Shot Down at Kitty Hawk

It's Wednesday, May sixth, and welcome to HigherIQ. Last Saturday, Spirit Airlines ceased operations. The bright yellow planes are grounded. The nine thousand employees are out of work. The 1.8 million passengers who had flights booked for the rest of May are scrambling to find alternatives. It's the first shutdown of a significant American airline since Midway Airlines went under immediately after September 11th. If Spirit's collapse feels like a one-off, a case of a budget carrier that finally ran out of road, it isn't. It's the latest entry in a pattern that has defined the airline industry for nearly fifty years: an industry that moves four billion passengers a year, that is essential to the global economy, and that has, since deregulation in 1978, cumulatively lost money. Negative thirty seven billion dollars over forty seven years. The airline industry is one of the worst investments in the history of capitalism. Warren Buffett, whose Berkshire Hathaway episode we covered on Monday, once said that a farsighted capitalist should have been present at Kitty Hawk "and shot Orville down." He meant it. The airline business has a problem that almost no other industry shares: its inventory is perishable. An empty seat on a flight that has departed is worth zero, forever. A hotel room that goes unsold tonight can't be stored and sold tomorrow. But a hotel can adjust by closing a wing. An airline can't fly half a plane. Every flight departs with the same fixed costs, whether the plane is full or half empty. This means airlines are under constant pressure to sell every seat, which means dropping prices to fill the plane, which means competing on price with every other airline on the same route, which means margins get crushed. The numbers are staggering in their thinness. The International Air Transport Association's most recent outlook projected an average profit of six dollars and fourteen cents per passenger across the global industry. Six dollars. The sandwich you bought at the airport cost more than the airline earned from flying you across the country. And that was a good year. In many years, the industry-wide profit per passenger is negative. Fuel is the largest single cost, typically accounting for twenty five to thirty five percent of an airline's operating expenses. Airlines can't control the price of oil. When the Iran war broke out and fuel prices doubled in some markets, Spirit, already operating on the thinnest possible margins, had no buffer. Its lawyer told the bankruptcy court in late April that the company's cash "is not going to last for very much longer." The fuel spike didn't kill Spirit on its own, but it closed the last window the airline had to survive. Labor is the second-largest cost, and it's rising. Pilot shortages after the pandemic drove wages up significantly, and regional airlines were hit hardest because their pilots were poached by larger carriers offering better pay. The four major airlines, United, American, Delta, and Southwest, now control roughly eighty percent of domestic flights, which gives them enough scale to absorb cost increases that smaller carriers can't match. The consolidation is self-reinforcing: when a small airline fails, the big four absorb its routes and grow even more dominant. Spirit was founded in 1992 and pioneered the ultra-low-cost carrier model in the United States. The concept was simple: strip the ticket price to the absolute minimum and charge for everything else. Carry-on bag? Fee. Checked bag? Fee. Seat selection? Fee. Water on the plane? Fee. The base fare might be forty nine dollars, but by the time you added the things most passengers consider essential, the total was often comparable to a legacy carrier's price. The model worked for years because Spirit maintained a genuine cost advantage. It flew a single type of aircraft, the Airbus A320 family, which simplified maintenance and training. It packed more seats into each plane by reducing legroom. It paid its employees less than legacy carriers. It operated primarily on leisure routes where price-sensitive travelers would tolerate discomfort for a cheap fare. Spirit was consistently profitable from 2010 through 2019. COVID broke the model. Every airline suffered during the pandemic, but Spirit's recovery was slower than its competitors'. The legacy carriers, flush with government bailout money and premium revenue from business travelers, launched their own "basic economy" fares that undercut Spirit's prices on many routes. Suddenly, you could fly American or Delta for nearly the same price as Spirit but with better service, more legroom, and a functional frequent flyer program. Spirit's cost advantage evaporated. It hadn't turned a profit since 2019. The JetBlue merger was supposed to be the lifeline. In 2022, JetBlue offered to buy Spirit for 3.8 billion dollars. The DOJ sued to block the deal, arguing it would reduce competition and raise fares. A federal judge agreed and killed the merger in January 2024. Spirit filed for bankruptcy ten months later. Then it filed again in August 2025. Then it sought a five hundred million dollar bailout from the Trump administration. The creditors rejected the deal. And at three in the morning on May 2, 2026, Spirit Airlines stopped flying. The consumer advocates are the ones sounding the alarm that most travelers won't hear until it's too late. Spirit's presence on a route lowered fares for everyone, even passengers who never flew Spirit. The threat of a forty nine dollar fare forced Delta and United to keep their own prices competitive. One analysis found that Spirit's entry on a route reduced competitors' fares by an average of fifteen to twenty percent. "You do not have to fly a small carrier in order to benefit from its presence," said one consumer advocate, "because they will bring down the big guys' fares." Without Spirit, those routes get more expensive for everyone. The airline that most people made fun of was quietly saving them money on flights they booked with someone else. The deepest question about the airline industry isn't why Spirit failed. It's why any airline succeeds. Since deregulation in 1978, more than a hundred and sixty airlines have filed for bankruptcy. Virtually every major American carrier other than Southwest has been to bankruptcy court at least once. In September 2005, every one of the four largest American airlines, United, Delta, Northwest, and US Airways, was operating simultaneously under Chapter 11 protection. Pan Am, the unofficial flag carrier of the United States, ceased operations in 1991. TWA, the carrier of Howard Hughes, was absorbed into American after its third bankruptcy. Eastern Air Lines liquidated the same year Pan Am died. Even now, with the industry consolidated down to four dominant carriers, the economics barely work. The IATA projects an average return on invested capital of 6.8 percent for the global airline industry, against a weighted average cost of capital of 8.2 percent. In plain English: the industry collectively does not generate enough profit to justify the money invested in it. Investors would earn more putting their money in an index fund. The airlines keep flying because sunk costs are enormous, because governments intervene to prevent collapse, and because there is always another optimist willing to try. Buffett, after decades of avoiding airlines, invested in all four major US carriers in 2016. He sold every share in 2020 during the pandemic, calling it a mistake. "The airline business has been extraordinarily disappointing as an investment," he said. He then bought back into the industry anyway, because even Buffett can't resist the occasional temptation, before selling again. The man who coined the Kitty Hawk line invested in airlines twice and lost money both times. The industry is that seductive and that punishing. Spirit's yellow planes are parked on tarmacs across the country. Its routes are being absorbed by the same carriers that will now charge more for the seats Spirit used to fill cheaply. The cycle will continue. Somewhere, someone is writing a business plan for the next ultra-low-cost airline. The math will look promising. It always does. The industry's curse is that it makes just enough sense to try and not quite enough sense to work. So if this comes up in conversation, here's how to think about it. The airline industry has cumulatively lost thirty seven billion dollars since deregulation in 1978. More than a hundred and sixty airlines have gone bankrupt. The average profit per passenger globally is about six dollars. Spirit Airlines, which pioneered ultra-low fares and quietly saved every traveler money by forcing competitors to match its prices, shut down last Saturday after two bankruptcies, a blocked merger, and a failed government bailout. The four remaining major carriers now control eighty percent of domestic flights. Fares on Spirit's former routes will likely rise. The airline most people made fun of was the one keeping their tickets affordable. And somewhere, someone is planning the next budget carrier, convinced they've figured out the math. They probably haven't. Nobody has. Stay informed, stay curious, and we'll see you tomorrow.