The Plane Truth About Airline Woes; It's not fallout from the 9/11 attacks that is causing the airline industry to crash, aviation experts contend, but government overregulation and loose bankruptcy laws

0 Comments | Insight on the News, March 29, 2004

Byline: Christopher Whalen, SPECIAL TO INSIGHT

It is a matter of faith among conservatives that the U.S. airline industry was "deregulated" in 1978 and that the industry has benefited greatly since then. In fact, a variety of sources tell Insight, air travel remains among the most heavily regulated businesses in the United States, particularly since Sept. 11, 2001. Deregulation in the 1970s did see ticket prices, choice of routes and right-of-market entry taken out of Washington's grasp, but everything else is controlled by government one way or another, including some of the most regressive labor laws in the U.S. economy.

After 9/11, America's airlines experienced a sudden and prolonged decrease in travel volume even as ticket prices remained under downward pressure. Massive assistance from Washington since then has not helped significantly, leading one long-term observer to coin the phrase "flying bankruptcies."

It is tempting to blame airline woes on external events such as terrorism, say industry insiders, but decades-old legal and labor laws, and the U.S. bankruptcy code, are at the core of what is wrong with the airline industry. "No other private industry has the federal government controlling the basic production line from how and when a flight can take off and land to how many airports there are and how much capacity [runways and gates] those airports can have," says an advocate who represents airlines in Washington. This veteran of previous airline collapses recalls that the last major industry "crisis," in 1991-92, saw five major carriers go through bankruptcy but did little to change the basic economics of an industry that still is run by and for pilots.

As 2004 began, US Airways and Delta Air Lines threatened to take bankruptcy to get their respective pilot unions to revise antiquated work rules. American Airlines just avoided that disaster, and United Airlines, which entered bankruptcy in 2002, still is struggling to emerge from its latest restructuring. As Mitchell Schnurman wrote in the Dallas-Fort Worth Star-Telegram: "A year ago, American Airlines went to the brink to stave off bankruptcy. But did it go far enough to turn the company around? To cut expenses? To change hearts and minds? We still don't know."

News reports say that US Air, formerly the "low-cost" carrier in the industry, now has the industry's highest labor expenses and needs a 25 percent cost reduction to be "competitive." Continental Airlines went through two bankruptcies in an effort to become a "low-cost" carrier but continues to labor under a weak financial condition and poor earnings. But the parlous state of airline finance is not due to keen competition among truly unregulated private companies. In fact, the periodic business failures that are the normal state of affairs for airlines result from the combination of government regulation, ridiculous work practices and permissive bankruptcy laws a toxic brew that ultimately consumes billions of dollars worth of private capital each year.

In fact, industry analysts say, it is erroneous to talk about "legacy" carriers vs. the "low-fare" insurgents such as Southwest Airlines or JetBlue Airways because all airlines face the same restrictive work rules and labor agreements. Newer entrants do have lower labor costs, but it is better personnel management that gives carriers such as JetBlue and Southwest the edge, say financial analysts who recall when US Air was the new kid on the block. Several airline-industry insiders, talking on condition of anonymity, tell Insight that the airlines historically have been able to generate only modest profits when traffic and ticket sales were growing, basically earning enough to cover operating expenses such as salaries and fuel. But when you look at the industry in terms of its total cost of doing business, including building airports and purchasing aircraft, it has been unprofitable for decades.

The entire U.S. airline sector has been locked in a familiar cycle of growth and stagnation, followed by financial default and bankruptcy, all leading to curtailed service and layoffs. Indeed, the loan guarantees and other federal subsidies provided since 9/11 have failed to slow the steady deterioration in air transportation in the United States that already was evidenced before the attacks. Overcapacity exerts downward pressure on ticket prices, generating fares that don't allow the airlines to cover the cost of providing service, making the average "private" airline look more like a public utility think of Amtrak with wings.

US Air filed bankruptcy in September 2002, followed by United Airlines two months later. The smaller carrier re-emerged in March 2003, but giant United has been struggling to complete the reorganization process. Moody's, the investment rating agency, has withdrawn all its ratings for United, including debt secured by United aircraft. The bankruptcy judge has given United until early April unilaterally to propose a plan to emerge from bankruptcy, after which the court will entertain other proposals. But the financially crippled airline is unlikely to meet that deadline because it is waiting for the latest bailout from Washington.