American Airlines goes bankrupt: Why the airline business is so bad

TORONTO, ON - NOVEMBER 29: An American Airline Plan sits on teh tarmac at Toronto Pearson Airport on November 29, 2011 in Toronto, Canada. American Airlines and its parent company AMR filed for Chapter 11 bankruptcy November 29, reportedly in an effort to shed debt and reduce labor costs.
Bruce Bennett/Getty Images

Matthew DeBord | November 29, 2011

The not-so-big news this morning is that American Airlines has filed for bankruptcy. There had been rumors circulating that this would happen for months, so no one is all that shocked. In fact, American Airlines has simply lived up to the apparent destiny of all airlines. Bankruptcy seems to be baked in the businesses cake.

This is from the Washington Post:

American Airlines on Tuesday joined a long list of airlines that have filed for bankruptcy protection. American was the only U.S. legacy airline that hadn’t yet filed. Several airlines have filed multiple times; Delta and Northwest filed on the same day six years ago. There have been 189 total since 1990.

So why is the airline business so lousy? Slate offered a good explainer back in 2005, on the occasion of the Delta-Northwest bankruptcy-palooza:

Bankruptcies are also common in commodity industries, where customers are most likely to buy at the best price—steel is steel, no matter who's selling. In the deregulated aviation industry, airline tickets are like a commodity—since multiple carriers serve the same routes, customers will go with whoever's the cheapest.

Airlines are now constantly exposed to what the economist Joseph Schumpeter called "creative destruction" and that Harvard's Clayton Christensen has labeled "disruptive innovation." Someone is always going to show up with a business model that's more competitive and that can translate into cheaper ticket prices. This endless commodification cycle builds companies up and takes them out at a ferocious pace.

Plus, it doesn't help that even when airlines invent new ways to charge more for tickets, such as developing a higher-priced business class, they expose themselves to a boom-and-but business cycle.

What's remarkable is that despite this, air travel remains breathtakingly safe. Essentially, airlines compete in a cutthroat market while avoiding cutting safety corners. Obsessively, for the most part. In 2011, there have been only a few major airline crashes.

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