Good column from Will on the Airline Industry, and the virtues of Bankruptcy.
washingtonpost.com
'Creative Destruction' and United Airlines
By George F. Will
Sunday, December 8, 2002; Page B07
United Airlines, which is on a bumpy glide path to bankruptcy, recently ran newspaper ads proclaiming its determination to avoid bankruptcy by winning from employees $5.2 billion in wage and work-rule concessions. United hoped these would help it win from the Air Transportation Stabilization Board (ATSB) a huge subsidy of $1.8 billion in loan guarantees.
Defining bankruptcy -- which actually is in United's and the nation's interest -- as failure, the ad declared: "Failure is not an option." Actually, failure is a fact, and was long before Wednesday's ATSB decision denying United's plea.
In United's 1994 crisis -- crisis is normality in the airline industry, which has not netted a nickel since Kitty Hawk -- employees agreed to $4.9 billion in wage, pension and work-rule concessions in exchange for 55 percent of United's stock, three union seats on the company's board and effective veto over the selection of United's CEOs. A union leader said the theory was that "no one washes a rental car." That is, you take care of what you own.
The owner-workers took care of themselves. United has the industry's highest labor costs, which is one reason it is losing $8 million a day -- $3.8 billion in the past seven quarters. Standard & Poor's rates United's debt at junk-bond levels. Other airlines, which say United drove up the industry's unsustainable pay scales, fiercely opposed the loan guarantee.
Some United mechanics, who demanded hefty raises before they would consider cuts, rejected $700 million in givebacks over 51/2 years. Their initial rejection caused United stock to lose 32 percent of its value in one day, a self-inflicted financial injury to the owner-mechanics. But their stock has lost more than 90 percent of its value in two years, and would go to zero in bankruptcy. Which is one reason why United's pilots, who own 25 percent of the employee-owned stock, agreed to $2.2 billion in givebacks.
The terrorist attacks wounded airlines, but not as much as a long history of dubious business decisions has done. The airline industry is capital-intensive ($100 million planes), highly leveraged (an idled plane can still cost $500,000 a month in payments) and labor-intensive (senior pilots can earn $300,000 a year for 80 hours per month). High fixed costs mean that a 12-week strike would bankrupt any major airline, so labor always holds the whip hand.
Opponents of an ATSB loan guarantee said it would have been another instance of the pernicious policy of keeping profits private but socializing losses. Advocates of a guarantee said United's assets would have ensured that the loan would be repaid. But if the assets are so impressive, why would bankers insist on federally guaranteed loans? And the sale of some of United's assets, including planes and routes, might make the loan less necessary.
If the guarantee had been granted, the government probably would have demanded, as it did when bailing out Chrysler 23 years ago, an equity stake in the company, to be sold when the market made that advantageous. But another virtue of bankruptcy is that it avoids this additional blurring of the lines between the public and private sectors.
Bankruptcy will not mean liquidation of the world's second-largest airline (second to American), it will mean restructuring, particularly of labor contracts. Already United has cut its employees from 100,000 to 81,000, with 9,000 additional cuts promised. And it has eliminated 25 percent of its flights.
Bankruptcy may mean fewer United flights and destinations, but the industry has excess capacity. Continental has been through bankruptcy twice, emerging healthier, as US Airways expects to do in March. And the alternative might be an American strain of Japan's disease.
Japan, in its second decade of stagnation, has a "zombie economy" in which many companies that should die are kept on life-support subsidies, thereby preventing a rational reallocation of capital. America's success rests on the solid foundation of failure, aka "creative destruction." Were America more like Japan, Americans today would drive Packards, Studebakers, Hudsons and DeSotos to airports and board flights on Braniff, Pan Am, TWA, Eastern and National airlines. And Americans' standard of living would be much lower.
The very name of the ATSB, which was created to help airlines cope with conditions after the terrorist attacks, indicates what is problematic about it: "Stabilization" is a dubious objective for any sector of a dynamic economy, and especially for a sector as troubled -- $7 billion in losses last year, perhaps $8 billion this year -- and misshapen as the airline industry.
What is needed is an ATCDP -- air transportation creative destruction policy. Which is what bankruptcy, in the hands of a sensible judge, is, and what the ATSB's denial of United's plea facilitates. |
