Good companies in bad businesses

All this talk about a federal bailout of GM and Ford has started me thinking about something that has always bothered me. There are some businesses where even the best companies seem to barely make it and everyone else is under water. The automobile business is a good example. Take Toyota, a company that most analysts would consider to be the star of the sector. The company earned a return on capital that matched its cost of capital last year and that was a good year. If the best company in the sector breaks even in a good year, where is the upside in this business? The airline business, since deregulation, is another example of a business that has few profitable companies. I know.. I know.. There are Southwest and Ryanair, but even these paragons of corporate profitability earn returns on capital that trail their costs of capital. The rest of the business is a disaster.

I opened up my economics and corporate strategy books to see if I could find an answer. One possibility is that these businesses are filled with irrational companies that do stupid things over extended periods, but I find that hard to believe. The other is that these businesses have not found (or have lost) a structure that can generate profits on a sustained basis. In the airlines business, deregulation opened the business up to new entrants and the new firms that entered undercut the established competition with lower prices for the most profitable routes. In the automobile business, the problem seems to be legacy costs - c0sts that firms have piled up over time, usually in return for short term labor peace. Note that the older automobile firms are in the most trouble... those pension obligations that they committed to decades ago have come back to haunt them.

Eventually, these businesses will have to find a stable structure, where the companies at least on average earn their cost of capital. When will this happen? I don't know, but we, as consumers, will continue to buy cars and travel on airlines... It is in our best interests that the companies that provide these products/services make a reasonable profit in the process.