Europe’s airlines are cutting costs and pledging to pare back the expansion of routes and flights across the continent as the boost to their profits from low oil prices fades. Lufthansa this week followed International Airlines Group, which owns British Airways and Iberia, in promising to curb capacity.
Should we believe that they - and the US airlines that have been making the highest profits in the world - can change their ways and ensure that the industry behaves in a more disciplined fashion than before? Put it this way: history is not on their side.
The global airline industry has achieved a remarkable feat in the past couple of years. For the first time since US airline deregulation in 1978, it has made sufficiently high profits to be worth investing in. Its recovery from the twin shocks of the September 11 2001 terrorist attacks and the financial crisis of 2008 has led to something unfamiliar - a respectable bottom line.
You would not know that from the reaction of investors: share prices of US airlines have fallen in 2016, although it is likely to be their most rewarding year ever. Like airline luggage, what travels hopefully may not arrive. Shareholders have little faith that the companies will resist their old instinct to redistribute all profits to their customers by adding new flights and trimming fares.
As one of these customers, I welcome that. Air travel may not be a pleasant experience, but it has become remarkably cheap and flexible. I recently found, for example, a return flight from London City Airport to Rotterdam - both secondary airports - on CityJet, the Irish airline, for £140 including taxes. That would have been outlandish in the past but is now commonplace.
Another example: when booking a holiday in Turkey (fares are soft following recent terrorist attacks in Istanbul and Ankara), I saw that EasyJet allowed me the choice of landing at three different airports in southern Turkey. At times, it feels as if low-cost airlines such as easyJet and Ryanair have taken lessons from Starbucks in clustering destinations as tightly as coffee shops.
They can do so profitably because their costs are low, but the relentless growth in flight capacity in the past few decades makes it harder for rivals such as Air France-KLM.
The number of direct flights such as London-Rotterdam has risen from 6,000 globally in 1980 to 17,000 this year; passenger air travel has expanded tenfold in 40 years as more people fly more often.
This persistent imbalance of supply and demand - worsened by the fact that new entrants tend to keep on adding flights even when legacy carriers try to retrench - has turned airlines into what Warren Buffett once called “a death trap for investors”. Berkshire Hathaway’s chairman should know, having invested $358m in US Air (now part of American Airlines) in 1989 and bemoaned his mistake ever since.
Consolidation into the big three legacy airlines - American, Delta and United Airlines - with low-cost Southwest making four, has perked up US profitability. “Capacity discipline”, the US industry’s term for not behaving as laxly as usual, helped global airlines to make a respectable return on capital last year. Even so, Mr Buffett is right to prefer US railways to airlines as an investment. By coincidence, Delta matched BNSF, the railroad company owned by Berkshire, on two measures last year. Both held a 17 per cent share of their respective industries; both made operating profits of about $7.8bn.
The resemblance ends there. Even in an exceptional year, Delta’s operating margin was 19 per cent compared with BNSF’s 35 per cent in an ordinary one (it took Delta $41bn of revenues to achieve this operating profit while BNSF required only $22bn). BNSF, which runs 32,500 miles of track, is also far better shielded from competition - no one will build a matching set of lines.
In theory, airlines should not risk the sacrifice of hard-won profits by adding to capacity at the peak of the cycle and returning to wasting capital. Those such as IAG and Lufthansa are trying to avoid it by offering route cuts this week, although Lufthansa’s share price fell after its first-quarter results.
But there are several obstacles to what would count as common sense in other industries. One is the fierce response of regulators. The US Justice Department nearly blocked the merger of American and US Airways in 2013 because of worries about a potential reduction in competition. Last year, it launched an inquiry into possible collusion after airline chief executives talked publicly of “capacity discipline”.
Even if regulators were not determined to stamp on profitability, airlines will probably do it themselves. A combination of high fixed costs and low seat prices makes it hard to shed capacity - keeping an aircraft sitting on the tarmac can end up being more expensive than filling the seats with people paying low fares.
As Air France has found with recalcitrant pilots, it is difficult for legacy airlines to reduce their wage bills.
In other words, an industry that has been run for decades like a privately financed public utility, with shareholders being squeezed and customers reaping the benefits, will probably carry on like that. Happy travels, everyone.
