The answer is'nt to become an industry of Southwests
Not to inundate you with views you've probably already heard (I meant to post the McArdle piece yesterday), but I ran across this opinion piece by Holman W. Jenkins Jr. in today's Wall Street Journal. It underscores the point that Crandall made earlier. (I wasn't aware of the government's equity stakes in the bankrupt airlines due to assumption of pension obligations, were you?)
Needed: Fewer, Freer Airlines
September 21, 2005; Page A27
Belated kudos to the United Airlines pilots union for flooding my inbox with unprintable rejoinders after a column calling for the bankrupt carrier's liquidation. Many useful suggestions were provided regarding where I could store common office objects on my person. Not forthcoming was any cogent challenge to my main point: By keeping United alive and agreeing to relieve it of its pension costs, the government was only making it more likely that other carriers would follow suit.
Northwest and Delta, which filed for Chapter 11 last week, will end up dumping their pension obligations now too. Much pain will be borne but the happy ending -- an airline industry that investors will sustain, customers will value and the government won't have to bail out -- won't be any closer.
Traffic is strong, the economy is growing, so the mainline carriers should be accumulating the surpluses now that will see them through the next downturn. But they're not, guaranteeing a worse bloodletting a few years from now.
The answer isn't to become an industry of Southwests. Southwest Airlines may be profitable, but by its own testimony, it's a "niche player." It flies between cities that generate enough traffic to sustain direct service, yet avoids for the most part flying to hubs controlled by the majors or trying to serve the 38,000 city-pair markets that generate fewer than 50 passengers a day.
Notice, too, that Southwest's pilots are rapidly becoming some of the highest-paid in the industry, and its celebrated but temporary oil-price hedges, which reportedly saved it $196 million on its fuel bill in the second quarter, more than accounted for the second quarter's profit of $159 million. In short, not even the industry darling is guaranteed an easy life in the shakeout ahead.
It's time to talk about market power -- defined as an industry player or players having sufficient clout to set fares that will cover their costs and make them stick. Anyone who thinks all will be satisfactory once a few high-cost airlines have patched themselves up in Chapter 11 should stay tuned. The mess will just get messier.
Cover the dog's ears because we're about to utter a heresy: The industry's innately challenging economics would be a lot more manageable if airlines were freed from some of our misguided antitrust prejudice against cooperative acts by competitors. We'll leave elaboration for a future column, but a good start would be freedom to enter and exit code-sharing deals at will.
Let's revisit recent history. Not entirely accurate is the impression of the old legacy carriers simply flailing without a plan, hoping somehow to hold it together until their rivals finally vanish in bankruptcy liquidation.
Yes, that's been the plan lately, but serious managerial attempts were once made to get ahead of the curve. Five years ago, United and US Airways sought to merge but abandoned the attempt when trustbusters stood in the way. Now both airlines are in Chapter 11. Northwest and Delta have been trying, in a complicated jig, to establish a code-sharing relationship as a halfway house to a merger. That effort has been opposed by the Justice Department. Delta and Northwest are now in bankruptcy.
In addition, rougher and readier solutions to the industry's problem of excess capacity have also been tried. After flight attendants and baggage handlers at US Airways stranded thousands of passengers over Christmas with an impromptu "sick-out," Delta sought to administer the coup de grace by slashing fares, while Southwest announced plans to invade US Airways' lucrative Pittsburgh stronghold.
Most industry experts would have told you (and still would) that US Airways was destined to disappear. But despite the best efforts of its competitors, the airline clings to life. Blame a bankruptcy judge, a federal loan and federal assumption of its pension obligations. Its merger partner, America West, has received similar aid. The government will even own a sizeable stake in the merged carriers after bankruptcy.
For now, US Airways has basically been sponsored by the government to go out and undercut the fare structure of competitors that haven't availed themselves of federal favors.
Ditto United Airlines. In bankruptcy for three years, the carrier never received a bailout loan but the window was kept open as an inducement for management to hang on. A federal bankruptcy judge entertained United's silly antitrust complaint against creditors who were seeking to repossess planes just before last year's holiday travel season. Having taken over United's pensions, now the government owns an equity stake in the airline that only increases its incentive to keep United flying.
With the latest bankruptcy filings of Northwest and Delta, politicians talk bravely about how they're finished bailing out airlines. All bets will be off, however, if American Airlines opts for Chapter 11 in the months ahead.
In any case, let's not delude ourselves: Through the bankruptcy and pension insurance systems, Washington is already engaged in a bailout -- an incoherent and self-defeating one. After Sept. 11, as long as the feds were in the business of lending money to ailing airlines, we argued that the bailout board should fully embrace the merchant banker role and sponsor the necessary deals to reduce the legacy airlines to a smaller number of stronger carriers.
That opportunity was missed once, but don't be surprised if it comes around again with the greater implosion still ahead.
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