American Airlines stock today dropped 33% on concerns that the ailing company might be filing for bankruptcy. This once giant corporation was reported to be worth $13.6 billion back in 2007 is now only worth close to $660 million. This has become a bad sign for investors who have been holding that stock for the long-term.
What’s amazing is, American Airlines is probably the only major airline that has not ended up filing for bankruptcy over the last 10 years. It seems that bankruptcy and airlines are becoming synonymous. It’s been more common to see an airline filing bankruptcy than to see one not. Back in 2005, the bankruptcy filing seemed imminent when Delta and Northwest both filed bankruptcy.
Warren Buffett and Richard Branson recently commented saying, that owning an airline was a key to financial disaster ending up in bankruptcy. Airlines have struggled making money all the way back to the Wright brothers. The owner of Virgin Airlines, Richard Branson, was speaking to a group of people advising them how to become a millionaire,” Just start as a billionaire and buy an airline.”
After doing some research it seems that the best times with airlines were back when they were still regulated. Decades ago, the government regulated the fares and routes. All the airlines had an explosion of growth and then deregulation came back in the 80s. The tough competition caused all airlines to continue to drop causing many to file for bankruptcy.
The problem with the airline business is it has a huge fixed cost in front of profitability. Most people look for the airline with the cheapest seats, so airlines to fill those seats continued to reduce their airfare. The profit margin is squeezed out by the competition without the ability to reduce its costs ending up in bankruptcy.