ in 2024 (management targets $10bn; check the 10-K). At plausible incremental margins the loyalty/card economics exceed the flying operating profit at more than one carrier, and worked example 2 does that arithmetic. During COVID, United's MileagePlus was appraised at ~$22bn while United's entire market capitalization was near $10bn. You'll hear the quip that airlines are loyalty programs with wings attached. It's a profit-pool statement. The attractive economics belong to an adjacent, structurally better business, a three-party payments/rewards network with fragmented "buyers" and real switching costs, that happens to be bolted to a cursed one.