'A New Industrial Code' Needed for Airline Industry,Expert Proposes

The majority of U.S. airlines teeter on the razor's edge of survivability, and it's impossible to determine in the present environment if safety has deteriorated, according to a new study of the reigning chaos in the airline industry which proposes a new public-private partnership to stabilize the situation.

Matthew Andersson, a 30-year industry veteran and chief executive officer of Aviation Development Holdings of Phoenix, Ariz., prepared the industry overview. In a telephone interview, Andersson said the current situation could be likened to a destructive "industrial comedy" almost certain to perpetuate the kind of overcapacity and poor service similar to the telecom industry, at least before its collapse.

Wholesale re-regulation must occur and go far beyond superficial oversight to the creation of a true partnership between the public and private sectors in order to bring long- term fiscal stability to the airline industry, Andersson argued in his paper.

Signs of instability lie all around. For example, in its assessment of the state of the industry at the start of 2004, Texas-based Frank Jay and Associates, an executive search firm for the transportation industry, observed:

"US Airways is on a 'downward slide.' With Southwest Airlines coming into Philadelphia this year and with US Airways' cost and labor problems, their viability becomes a real 'issue.' "

"United Airlines will probably make 'top level' management changes within several months after emerging from Chapter Eleven bankruptcy."

"Delta Air Lines looks like they are 'behind the curve' in getting their business together."

There are safety and security implications to the present fiscal crisis, Andersson maintained. "Safety is a responsibility of the carriers, and if they're operating at a loss, then fleet management and maintenance cannot be funded," he said.

"You cannot say that a carrier like United Airlines, operating at a loss, is unsafe, but there are signs of enormous pressure on the cost of safety-related activities throughout the industry," Andersson said.

To highlight some of the key points made in his paper:

The current state is a jumbled mix of archaic, incomplete or conflicting rules and objectives.
Labor laws perpetuate low productivity and tax laws discourage capital investment.
The Lean Enterprise Institute calculates that a snail moves ten times faster than the sub-assembly routines of a major airframe manufacturer.
Meanwhile, nearly every aircraft in the United States today may be flying with one or more bogus parts. As evidence, the Federal Aviation Administration (FAA) issued yet another of its periodic warnings about unapproved. Indeed, the unapproved parts problem is so pervasive that the FAA maintains a section on its website dealing specifically with unapproved parts notifications (see www2.faa.gov/avr/sups/upn.cfm ).
The Transportation Security Administration (TSA) is perennially underfunded and security - its infrastructure, management and long-term funding - remains completely unsolved. The airlines object in front of Congress to additional security fees and taxes, while consumers demand low fares. In the meantime, travelers continue to fly on passenger jets with cargo this is not screened, while Congress and airlines argue over who will pay to screen it.
Conflict and budgetary constraints horribly compromise the very charter of the FAA: oversight of technical and safety matters (for examples, see ASW, Jan. 19).
Code-sharing is really nothing more than supply management in the face of regulatory constraints. Indeed, among Northwest, Continental and Delta Air Lines, over three thousand of their routes overlap (emphasis in original).
The technology is at a plateau. Andersson maintained in his paper that Boeing, General Electric, and Pratt and Whitney "are peddling 40-year old airframe and propulsion technology against Airbus and Rolls Royce."
The major carriers have so standardized and commoditized their service that only low-cost producers can win. Yet [the majors'] infrastructure and ubiquitous service is an enormous public asset.
The U.S. Congress is willy-nilly imbedding patchwork funding in House resolutions, bills and ad hoc emergency support.
Meanwhile, the customer in all of this chaos literally hates the service and consistently ranks airlines and air travel as one of the worst, most dreaded consumer experiences.
The 1978 Airline Deregulation Act is creating the very same structural cycle as telecom and surface transportation de-regulation: overcapacity, loss of pricing power, operating losses, excess demand for scarce capital, profound waste, stagnating technology, an alienated customer base and, perhaps worst of all, a loss of pride by labor, management and, most of all consumers, in the potential and greatness of powered flight.
With this grim scenario as background, Andersson argues that the industry-government relationship must be restructured wholesale. The U.S. airline industry is largely "nationalized" already, he noted in his paper, in the sense that airports and air traffic control are federally funded. "A public-private partnership makes explicit and coordinated what has been understood for decades: certain industries are so critical, and financially and operationally intensive, that they require the broadest scope of support," he wrote.

Andersson's approach clearly would involve the government. This approach was rejected by Transportation Secretary Norman Mineta in a Jan. 27 speech, although in that same address Mineta touched on many of the same symptoms of an air transport system under stress elucidated by Andersson.

Without bold action, Mineta warned the bright dream "that began at Kitty Hawk could soon become a congested nightmare of congested skies and frustrated traveler," as well as the loss to America of its continued global leadership in aviation.

To put the industry on a long-term stable footing, Andersson outlined what he dubbed "four steps to recovery."

1. Organize:

Make the current Airline Transportation Stabilization Board (ATSB) a permanent public-private body with broad investment, risk management and credit enhancement responsibilities. The board's charter must be extended down the supply chain and manufacturing.

The private sector must organize a counterpart to the ATSB. It will (with anti-trust immunity) initially focus on capacity coordination and management, pool purchasing in the supply chain, and labor integration. The two "ATSBs" from each sector will, in a second stage, merge with joint representation.

2 .Fiscally harmonize:

Arrange all U.S. government air transport agencies (the DOT, FAA, the TSA and airport authorities) and their budgets and revenue models under the Airline Transportation Stabilization Board. While airport authorities feel they can charge whatever they want as "toll booth operators" for slots, gates and ramp access, this strategy only diverts capital from the airlines.

3. Re-capitalize:

Legislate access to multilateral development bank financing from the World Bank and its affiliates: the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF), in addition to traditional capital market sources. The creation of an "Airline World Bank" patterned along WorldTel in London could be more forcefully developed as a sector-specific development bank.

4. Re-regulate:

There are four components of a balanced regulatory regime: (1) antitrust, (2) tax, labor and investment law, (3) competitive fitness and (4) international treaty, all of which are inter-related.

First, repeal provisions of anti-trust law that prevent capacity coordination, and enforce anti-trust law that addresses wasteful and destabilizing competition (dumping inventory on the market below cost).

Second, re-instate a long-term investment tax credit that makes aircraft financing less complex and costly. Foreign leveraged tax leases benefit everyone except the airlines and are enormously complicated and transactionally expensive. Abolish the Railroad Labor Act, with its outdated provisions that are still applied to the airline industry. Set fair wage guidelines and wage-price controls including executive compensation, coordinated by the ATSB.

Third, require any new carrier to pass a much higher test of strategic and financial fitness before the ATSB prior to being allowed in the marketplace.

Fourth, ratify an "open skies" agreement with the European Union to allow for trans-Atlantic supply coordination, and nullify citizenship investment restrictions to open up foreign capital flows to the U.S. industry.

Andersson said, "These initiatives may strike some as overly ambitious or idealistic, but they represent nothing short of an overdue industrial revolution."

Air travel, he declared, is a service that's "just too unforgiving, expensive and too important and promising to leave to chance." Andersson, e-mail mandersson@aviationdevelopmentholdings.com

Poor Financial Health Erodes Safety
Matthew Andersson's thesis:

"The systematic long-term financial instability of the U.S. airline industry, a priori, must negatively impact broad industrial safety, as safety infrastructure is funded from a blend of sources including private sector investment.

"Because no one airline can or will take a leadership position for the broader industry, and because the government's policy has been so heavily weighted to 'market solutions,' the industry is devolving, deteriorating and becoming less safe. In an industry as system-complex as aviation, safety is a product of the integrated 'regulation' (where regulation is meant in the biological sense, meaning to control and ensure the proper function of all the systems) of all the components that make up the civil aviation sector, or the 'Five A's' - airports, airplanes, airspace, airlines and after-market suppliers.

"But each of these components is separately financed, managed, and regulated with tremendous 'information asymmetry' between them. The recent safety and congestion problems at O'Hare are a perfect example.

"The specific areas that are weakened by the industry's poor health include: aircraft maintenance engineering and control; airport passenger and freight security design, management, staffing and training; ATC technology development and staffing; and corporate culture within commercial airlines and agencies.

"Until the industry is integrated into a whole-functioning system, safety will always be compromised."

The Latest Warning of Unapproved Parts
Notification No. 2002-00006, Jan. 7 (extracts):

A joint suspected unapproved parts investigation ... revealed that Amanullah Khan (a.k.a. Wali Merchant) and Ziad Jamil Gammoh, operating as United Aircraft & Electronics (UAE) ... [of] Anaheim, Calif., falsified documents associated with the sale of aircraft parts.

UAE sold surplus or used aircraft parts as new parts with falsified certificates of conformance, invoices, and FAA Forms 8130-3 (airworthiness approval tags). UAE added false dataplates, stamps and serial numbers to reworked parts.

Examples include reworked turbine vans and blades with counterfeit Pratt & Whitney stamps and packaging.

All parts purchased from UAE should be considered suspect and quarantined to prevent installation until a determination can be made regarding each part's eligibility for installation.

Source: FAA, at www2.faa.gov/avr/sups/upn.cfm