The economics of the airline industry are sheer hell

AVIATION has changed massively since the era of Pan Am, a byword for style and sophistication in its 1960s heyday. The once besuited passengers have been replaced by an understandably angry mob, fighting to fit their suitcases into fluorescent-coloured over-head cabins. It is out with the caviar and freshly cooked roast beef and in with the over-priced soggy sandwich.

Yet airlines are still status symbols, which is why they are founded and owned by some of the most colourful characters in business, including Richard Branson (Virgin Atlantic), Tony Fernandes (Air Asia), the late Tony Ryan (Ryanair), Stelios Haji-Ioannou (EasyJet) and Vijay Mallya (Kingfisher Airlines). It is no coincidence that two of these figures, Fernandes and Mallya, also have interests in British football clubs, another trophy asset that is guaranteed to lose money.

It has to be the sex appeal that attracts them, because it certainly isn’t the easy profit. It was Warren Buffett who said the “amount of money made by all US airlines since the dawn of aviation is zero”.

C. R. Smith, the late chairman of American Airlines, would have concurred, warning in 1970 that “nobody can make money in the goddamn airline business these days. The economics represent sheer hell.” If he were alive today, he would be unsurprised that his airline is now technically bankrupt.

Mallya’s Kingfisher Airlines is the latest to fall victim to the torrid conditions for the airline industry. Yesterday it flew its last ever international flight, the 12.50pm Delhi to Heathrow. In India, it is being forced to pay its airport fees in cash before being allowed to land.

The story behind Kingfisher’s downfall is well-rehearsed. A cripplingly high oil price coupled with reckless over-expansion meant even the considerable profits of the eponymous brewing empire could not keep its planes in the skies.

Even successful airlines are finding it tough going. Ryanair was forced to ground 80 planes over the winter months while Branson’s Virgin Atlantic is struggling to find a new equity partner. Air Asia might be the darling of the industry at the moment, but when it handed Airbus its biggest ever order at the Paris air show last year, for 200 A320s, it smacked of over-expansion. Flybe, the latest UK airline to go public, added two per cent yesterday after it said losses would be in line with expectations, but its stock closed at 71p – well below its 295p listing price in December 2010.

Things will only get worse, with oil – which accounts for a third of costs – at $120 a barrel and rising. The aviation analyst’s favourite joke rings more true now than ever before. How do you amass a small fortune? Take a large fortune and buy an airline.