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Watchman
20-04-2010, 05:56 PM
The Airlines and the Volcano: “Losses” Don’t Mean Losses
April 20, 2010

Posted by James Surowiecki

The A.P. reported yesterday that the grounding of flights in Europe for the past five days (thanks to the cloud of volcanic Icelandic ash) has already led to a billion dollars in “airline losses.” That number comes from the International Air Transport Association, which says the airlines are losing at least $200 million a day and perhaps as much as $300 million.

Those numbers are grim, especially when you consider that most airlines are already in a pretty fragile state due to the recession. But they’re also overstated, because what the A.P. (along with most other news stories on the subject) doesn’t make clear is that the “losses” don’t represent actual money out the door, but rather lost revenue. Those are two very different things. There’s no question that the break is costing the airlines substantially, since they have to continue to pay their fixed costs (salaries, maintenance, lease payments on their jets, etc.) while earning nothing. But the lost revenue is offset, at least to some extent, by the fact that the airlines don’t have to pay any of the costs of actually flying the planes—such as, above all, fuel. And to the extent that people who haven’t flown in the last five days will fly in the future, the revenue from their trips hasn’t been lost, but rather postponed. (Actually, since people buy their tickets in advance, the airlines have already collected that revenue—whatever they lose will be in the form of refunds and revenue from spur-of-the-moment flights that the volcano kept people from taking.)

The curious thing is that a moment’s calculation makes this obvious: if the airlines really made $200 million a day in profits from European flights, that would mean the industry earns $73 billion a year in profits (365 x $200 million) just from flying in Europe. Somehow I doubt it. (http://www.newyorker.com/online/blogs/jamessurowiecki/2010/04/the-airlines-and-the-volcano-losses-dont-mean-losses.html)