What Next for the Airlines?



By Robert Crandall
Thursday, August 15, 2002; Page A25

The bankruptcy of US Airways underscores the depth of the crisis in the country's airline industry. The recession, the immediate and ongoing effects of the Sept. 11 attacks, new technologies, intense competition from low-fare carriers, inflexible operating procedures and stubbornly high labor costs all have contributed to circumstances that are severely challenging airline managements. The crisis is also heightening a long-felt uneasiness among policymakers in Washington, and in state and city governments, about how the industry's response to its problems will affect the availability and cost of airline service throughout the country.

In the past, bankruptcies have been a destabilizing influence in the industry. Bankrupt carriers are able to use the statute to lower their costs in many ways; additionally, they have often chosen to offer lower-than-normal fares to retain customers. While it remains to be seen what course US Airways will follow, its new flexibility can only intensify the pressure every major airline is feeling.

On the other hand, the US Airways bankruptcy could prove to be the catalytic event many industry observers have believed necessary to drive the industry toward dramatic change. During the past several years, the public has made its preference for lower fares more than clear, and in response the country's major carriers have been aggressively reformatting their business models. This week's announcement by American, and speculation about impending changes by other carriers, reflects a broad understanding that new approaches are needed.

Because large labor cost disadvantages lie at the heart of the difficulties the traditional U. S. carriers face, US Airways will no doubt do all it can to use the flexibility the bankruptcy statutes offer to reduce its historical labor cost disadvantage. Reducing its costs sufficiently to become competitive with such low-cost carriers as Southwest and JetBlue is important for US Airways, because each of those carriers has encroached heavily on important US Airways markets.

As the US Airways reorganization proceeds, other carriers will find themselves confronted with a new, more effective competitor. Faced by that reality and unwilling to contemplate a noncompetitive future, managements and unions may find new opportunities to work out the effective cost reduction formulas that have thus far eluded them.

As the story unfolds, the federal government should avoid actions that might prevent market forces from working. Specifically, the Air Transportation Stabilization Board should reject US Airways' bid for a loan guarantee. It is clear that the bankruptcy laws and private capital markets will provide a reorganization opportunity for US Airways if the company and its unions can agree on contracts that will allow it to operate at competitive costs.

Congress should rethink the aviation security mandate it laid down in last fall. It is now clear that the planned changes cannot be implemented effectively and efficiently by year's end. Attempting to do so would waste a stupendous amount of money and discourage travelers from returning to the skies, thus slowing the recovery of both the airline industry and the economy.

The administration and Congress should give careful thought to the question of how an industry that is forbidden to consolidate but whose failures are consistently resuscitated by the bankruptcy laws can ever achieve success. In most industries, financial results equivalent to those produced by the airline industry would have long since resulted in liquidations and consolidations.

The US Airways bankruptcy is a catastrophe for those who invested in the company. But failure is always a possibility in a free market, and the bankruptcy laws, though badly flawed, are society's best judgment about the most appropriate remedy. Given the importance of the nation's airline industry, we must all hope that the marketplace will guide the airlines to solutions consistent with the continued availability of convenient, competitively priced transportation services for cities across America. As the industry works out its problems, the government should stand back and let the market do its job -- while avoiding actions that will make things worse.

The writer is former CEO of American Airlines.

http://www.washingtonpost.com/wp-dyn/articles/A19834-2002Aug14.html

Mark's response to this article that he submitted:

August 16, 2002


Robert Crandall, former CEO of American Airlines, argues that the fate of beleaguered airlines should be determined by market forces (Opinion, August 15, "What next for the Airlines?"). He asserts that it is in the interest of "convenient, competitively priced transportation services for cities across America" for the government to reject US Airways' bid for a loan guarantee, relax security mandates and lift restrictions that limit the consolidation of carriers. It is clear that the proposed actions would benefit large air carriers (other than US Airways), but the benefit to consumers is questionable. Mr. Crandall states that, without loan guarantees, US Airways will "use the flexibility the bankruptcy statutes offer to reduce its historical labor cost disadvantage." In other words, if jobs are threatened, US Airways can play hardball in negotiating with its labor unions. Other carriers' leverage will increase as the result of the competitive pressure of a leaner, meaner US Airways. But consumers should be aware of the nature of the concessions that the air transport industry would negotiate. Relaxed work rules will result in longer hours, less downtime and increased pressure and fatigue for flight and maintenance crews. Essential functions will be relegated to lowest-bidder subcontractors. The tragic crashes of both Valujet and Alaska Air were the direct result of precisely these practices.

In the years since our sixteen year old daughter Tara was killed in the crash of Swissair 111, my wife and I have learned a lot about the business of air transportation - and it's not good. Mr. Crandall is an veteran of and a spokesperson for the big air business, the interest of which is profit, pure and simple. This is not to say that there is anything wrong with businesses that deliver value to their customers making money. But it is pure foolishness for consumers to believe that airlines will act in a manner that is contrary to their own profit motive when it comes to safety and security. Perhaps most disturbing is the manner in which industry advocates like Mr. Crandall couch their arguments for reductions in regulatory safety and security mandates in terms of the public interest. This from an industry that spent over sixty million dollars on lobbying during the period from 1997 to 2000!

In 1996, the White House Commission on Aviation Safety and Security (chaired by Al Gore) recommended, among other things, bag matching and criminal background checks for airport security screeners. The FAA missed a congressionally mandated deadline of May 31, 2002 for release of rules implementing the commissions recommendations. United Airlines objected to proposed requirements that security screening trainers have 40 hours actual work experience and that trainees pass a test on the basis that it would create an "unnecessary administrative burden." Other carriers and industry groups registered similar objections.

Under deregulation, the FAA does retain regulatory authority over safety, which is administered through a certification process for aircraft and related equipment. But, in practice, the actual certification is performed by FAA designees who are often on the payroll of the regulated manufacturers. The FAA's direct involvement is limited to the specification of the process. After the crash of Swissair 111, the FAA conducted an investigation into the certification of the in-flight entertainment system installed in Swissair's MD11 fleet. Certification of the equipment was revoked and the company that performed the certification was stripped of its status as an FAA designee - yet the FAA's final report found that "no regulations were violated."

While the industry decries regulation as contrary to the free market forces, it is absurd to believe that the public interest in safety and security are somehow special - an exception wherein hiring the fox to guard the henhouse will be just fine. How many human lives will the public willingly sacrifice for lower fares, or for the welfare of the airlines? I'm darn sure the answer is none! For air carriers in the relentless purist of the bottom line, I'm not sure at all.

Mark Fetherolf