If 2004 presented some financial stumbling blocks for the airline industry, 2005 brought a minefield. Climbing fuel costs have combined with slumping revenue and new security concerns to turn even the most resilient airlines belly up. Already this year, three of the seven major carriers have gone the way of United Airlines, taking shelter from labor unions and creditors in bankruptcy court. With Delta and Northwest’s uncoordinated but simultaneous Chapter 11 filings last week, more than half the industry is now flying broke.
- Angela Cesere
For those analysts already writing obituaries, the sharp rise in oil prices after Hurricane Katrina appears the generally accepted cause of death. With a number of Gulf-area refineries closed, processing bottlenecks sent jet fuel prices through the roof. And because high fares had already stretched customer demand, airlines couldn’t write off additional costs with surcharges. Seeing no signs of oil tapering off, Northwest and Delta threw in the towel.
But fuel prices don’t tell half the story. Expensive oil may have accelerated the process, but these carriers were flirting with insolvency long before the $60 barrel. In fact, to the extent that it could influence the Chapter 11 process, a focus on oil may be counterproductive. Not only does it risk shadowing some of the major airlines’ more serious problems – their chronic inefficiencies and dated operating models, their vulnerability to price swings and oppressive cost structures – but it pays heed to the misguided idea that in a more favorable economic climate, these ailing carriers could rise again.
Their troubles date back to the late 1970s, when Congress passed the Airline Deregulation Act, releasing the industry from government regulation and opening the skies to a commercial market. Deregulation exposed the decay of an industry that for four decades had operated in the absence of competition and market pressure. The government set all fares, routes and schedules, ensuring profits for the select carriers that were able to secure landing rights. It was state-sanctioned monopoly, a government-constructed vacuum where incentives were reversed and inefficiency went unpunished. Coinciding with this period were the golden years of big labor. Unions, endowed with a degree of political influence unknown to them today, had mobilized every corner of the labor pool. From engine mechanics to sales clerks, complacent airline executives signed off on some of history’s most exacting labor contracts, fixed costs that couldn’t be forgotten once the government’s feeding tube was removed.
The once-regulated major carriers entered the free market half baked and inefficient, Big Labor’s noose resting securely around their necks. For a while they survived by discounting fares, swallowing short-term losses in order to price new entrants out of the market. But some competitors proved resilient, and low-cost carriers like Southwest Airlines surfaced from the price wars with record earnings and fail-safe operating models.
Instead of the traditional hub-and-spoke system in which carriers route traffic through regional hubs, Southwest adopted a more flexible point-to-point model. While United was shuttling half-empty jumbo jets between O’Hare and JFK, Southwest was overbooking gates in Phoenix and Orlando. Southwest’s routes became templates for new firms, and the 1990s witnessed the birth of an agile class of discount airlines. It was these low-cost competitors – the JetBlues, the Air Trans and yes, even Hooters Air – not high energy costs that spelled demise for “legacy carriers” like Delta and Northwest – two of the last vestiges of the regulation years.
In this light, a look at Southwest’s balance sheet says as much about the company’s success as it does about the industry’s failure. While the major carriers teetered on bankruptcy, Southwest stayed in the black, operating profitably every year since 1973. The company embodies business savvy, its operating models and corporate culture the fascination of business schools across the country. In short, Southwest is everything its outsized competitors aren’t, a benchmark for the future in an industry haunted by its past.
If they are to have any hope of revival, the Chapter 11 proceedings can be nothing short of a ransacking. Assets will have to be sold off and liquidated, labor contracts trimmed and abandoned. But even if they return from bankruptcy a few pounds lighter, Delta, Northwest and United will be no more fit than the low-cost carriers who landed them there in the first place. Taking apart and rebuilding a company in court, as we’ve learned from U.S. Airways – which has been in and out of bankruptcy twice over the last three years – has its pitfalls.
Regardless of the degree of reform, there will be a great deal of pressure for the federal government to stay involved, to cushion the runway for Delta and Northwest, as it’s done for other carriers in the past. In particular, the two airlines will be looking to unload the lion’s share of their pension responsibilities on the Treasury Department. This can’t happen.
Certainly federal resources should be used to insulate the hundreds of thousands of airline workers waiting in limbo, be it through federal pension insurance or other forms of employment adjustment. But using taxpayer dollars to prop up a fumbling industry at a time when more carriers are staggering closer to bankruptcy would set a costly and irresponsible trend. If the government really wants to do the industry a service, it will let the market sort things out.
Singer can be reached at singers@umich.edu. Discuss this column with him on the Daily Opinion blog, which is accessible from michigandaily.com.