What Next for the Airlines?
washingtonpost.com
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. |
