Originally Posted by
Beckles
My understanding is that on the whole US airlines have lost more than they've made no matter what period of time you examine. To claim they "haven't been extremely profitable in the long-run compared to other industries" is a gross exaggeration of their profitability. They've lost money, period. All but a few have completely wiped out their shareholders in bankruptcy at least once.
You might be correct for several (not all) of the airlines. Without government or regulatory intervention, it wouldn't be possible to lose money in the long run (for investors would give up injecting new capital into an entity with no future). However, especially in recent years, we have a government that is eager to support losing business models and prop up failure (not just airlines, but autos, banks, insurance, and much more). Had the weak been allowed to fail, we'd have less capacity, higher prices, and more profitable airlines today. Intervention, however, has propped up the really bad players like US (multiple times) at the expense of the stronger players.
My real point was just to correct the notion that short-run losses indicate that a company isn't for-profit. All companies strive for profits, and absent government or regulatory interference, will profit in the long run or cease to exist.
Originally Posted by
Beckles
If you're selling a product today that you won't deliver for several months, it only makes sense to lock in what it will cost you to deliver the product in the future based on what you sold it for today, even if you may end up paying a bit more for the security of locking in that cost. I really don't cosnider that a "bet", but rather a reasonable business decision.
You may not consider it a bet, but it is a bet. A premium is paid for insurance (in the form of fuel hedges, in this case). Cumulative premiums represent the revenue for the trading market and the cost for those buying the insurance. Some bets end up ahead, more than offsetting this cost, but on the whole, the pool of people buying insurance have a negative expected return.
The logic of buying the insurance and accepting the expected loss is a different issue. In general, you want to buy insurance only when the event being protected against could have a devastating enough impact that you couldn't withstand it. Buying a $20 warranty on a $50 phone with an expected return of -$10 is not logical for most people, as few would be materially impacted in the event the phone died and they had to blow another $50 to replace it. Home insurance, on the other hand, is logical for the vast majority of people, as few would be able to handle a six or seven figure loss without devastating their lives. In their case, accepting the premium loss is the lesser of two evils - makes sense to be risk averse.