Does the theory of the ‘core’ explain why airlines fail to cover their long-run costs of capital

Does the theory of the ‘core’ explain why airlines fail to cover their long-run costs of capital?

Journal: Air Transport Management

Author: Kenneth Button

Published: 2003

Abstract

The major air transport markets at the early part of the 21st century are failing to generate sufficient revenues to cover their long run costs. Many airlines are being supported by subsidies, going out of business (e.g. Sabena, An sett, Canadian International, Swissair) or having to resort to various forms of financial restructuring such as afforded by Chapter 11 bankruptcy laws in the US (US Airways, Midway, National). The effects of the terrorist attacks of September 2001 have exacerbated this situation, but the data suggests the problem be more deep routed in the ‘deregulated’ markets that now exist in many parts of the world. This paper concerns itself with the issue of whether there are intrinsic features of the scheduled network airline industry that makes the current structure of liberalized markets unsustainable. It highlights on a number of features of this market but pays particular attention to the question of whether the market is naturally prone to excesses in competition that, because of its nature, forces airline fares down to the level where full costs cannot be recovered. It focuses in this sense on a long established concept in economics, namely does a core exist in this market. The fact that there is prima face evidence to suggest that the core is empty then leads to a discussion of appropriate policy reactions that may allow a more sustainable market structure to survive.

Keywords: Core theory; Airline regulation; Capital cost recovery

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