View From the 23rd Row

Independence Air

Last week low-cost carrier Independence Air closed its doors. Why does an airline shut down? In a nutshell, costs. The expenses outweigh the revenue. But how can that be when air tickets are not that cheap? It in this business environment it is relatively simple - everything costs more, but the price of the seat goes down. Fuel prices alone can cripple an airline.

I think in Independence Air's case it was probably a case of everything costing more - labor, fuel, slots at Washington Dulles airport. And though their flights were mostly full, people can't understand why they went under. Again, simple math, if you pay say $2,000 to fill up the plane gas tank, another $10,000 for the crew (including gate to gate agents and bag handlers and benefits for everyone), another $2,000 for misc. costs (fees, taxes, cleaning etc), you now have to have the passengers cover the cost. So let's say the plane seats 50 at an average ticket price of $150, you only make $7,500 - that is almost $7,000 short! Keep doing that for flight after flight and you got yourself a problem.

"But Southwest does that and they are in the black?" Ahh the Southwest factor - three big things keeping Southwest floating despite their insanely low ticket prices. A) low labor costs, they don't pay their employees the standard rate for the airline industry, they pay lower. B) They fuel hedged back in the 1990's, so they are paying lower costs on oil per barrel cost (very smart move!). C) they fly out of smaller airports, where there is going to be less cost involved, gates are not as expensive etc.

The airline industry is glamourous and many a businessman has tried to get into the party. It is easy to start an airline, almost laughably easy but as Branoff, Pan-Am, Eastern, TWA and now Independence Air have proven, making an airline successful is no joke.