TB: Why Airlines Are Always Going Bankrupt (Oks)

Précis

The airline industry is structurally unable to reach a profitable competitive equilibrium: it is the textbook example of an empty-core industry, where lumpy capacity, large minimum efficient scale relative to total demand, low marginal cost, undifferentiated product, and volatile demand combine to make every allocation unstable. Oks' claim, drawing on Lester Telser's cooperative-game-theory work, is that bankruptcies, mergers, alliances, and frequent-flyer-program capture are not management failures but the only stable arrangements possible — to be profitable, the industry must be uncompetitive.

Key Takeaways

The diagnosis

John's annotation quote: "We've admitted to ourselves, by now, what we're still not able to say aloud: that there's no such thing as a competitive equilibrium for the airline industry."
From deregulation in 1978 through 2025, cumulative net profit of the US airline industry is negative — approximately -$37 billion in March-2026 dollars, per Oks' replication of Severin Borenstein's 2011 methodology carried forward.
IATA's 2026 outlook projected return on invested capital at 6.8% against a weighted average cost of capital of 8.2%: "the airline industry collectively does not generate earnings that cover its cost of capital."
160+ US airlines filed for bankruptcy between 1978 and 2005; in September 2005 every one of the four largest US carriers (United, Delta, Northwest, US Airways) was simultaneously under Chapter 11.

The "empty core" mechanism (Telser)

In cooperative game theory, the core is the set of outcomes no coalition can improve on by breaking away. If the core is empty, no allocation is stable.
Industries get empty cores when they combine: undifferentiated product, volatile demand, high fixed costs, low marginal costs, sharp economies of scale, and a minimum efficient scale that is large relative to total demand (so the efficient firm count is a small non-integer).
Stylized example: if a market supports "2.5" efficient firms, two firms leave demand unmet (price rises, attracts a third entrant); three firms oversupply (someone bleeds money, someone exits). The cycle never settles.

The airline case

Aircraft (~$100M+ widebody), gate slots, landing rights, and (under the Railway Labor Act of 1926) labor contracts are all fixed costs over multi-year horizons; jet fuel is the main variable cost.
On a stylized SF–Tokyo route with ~800 daily passengers at full-cost fares and ~250–300-seat widebodies, the efficient flight count is between three and four — and lumpy capacity guarantees price wars.
Half-empty planes cost almost as much as full planes to fly, so capacity does not retreat in proportion to demand; shocks drive margins from slightly positive to sharply negative.

Why bankruptcy is structural

Chapter 11 is the only mechanism by which US airlines can renegotiate rigid cost structures (aircraft leases, collective bargaining agreements, pension obligations).
United terminated its pension plan in 2002 bankruptcy, offloading ~$6.6 billion to the Pension Benefit Guaranty Corporation.
Post-bankruptcy carriers emerge at a lower cost base — which resets the floor for the next round of ruinous competition rather than restoring industry-wide profitability.

The empirical responses: cartelize or exit the business

Alliances (Star, SkyTeam, OneWorld) with codesharing and antitrust-immunized JVs are private-contract recreations of the pre-deregulation cartel structure.
Hub-and-spoke produces local monopolies: American holds ~90% at Charlotte and ~82% at DFW; Delta dominates Atlanta; United dominates SFO. A feudal map of fortress hubs.
Frequent flyer programs are now the actual business. Delta's American Express partnership produces ~$8B/yr — more than Delta's entire profit. Annual spending on Delta-AmEx cards is ~1% of US GDP. "Delta's aviation business is a loss leader for a much more profitable credit card partnership."
Ryanair runs the inverse strategy: lowest fixed costs in the industry via small secondary airports (Stansted, Charleroi), regional subsidies, ancillary-fee revenue, and effective route monopolies — "profitable roughly to the degree that it chooses not to compete."

Policy implication

The cycle is now grinding to its logical endpoint: in 2025 the Trump administration floated a 90% federal stake in Spirit (which collapsed in May 2026 anyway) — first prospective US government ownership of a passenger airline ever.

Notable Quotes

"The airline industry itself can either be profitable, or it can be competitive: but it can't really be both."
On uncompetitive equilibria: "Anticompetitive measures, like cartels and mergers and vertical integration, are necessary in these industries: not because the firms involved are particularly 'greedy,' but because uncompetitive equilibria are the only stable equilibria."
Warren Buffett, quoted by Oks: "If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."
"We've admitted to ourselves, by now, what we're still not able to say aloud: that there's no such thing as a competitive equilibrium for the airline industry."

Why this matters / Connections

The piece is the clearest current explainer of the empty-core concept — a useful mental model far beyond airlines (railroads in the 1880s, ocean shipping today, possibly streaming media). It also reframes "industry consolidation" from a moral failure to a structural inevitability under specific cost/demand conditions. Practical implication: when you see waves of bankruptcies cycling without convergence, suspect lumpy capacity + low marginal cost + volatile demand, not corruption.

Source

Why Airlines Are Always Going Bankrupt — David Oks, davidoks.blog (Substack), 2026-05-04