Why Airlines Are Structurally Worse Cyclicals

In his 2007 letter to Berkshire Hathaway shareholders, Warren Buffett wrote that if a farsighted capitalist had been present at Kitty Hawk in 1903, he would have done his successors a huge favor by shooting Orville down. Investors, he said, had poured money into a bottomless pit — attracted by growth in the industry when they should have been repelled by it. He wasn't writing from a distance. Berkshire itself had lost money on USAir preferred stock in the early 1990s, and Buffett knew the pattern from the inside before he ever put it on paper.

Nine years later he bought airlines anyway. Berkshire built stakes in Delta, American, United, and Southwest starting in 2016 — the so-called Big Four, survivors of a consolidation wave that had, by most accounts, finally fixed the industry's oldest problem. Four years after that, in April 2020, Berkshire sold every share at a loss as the pandemic grounded fleets overnight. The reversal wasn't really Buffett changing his mind about airlines. It was the industry proving his original point on a longer time horizon than even he'd priced in.

Every capital-intensive sector is cyclical. Steel, autos, semiconductors, homebuilders — all of them take turns getting crushed when demand falls and fixed costs don't. What makes airlines different isn't that they're cyclical. It's that the specific mechanics of the business make each downturn harder to absorb than a peer sector carrying a similar capital structure, and the industry has spent a century demonstrating exactly why. I'll work through that structural case, then read the current competitive landscape three cycles after analysts last declared the problem solved for good.

The Structural Case Against Airlines as Ordinary Cyclicals

Start with the inventory, because it's the cleanest way to see the difference. A steel producer that misjudges demand can idle a furnace and sell the unsold coil next quarter, or the quarter after that, at whatever price the market clears. An airline seat that departs empty is gone. Not banked. Not marked down and resold tomorrow. There's no warehouse for it — the revenue simply never existed, which means an airline has to price every seat on every flight against a demand curve that resets daily, with no inventory buffer to smooth a bad forecast the way almost any physical-goods cyclical can.

Fixed costs compound the problem rather than offsetting it. Aircraft leases, pilot and crew contracts, airport gate leases, heavy maintenance schedules — none of it scales down meaningfully when bookings soften, at least not on any timeline shorter than months. An automaker facing weak demand can cut a shift and idle a plant within weeks. An airline grounding aircraft still owes the lessor, still owes the union contract's minimum guarantees in many cases, and faces real reactivation costs and crew-recall lag when demand does return — which is exactly why airlines have historically kept flying capacity into visibly weakening demand rather than cutting it early. That's a structurally different response function from most other capital-intensive industries, and it's the mechanism behind decades of fare wars that destroyed capital across the whole sector rather than just the weakest operator.

Fuel is the third leg. Jet fuel has typically run somewhere between 15% and 25% of a major airline's operating expense depending on the price cycle, and while hedging programs smooth some of that exposure quarter to quarter, no airline has found a durable way to hedge a multi-year price regime shift — 2026 is the live proof, and I'll come back to it. A cost input that volatile, sitting on top of a fixed-cost base that can't flex and an inventory model with zero shelf life, is what actually separates airlines from a business like the one I looked at recently in industrial distribution — those companies carry real capital intensity too, but they can hold inventory, adjust order volume, and pass costs through with a lag. Airlines mostly can't do any of the three.

Three Roles, One Structural Problem

Group the sector by competitive role rather than by ticker, and the structural pressure shows up differently in each tier. But it shows up everywhere.

• Network legacy carriers — Delta, American, United. Global hub-and-spoke systems, the largest fleets, the heaviest fixed-cost base, and the largest absolute-dollar fuel exposure in the sector. Hub dominance functions as a version of [efficient scale](/blog/efficient-scale-moat) — once a metro area only supports so much competing capacity, the incumbent hub carrier's density advantage compounds — but the same fixed-cost structure that protects the hub in good years is what hurts most in a downturn. What partly offsets that: the most diversified revenue base, spanning premium international routes, corporate contracts, and loyalty programs that now generate a meaningful share of pretax profit independent of how many economy seats sell.
• Low-cost and ultra-low-cost carriers — Southwest, JetBlue, Frontier, and Allegiant, along with Spirit until its final collapse in 2026. Lower unit costs from denser seating, simpler fleets, and point-to-point routing, but a much thinner margin for error. Their entire value proposition is price, which means they're the first and hardest hit whenever a legacy carrier decides to match fares to defend share rather than yield.
• Cargo-heavy carriers — FedEx Express and UPS's air operations. Structurally the steadiest of the three, running on contracted volume rather than daily leisure demand, but that steadiness is exactly why the pure-play public cargo carriers didn't stay public. Atlas Air Worldwide went private in 2023 and Air Transport Services Group followed in 2024, both acquired by private capital drawn to contract-based cash flows that don't fit well inside a stock market pricing airlines on quarterly passenger metrics.

Reading the Metrics: Load Factor, PRASM, and CASM

Three numbers do most of the analytical work in this sector, and none of them show up in a headline revenue figure. Load factor is the percentage of available seats actually filled — the direct read on how much of that perishable inventory got sold. PRASM (passenger revenue per available seat mile) measures pricing and mix. CASM (cost per available seat mile) measures the fixed-and-fuel cost base per unit of capacity flown. The spread between PRASM and CASM, not either number alone, is what determines whether growth is adding value or just adding exposure.

Delta's 10-K for the year ended December 31, 2024 shows the mechanism at its healthiest: PRASM of 17.65 cents against CASM of 19.30 cents on a total-revenue basis of 20.98 cents, a spread wide enough to support the strongest margins among the network carriers, alongside an 85.0% load factor unchanged from 2023. United's fourth-quarter and full-year 2024 earnings release put its load factor at 83.1%, down from 83.9% the year before. That's a small move. But in a business this sensitive to unit economics, a full point of load factor is a real swing in the PRASM-CASM spread. American's own full-year 2024 results showed a GAAP operating margin of 4.8% (6.0% adjusted) — the thinnest of the three network carriers, and a reminder that even inside the "fixed" legacy tier, execution on the cost side still separates winners from laggards.

Southwest's numbers tell the low-cost story from the softer end. Its full-year 2024 results, reported in the company's 8-K earnings release, showed record operating revenue of $27.5 billion, but net income of just $465 million — a 1.7% profit margin, thin enough that the company's own 2025 guidance targeted an operating margin of only 3% to 5%, with a 2027 target of 10% or better and return on invested capital climbing from a targeted 5%–8% range toward 15% or more by 2027. Those are turnaround targets from a carrier that spent decades as the industry's steadiest operator. Allegiant, running a genuinely lower-cost ultra-low-cost model, still saw its adjusted CASM climb 5.4% year over year to 8.56 cents in 2024 even as its adjusted airline-only operating margin held at 7.7% — cost inflation the model absorbed, but didn't escape. Whether Southwest's turnaround actually works comes down to whether that margin recovery shows up as durable free cash flow, not just a better income-statement print in a strong demand year.

None of those 2024 baselines anticipated what came next. Strait of Hormuz disruptions tied to the US-Iran conflict that broke out in February 2026 took an estimated fifth of global jet fuel supply offline within weeks, and IATA's industry outlook, published in June 2026, now projects industry-wide fuel costs of roughly $350 billion for the year — up from $252 billion in 2025 — pushing fuel from about a quarter of operating expense toward nearly a third and cutting the industry's projected net margin from 4.2% to 2.0%. American's second-quarter 2026 results, reported in its 8-K on July 23, showed the mechanism directly: fuel expense rose 83% year over year to $4.88 billion, an increase of more than $2.2 billion that erased roughly half of a 16.3% revenue gain. United's own Q2 2026 earnings release, filed July 15, guided to nearly $6 billion of added full-year fuel expense versus its start-of-year plan — even as the airline raised its adjusted EPS guidance to $9–$11 on resilient demand and fare recovery. That's the fuel-exposure argument from a few paragraphs back, playing out in real time rather than in theory.

What Consolidation Fixed — and What It Didn't

The 2008–2013 wave — Delta-Northwest in 2008, United-Continental in 2010, Southwest folding in AirTran by 2011, American merging with US Airways in 2013 — collapsed the major-carrier count from roughly a dozen meaningful national competitors to four controlling most domestic capacity. That consolidation genuinely changed pricing discipline in ordinary years: fewer carriers meant less incentive for any single one to chase share with an irrational fare war, and the fare wars that had defined the previous three decades became rarer.

But consolidation fixed the competitive landscape, not the underlying structure. The fixed costs didn't shrink. The perishable inventory didn't change. The fuel exposure didn't go away. What consolidation bought the industry was fewer irrational competitors setting prices below cost in normal demand conditions — a real and valuable fix, but a different one from fixing the sector's vulnerability to an actual demand shock. Buffett's Big Four bet in 2016 was a wager on the first kind of fix. The 2020 exit was the second kind of problem reasserting itself: a genuine demand collapse doesn't care how many competitors are left standing, because every one of them still owes the same lease payments and crew contracts regardless of how few passengers show up to fly.

The Long Tail Consolidation Never Solved

If the Big Four's post-consolidation stability suggested the structural problem had narrowed to an ordinary cyclical headwind, Spirit Airlines' two-year unraveling proved otherwise — and its ending reads like a textbook case of the fuel-exposure argument above. Spirit filed for Chapter 11 in November 2024, emerged in March 2025, lost roughly $257 million in its first three and a half months back as a going concern, and filed for Chapter 11 again on August 29, 2025. That second restructuring plan assumed jet fuel would run around $2.24 a gallon in 2026. It didn't. Strait of Hormuz disruptions pushed jet fuel to roughly $4.51 a gallon by the end of April 2026, and no restructuring built around the lower number could survive a gap that size. Spirit ceased all flight operations on May 2, 2026, moving straight to a court-supervised wind-down budgeted at roughly $217 million through February 2028 and costing close to 17,000 direct and contractor jobs. Thirty-four years in business, and the fixed costs and unhedgeable fuel exposure this piece opened with are what finally ended it.

JetBlue's numbers, while less dramatic, point at the same tier-wide pressure: $9.3 billion in 2024 revenue against cumulative losses exceeding $1.1 billion across 2023 and 2024. Frontier's response has been to lean harder into ancillary fees, which reached roughly 62% of total revenue in 2024 — a structural adaptation that keeps the headline fare low while extracting margin elsewhere, and a sign of how little pricing room the base product itself now carries. I'm less confident than I'd like to be about whether the surviving low-cost carriers have found a genuinely durable model or are simply running the same capital-destruction pattern on a longer fuse than Spirit's. More than 190 US airline bankruptcies since 1978 by most industry counts — clustering, like most corporate distress, around recessions and demand shocks rather than spreading evenly across the cycle — argue for humility here, not confidence that this cycle's survivors have solved what a century of predecessors didn't.

Key Takeaways

• Airlines aren't just cyclical the way steel or autos are cyclical. Perishable inventory, fixed costs that can't flex on a short timeline, and volatile, unhedgeable fuel exposure combine to punish demand shocks harder than in most other capital-intensive sectors.
• The sector splits into three structurally different roles — network legacy carriers, low-cost and ultra-low-cost carriers, and cargo-heavy operators — and the cargo tier's exit from public markets (Atlas Air in 2023, ATSG in 2024) is itself a signal about how differently its economics actually behave.
• Load factor, PRASM, and CASM have to be read together. Delta's 2024 spread between a 17.65-cent PRASM and 19.30-cent CASM produced the group's strongest margins; Southwest's 1.7% 2024 profit margin and its own 2025–2027 turnaround targets show how thin that spread can get even for a historically disciplined operator.
• Consolidation fixed competitive behavior in ordinary years, not the underlying structural vulnerability to a genuine demand or cost shock. The 2026 fuel shock tied to the Iran conflict — American's Q2 fuel expense up 83% year over year, United guiding to nearly $6 billion in added full-year fuel cost — is that argument playing out live, and Spirit Airlines' collapse from two bankruptcies into a full wind-down, built on a fuel assumption the market blew through, is what happens when a carrier runs out of room to absorb it.