George Will - Turbulent Skies Editorial
 

Airline industry turbulence is good for fliers - The Washington Post

DALLAS — From his office window, Thomas W. Horton, in his fifth month as CEO of American Airlines, can see in the distance the Manhattan-size footprint of Dallas-Fort Worth airport, where American has 85 percent market share; it also has 68 percent in Miami, gateway to South America's booming market.

In the foreground, however, he can see one reason why, nevertheless, his company recently entered bankruptcy — the corporate headquarters of Southwest Airlines.

Southwest, the most successful of the "low-cost" carriers that proliferated after the 1978 deregulation of the industry, has been profitable for 39 consecutive years, while the rest of the industry was losing $60 billion between deregulation and 2009. Southwest, JetBlue and the others have 30 percent of the domestic market, up from 10 percent in 1999.

The "two-tier" airline industry is, however, becoming a thing of the past. All carriers are going to have low costs because of what Horton calls "fear-based discipline," aka competition.

In the last three decades there have been 188 airline bankruptcies. Not coincidentally, fares, adjusted for inflation, are 18 percent lower than in 2000.

Forty years ago, a majority of Americans had never taken an airplane trip. Now everyone is more free than ever to move about the country, air travel having been democratized by liberating it from government.

In 1938, the Civil Aeronautics Act codified a government-managed cartel. Reason magazine's Nick Gillespie and Matt Welch report that, 34 years later, United's percentage of market share had gone from 22.9 to 22, Eastern's from 14.9 to 11.6 and TWA's from 15.1 to 11.9.

Why this bureaucrat's dream of near stasis? Because between 1950 and 1974, the Civil Aeronautics Board received 79 applications for startup airlines and rejected them all, believing that if even one passenger would be taken from an existing carrier, competition would be excessive.

Intellectuals are often the last to learn things, so John Kenneth Galbraith, Harvard's celebrity economist and one of liberalism's pinups in the 1950s and 1960s, argued in his 1958 book "The Affluent Society" that modern marketing — advertising and other supposedly dark arts — is so powerful that big corporations could manufacture demand for whatever they manufactured. In 1958, Ford put all its marketing muscle behind the Edsel.

Undiscouraged by evidence, in 1967 Galbraith, full of the progressive's enthusiasm for the administrative state, asserted in "The New Industrial State" that the U.S. economy would soon be dominated by large corporations essentially immune from competition and hence from market turbulence. Four years later, Southwest launched its first flight. The "legacy carriers" — those that had operated under the CAB regime — were in for heavy weather.

American bought TWA shortly before 9/11, adding capacity just when less capacity was suddenly required. American is the last of the six legacy carriers to enter bankruptcy. The other five are United and Continental, now merged, Delta and Northwest, also merged, and US Airways, which entered bankruptcy twice before merging with America West.

Airlines have resembled those local governments that have given unsustainable contracts to unionized public employees and now are contemplating bankruptcy. (Watch Stockton, Calif., which may soon be the biggest municipal bankruptcy since the Depression.)

Bankruptcy has been a management tool for airlines that cannot stand strikes — there has been no strike at a major airline since 2005 — because they must amortize their aircraft even when not flying. Bankruptcy has enabled carriers to shred improvident contracts entered into to purchase labor peace.

If American's pilots had the work rules covering Continental pilots before the merger with United, American could have hundreds fewer pilots, and more earnings: A senior captain flying a wide-body plane makes more than $200,000 a year and has rich pension and medical plans.

Horton has done taxpayers a favor by deciding not to turn American's nonpilot pensions over to the Pension Benefit Guaranty Corp., the deeply underfunded federal agency that would pay only a portion of what employees were expecting. American will pay benefits already accrued but henceforth employees will have defined contribution rather than defined benefit plans.

Airline bankruptcies are peculiar: Just last July American bought $38 billion worth of new fuel-efficient aircraft. It takes money to save money and an airline.

Horton is imperturbably noncommittal about the possibility that the industry's next consolidation will meld American with perhaps US Airways or Delta: "Our plan is to create the best outcome for our stakeholders."Which is a nice way of saying, "Please leave your seat belts fastened." Turbulence is normal, and normally good for travelers.

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Evidently George Will blames American pilots for AA's bankruptcy; I blame poor management. Nor would I equate pilot unions with public employee unions (which are a monopoly with no competition).

It's the same old stuff. In good times, the management or CEO must have done a great job. In bad times, it's got to be the worker's fault. One day, America will wake up. Just not today.

Actually, Will does not blame it on the workers/pilots, he carefully and rightly points out that mismanagement by both government and poor business management caused much of the trouble.

The positive side is that consumers benefit from free competition and good business models adapt and profit. Like it or not, the market(that is people who actually buy what you are selling) dictates the terms.

Interesting, this leaves one with varied impressions. On one hand we've got George Will pontificating at great length on a subject he knows very little about. Turbulence good ? The denigration of airline training departments and valued experience along with maintenance performed by un-skilled labor in third world countries is part and parcel of de-regulation. On the the other hand, the AA pilot group under the Allied banner has helped to destroy labors strength with poor treatment of acquired pilot groups. This leaves me with little empathy for this pilot group and I don't want my tax dollars supporting their retirement plans,,,or United's for that matter. It all too often seems to be an ill conceived reaction to an ill conceived decision.

"This leaves me with little empathy for this pilot group and I don't want my tax dollars supporting their retirement plans,,,or United's for that matter."

Are you serious? How would your tax dollars go to supporting American and United Pilot retirement plans? My pension at United may have been underfunded but there was excess money in the plan above what was legally required to pay retirees under the PBGC rules so the PBGC was salivating to get a hold of United Pilots Pension so that they could give the pilots the required minimum and use the excess to fund other peoples pensions. So, the PBGC took my property and gave it to somebody else. Your tax dollars will not go to supporting United Pilots Retirement Plan at the PBGC. We would have been much better off if we were allowed to freeze our Pension Plan but the criminals at UAL management and the PBGC/Govt were able to steel it before that could happen.

The PBGC is just another grossly underfunded government Ponzi scheme.

I have said it before, and I will say it again-unless you and your union demand funding of your pension into an account with your name on it every month, then you in fact only have a worthless piece of paper and not a retirement fund.

It is amazing how many times this trick has been pulled and yet....

"...unless you and your union demand funding of your pension into an account with your name...."

What pension?

All of Amerika is just one big Ponzi scheme nowadays with the banksters in control.

My point exactly, if you think the company, the union or the gov can be trusted with your money you have already made a fatal error.

Your B plan at UPS is just as vulnerable, maybe more so.

I would hate to see what would happen to the UPS pilots and their sizable B plan if the Super Committee pushes to make the proposed change to 413, which my Union was successful at stopping, albeit temporally.

Let's hope it does not happen, for all of our sake.

How is a companies DC/B-plan different from say a 401(k)? If I've been pumping 12% of my pay in, and the company is matching that, is it feasible for them to get their hands on it?