Can UAL Takeoff?

The airline industry is not what it once was. It has matured and transformed from a highly competitive and fragmented industry to one that is still competitive but more disciplined as it is now dominated by a few number of large and regional players. In the US, the industry is dominated by 4 companies (America, United, Delta, & Southwest) and a few regional carriers (Hawaiian, Alaska, Great Lakes, Republic, JetBlue and SkyWest). In the past, the industry was notoriously cyclical. When the industry was making money, it was easy for startups to enter the market by leasing aircraft. With lower overhead, they offered tickets at lower prices, putting profit pressure on everyone. While big airlines might have higher overhead, they also enjoy economies of scale. Recognizing this fact and the desire to grow, the startups would expand. They typically expanded by purchasing and leasing more aircraft, which means taking on debt. When the next recession came along, business would slow down and the newcomer would default and go out of business. With the little guys out of the way, the big guys would turn profitable once again as the economy recovered. The tragedy of this process was that over the full cycle, even the big guys would not make any money.

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