Flying the Bankrupt Skies
STELZER, IRWIN M.
Flying the Bankrupt Skies The era of big airlines is over. BY IRWIN M. STELZER AIRLINE MECHANICS apparently include among their many skills an ability to drive nails into coffins. Last week the...
...A strike, which at this writing is a distinct possibility, would almost certainly throw United into bankruptcy...
...But those parked aircraft carry leases that require payments of anywhere between $300,000 and $500,000 per month, even when the planes just sit in the desert sun...
...Discounters that "pile 'em high and sell 'em cheap" exist side-by-side with posh retailers...
...In retailing, the discounters, with the exception of Kmart, are prospering, and attracting customers who until recently were willing to pay premium prices to shop in posh surroundings and be asked repeatedly, "Are you being served...
...Then there is September 11...
...The transatlantic carriers are powerless to offset the grounding of the investment bankers who filled the first-class and business-class seats with their exalted persons back when the merger and acquisitions business was booming...
...Not that titans of industry, or lower echelon business travelers, prefer a bag of salted peanuts and cramped legroom to a glass of champagne and a good stretch...
...But that may be where it is headed in any event, given the prospect of soaring labor costs and lost business, as travelers switch to other carriers during this period of uncertainty...
...The success of Southwest Airlines and JetBlue (which filed for a $125 million initial public offering two weeks ago), and of EasyJet and Ryanair in the U.K., when set alongside the plight of the full-service "hubbers" such as American and United, suggests that the business model of the latter may be fatally flawed...
...by airport operators' refusal to allow landing fees to reflect their economic value at different times of the day...
...Last week the International Association of Machinists and Aerospace Workers rejected the 37 percent pay raise offered by United Airlines—its members want 43 percent— and threatened to strike...
...He says that the point-to-point carriers and the hub operators are "two kinds of operation," each serving a different need...
...The bad news is that none of these favorable developments can change the ugly facts of life of the airline industry: It is inherently a cyclical, boom-and-bust business...
...With good reason, since forces are at work with which not even the most skilled managers and devoted workers can cope...
...But it seems that many of the big, full-service airlines are in the grip of something lethal, or at least far more damaging than a mere cyclical downturn...
...But the fare difference is so great as to make discomfort tolera-ble—and leave plenty in change to pay for a good bottle of the bubbly on arrival...
...A shift in consumer preferences would not be the only long-term threat to the eventual return to prosperity of full-service carriers...
...The good news is that recessions end, merger waves have a way of returning, and the post-September 11 fears will subside as time passes and airport security systems are upgraded...
...Although the government pumped almost $2 billion into the industry after September 11, and has guaranteed a $380 million loan to keep America West flying, most analysts are expecting one or two of the top ten carriers to go belly up in the near future...
...Indeed, there is already some evidence that businessmen who use the low-fare carriers to take their families on vacation have begun to migrate to those same airlines for their business travel, with one such bargain line announcing that business travelers account for a high proportion of its 74 percent increase in passengers...
...But he also notes the possibility that the increasing success of the discounters might leave the majors with so many empty seats that they will not be able to charge business travelers, who pay hefty premiums for the privilege of booking late, enough to turn losses into profits...
...When times are merely bad, and there are empty seats, it pays for the carriers to introduce promotions that earn them something above the zero revenue they get from leaving those seats empty...
...We won't know until the recession, and its impact on business travel budgets, is forgotten by major corporate customers, and the good times once again roll for the dealmakers on Wall Street...
...Never mind that the carrier lost $2.1 billion last year, is drowning in red ink, and— here's the irony—is employee owned...
...And full-service airlines that provide the convenience of multiple-destination connections at their massive hubs coexist with low-service, low-fare carriers specializing in point-to-point routes...
...But there may be more than the business cycle at work today...
...Kahn is undoubtedly right in saying that there will likely always be a market for hub operators—but it may be a shrinking market...
...If the booming sales of the discounters and the shriveling sales of the high-end retailers are any indication, this shift may prove to be a durable trend...
...Many Americans since then have been reluctant to fly—not just because of a fear of being blown up by some suicide bomber, but because they don't want to be stranded away from their homes and families if a new attack forces the government to close the skyways again...
...Equally important is the unwillingness of many governments, especially those in Europe, to allow the market to work its way with their national champions...
...So let business revive, even a bit, and that capacity is quickly reactivated, shortening the period in which planes are flying full and fares and profits are rising...
...Many of these would be mere memories by now were it not for their governments' determination to keep them and their highly unionized and vocal work forces flying...
...Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, a scholar at the Hudson Institute, and a columnist for the Sunday Times (London...
...Nor can even the most brilliantly conceived promotions bring busted dot-commers back onto United's important West coast-to-Wall Street flights...
...Alfred Kahn, the father of airline deregulation and still the keenest of the industry's observers, is not so sure...
...When times are worse, the carriers can ground some of their planes, and store them in Arizona's massive aircraft holding pen...
...in most industries, there is—or has been— room for both full-service and no-frills enterprises...
...So, too, in the airline business...
...That may all be changing...
...That is the fate of all cyclical industries...
...This means that airlines such as United and American here, and British Airways in the U.K., must compete across the Atlantic with subsidized competitors that will never be allowed to fail, no matter how large their losses...
...United is not the only airline in trouble...
...With a market further distorted by governments' refusal to create a market for landing slots...
...and by the willingness of Washington to bail out the likes of America West and its readiness to do the same for other carriers if asked—the possibility that we will someday be blessed with an efficient, market-oriented air transport system, geared to meet the needs of all travelers, becomes ever more remote...
Vol. 7 • February 2002 • No. 23
