Some Things Will Never Change With This Industry

The airline industry has long been a place where fortunes are destroyed. Between large capital costs, long equipment lead times, and operating expenses that are largely based on the number of flights rather than the number of paying passengers, the industry is plagued with huge structural problems. Those problems aren't going away anytime soon.

When you add in the skyrocketing costs of fuel, the mixture gets all the more volatile -- and not just from the exhaust fumes. After all, business travelers often decide to cut back their travel expenses to compensate for the impact that higher fuel costs have on the rest of their own operations. That limits airlines' abilities to successfully hike fares just as their own costs skyrocket.

Baggage surcharges can't save them
In something of an acknowledgement of their industry's inability to generate profits from their core business, airlines have taken to nickel-and-diming their customers. Things like baggage surcharges, snack and water fees, and even charges for blankets have been instituted by airlines across the country in an attempt to get the carriers to recover their costs.

And that strategy seems to be failing the airlines in their quests to cover their costs. United Continental (NYSE: UAL), for instance, recently reported a quarterly loss of $213 million. While it blames some of that loss on merger integration expenses and some on the Japan earthquake, the fact that it's also blaming fuel prices shows that it, like many airlines, can't cover its core costs.

Similarly, AMR (NYSE: AMR), the parent company of American Airlines, reported a $436 million loss for the quarter. While that's better than the $505 million it lost in the same quarter a year ago, that's not exactly a sign of a healthy industry.

Even Southwest (NYSE: LUV), typically among the more financially stable of the airlines, saw its profits slashed to $5 million on $3.1 billion in revenue -- or a net margin below 0.2%. With the expected costs and management distractions from its pending $1.4 billion acquisition of AirTran (NYSE: AAI) added to the picture, even those razor thin margins may be tough to sustain.

When good news is actually bad
Even among the airlines posting decent earnings results, the numbers are only good relative to the context of this very ugly industry. JetBlue (Nasdaq: JBLU), for instance, squeezed out a $3 million profit on $1 billion in revenue -- or a net margin of 0.3%.

Likewise, Alaska Airlines' (NYSE: ALK) substantial $74 million profit was driven in large part by $82 million in fuel hedge gains, along with other one-time helps. While hedging can help an airline manage short-term fuel spikes, it can't sustainably protect a company from the basic pricing problems endemic to its industry.

And while Delta (NYSE: DAL) doesn't report until Tuesday, even if its numbers do turn out well, the airline still faces a rocky future. For instance, Delta's extensive presence in Japan means that country's recent earthquake, tsunami, and nuclear disaster could prove quite costly for the airline -- not just in the March quarter, but through the current one, too.

It won't change anytime soon
As long as it costs $50 million to $300 million (or more) to buy a commercial airplane, airlines will want to fill seats to recover those capital costs. And as long as the costs of running that airplane are based more on the number of takeoffs, landings, and miles than the number of passengers, airlines will have incentive to keep prices low to fill those seats.

That's why -- even with all the fees and surcharges -- the airlines, as a whole, struggle to post profits and why those that can post profits so often show such razor thin margins. It's endemic to the industry, and it's a problem that won't go away anytime soon.