PAN Am's Exit

Pan American World Airways eventually passed away. The company had been flying since 1927, and for many decades had been the dominant global airline. In fact, some said that the Pan Am logo may have been the most widely recognized corporate logo in the world at one time.

The death came as no surprise. Pan Am had lost money in every year -losses that totaled nearly $2 billion. It had officially declared bankruptcy. But what life support system delayed the exit of Pan Am from commercial aviation? How can our economic model account for a company that makes losses for a decade and even continues to operate after it has officially declared bankruptcy ?

The model of entry and exit based on cost curves gives a useful explanation of why Pan Am would not exit after a single year of losses. As long as a firm can charge a price above average variable costs, it makes economic sense to stay in business, even if the price is below average costs and the firm is making losses.

To stay in business while making losses, though, a company must have assets to sell. In its many profitable years, Pan Am had built up many such assets and it proceeded to sell them off. The company sold the Pan Am Building to Metropolitan Life insurance for $400 million, its Intercontinental Hotels subsidiary for $500 million, it Pacific operations and later its London routes to united airlines, and a considerable amount of Tokyo real estate. Moreover, Pan Am was proposing to sell off most of its other routes to Delta and become a small airline based in Miami, serving mainly Latin American destinations. In other words, although Pan Am continued to fly during the years while losing money, it was slowly exiting during most of that time. In the real world, an "exit" often means a reduction in size.