Thursday, October 15, 2020

Airlines are Sunk Costs

Demand for air travel fell during the pandemic, like a lot. It fell to about 5% of the previous year in early March and is still at 30%. And it won't get back to 100% for at least a year, maybe two or three. Assets are going to have to leave this industry.











The physical assets are very industry specific. There is little else you can do with an airplane but fly it. This is a risk one takes when one invests in airlines. Subsidizing these does not help since these assets are sunk costs.

Human capital is also very industry specific. There is little use for most pilot, flight attendant, and airplane mechanic skills for a years. For many, this human capital is now worthless. Fortunately, humans are more fungible than airplanes. They can acquire new human capital. Perhaps we want to help them out until then. How much?

The bailout in March was $25 Billion and the industry employed ~634,000 full-time workers. This comes to ~$40,000 per worker for six months. Unfortunately, a stipulation was to prevent layoffs - that is, keep people from acquiring new human capital. They say they need another $25 Billion to keep these workers employed over the next six months. Perhaps, instead, we allow the airlines to shed these workers but give these laid-off workers retraining subsidies.

HT: Tim Wunder

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