A Bad Experiment

[Bob Owens]

I'll tell what's gonna happen......US airline workers will be earning even less than they earn now because the airlines priorities are shareholders, executives and passengers, in that order....

If you read Sen McCains bill, S1327 you will see thats some in the governments priorities as well.



AMTRAK hasnt made a profit in years yet their workers still have pensions, paid holidays and health benifits. The airline industry is much more vital to the US Economy than passenger rail is, the time has to come when we are no longer forced to subsidize this industry.

Let the industry consolidate. The bigger the carrier the more vital it is to the economy. In other words they cant let it fail.

There are plenty of precidents that we can look at as for what may come in the future. The Rail industry, the oil industry, and most other mature industries all went through massive expansion with many upstarts etc. The best example is the NYC Mass Transit system. many companies competing with the employees of each company represented by competing unions who put their members in a race to bottom. In that case the workers got together into one union and have been better off ever since. Profits are no longer the burden of the transit workers. They shouldnt be ours either, we provide the labor for an essential service, we should be compensated fairly for that.

 

[FWAAA]

An excellent, well thought out post.

The thing you failed to mention in your post is how the BOD's and executives are compensated for running bad businesses with bad models.

Thanks. Directors and execs are grossly overpaid in all industries, IMO, with very few notable exceptions. Gates, Buffett and the Google founders Page and Brin come to mind, but if you have tens of billions of dollars worth of your company's stock (as all of them do), there's no need to take a big salary or bonus. I have no idea how to attack that problem. Even the big public pension funds like CALPERS haven't done enough, IMO. Neither have Fidelity or Vanguard or the other big mutual funds, and just those two control hundreds of billions of dollars worth of stock. Add up all the pension funds and mutual funds and they probably own a combined 90% of the stock value in the USA. And yet exec compensation rises much faster than inflation or GDP or any other reasonable measure.

What appears to be the case at AMR is that the execs feel entitled to their stock payouts because they shepherded the company thru the dark times and most of the company's employees still collect a paycheck. Just like their counterparts at UAL or NWA or DAL (all of whom except for Grinstein took hundreds of millions of dollars of new stock, options and incentives when they emerged from CH 11), the AMR execs probably feel entitled to their "we kept the company going" reward.

And to their credit, unlike UAL, the AMR execs didn't spend $660 million on bankruptcy lawyers, accountants, investment bankers and other bankruptcy parasites like UAL spent during their bankruptcy. For all their horrible flaws, Arpey and Co. did it without spending that $660 million. Oh, and they didn't cancel the common stock, either. For that, the shareholders of AMR are eternally grateful and really don't mind the PUP/PSP greed. I made out like a bandit on AMR stock between early 2003 and early 2007. I can't get too worked up over the exec payouts.

We have a system where airlines can collude on pricing, yet they fail to price their product to gain profits.

Collude is kinda a strong word - since that gets you hard time and big fines unless you have ATI. If enough high-cost, high-fare capacity can be removed thru consolidation or liquidation, the survivors might be able to eek out a profit. Problem is, there's probably a fuel price somewhere that will prevent any airline from flying profitably. If oil hits $200, for example, every airline will have to charge such high fares that not enough people will be willing to pay. And all will lose money. Oil was practically free from 1978-2002. There were blips up and blips down, but it really wasn't very expensive. Americans have become frequent travelers because jet fuel was practically free. Not now. Planes are still full as airlines desperately bid fares down to try to bring in whatever revenue they can, but by this winter, if fuel stays up, it won't keep working.

How is it that UPS and FEDEX can fly a package from point A to point B and make it profitable?

I know that is a simplistic retort, but a valid one.

Not too simplistic for me, and perfectly valid.

A little over a week ago on Saturday afternoon, I had a very important document that absolutely had to get to Baltimore by Monday. It involved big money and lotsa work. So I took it to the Canoga Park FedEx center. I get there and some dumb broad is arguing with the staff over the price to ship a huge picture frame across the country. Turns out she was a stupid e-bay seller who had no idea how expensive it would be to air express a huge, heavy picture frame. Finally, she paid about $50 to send it by FedEx Ground and after she left, the staff unloaded. Very funny.

So I put my 6 ounce FedEx Letter package on the scale and the price is gonna be about $24. Fine, I say, and mention to the staff that the bimbo ahead of me needs to realize that FedEx runs a profitable airline, unlike the passenger airlines. They laugh and agree. I would have paid even more than $24, since the documents were VERY important.

Couple days before, I had returned from SJU on a ticket that netted AA a grand total of about $200 (taxes consumed the rest). That was West Coast to SJU for which AA gave me over 8,500 miles. So my tiny little letter (all of six ounces) would cost more than 10% of my roundabout journey over which AA transported over 200 pounds (including my carryons) over 8,500 actual air miles. Oh, and I had purchased the ticket only three days in advance of flying - and it was a 3 day advance purchase fare. And since I'm a top-tier elite frequent flyer, AA gave me First or Biz on all segments for NO additional money, since AA EXPs get free upgrades.

The lesson here - is that AA was desperate for money. FedEx, on the other hand, was not. FedEx and UPS have matched capacity to demand while AA and the other legacies have not. So AA begs me to buy a money-losing fare at almost the last minute yet FedEx says "10 of those little letters would cost the same as your mini-vacation fare." Unreal. As an aside, I'm glad there's some FedEx stock in my retirement accounts. If there were six big express air freight airlines instead of two, maybe FedEx would have been desperate that Saturday.

 

[Cosworth]

1. Price competition is NOT bad when logic is used to dictate the cost of a product in order to ensure a profit. Competition IS bad when a company charges less then the cost to produce the product and turns to the employees for life changing scarifices only to turn around and reward themselves with the sacrifices made.

2. Why not have the government set airline fares? They did before and airlines made a profit. The airlines can not seem to get it right on their own. (See #1.)

3. Government should/could set fuel prices. Why is the suggestion of creating privatized company that sells fuel to all airlines, hence helping to level the playing field, a bad idea? A profit could be made and used to overhaul the infrastructure.

4. Yes, the government should mandate that US registered a/c do maintenance in-house. Why shouldn't they? Airlines would have better quality control AND it would prevent American jobs from going overseas to less skilled/trained people. Are you against keeping highly skilled jobs in the US?

5. Yes, airlines should liquidate if they can not operate by playing the same rules everyone else does. How many times, (1, 2, 3 4 times), should a company be allowed to go into BK, break contracts, etc. AND still allow management to sit back and claim bonuses why employees bare the burden?

6. Yes. Perhaps not a "full" re-regulation but as I point out/suggest, something needs to be done. Airline managements have acted liked spoiled, greedy children and when punished, ie. BK, it is like the child being sent to his room but they have tv, Nintendo, internet, cell phones to play with.

And last but not least:

7. What is your suggestion for saving the airlines?

Is your answer to everything "the government should ..." Given the current state of the nation, economy, SS, Medicare .. and everything else they have their hands in you really think they can fix your airline? I have a bridge to sell you.

I agree with others that if an airline cannot meet its financial obligations, their doors should be shut. I believe that if the likes of UA, NWL and others knew that their doors would be closed if they failed to fix their problems, things would have turned out differently. If there are no consequences, they why worry about it.

Competition is part of what separated the US from the likes of the USSR. If American or UAL are protected by the government, then why should they strive to produce a better product? What will spur ingenuity? How could a carrier like SWA come into being?

It seems you want to protect your self and others from the risk of failure and you want the government to do what your company cannot. I wonder if the folks at SWA share your feelings. My guess would be know because the company they work for seems, at least for now, figured out how to play the game and win. That right their is proof enough to me that your idea is bankrupt from the get go.

Were it not for competition, Toyota, Honda, Hyundai and the like would never have taught the Big 3 how to build a car. Were it not for competition, Airbus would not be keeping Boeing on their toes.

I'm sorry if you, your union and the company you work for have not kept your eye on the future and adjusted accordingly. Penalizing those who have figured out how to play the game is not the way to level the playing field. The way to make it equal is to find someone who IS capable of playing the game and getting rid of those who cannot.

There will always be air transportation. If will probably look far different from the landscape we see now but it will exist. Perhaps the future will be a version of Virgin, SWA, JB type airlines doing the big stuff and small regional carriers or charter companies doing the small stuff. Perhaps rail will make a come back. For a short trip rail makes far more sense. Take a train to down town Berlin and then a subway or bus to your destination. I took the train from LAX to SAN. Far less of a hassle and IIRC less time.

Take away the safety net and let those who can ... do ... those who cannot ... buh bye.

 

[limit]

This is bull, Fwaa.
The government has been forgetting everything you talk about, as soon as a company enters bankruptcy(and this is only one example).
Free market goes out the window.The judges with the full support of government reward failure and protect capital
on the shoulders of everyone else.
Your capitalist BS only exists in your dreams.
If the government protects capitalists by practicing socialism ,why is it wrong to apply the same for labor?
I do not necessarily support one or the other ,its just that your writings are better fit for classroom utopias,rather than market world/US policy realities.

 

[FrugalFlyerv2.0]

AMTRAK hasnt made a profit in years yet their workers still have pensions, paid holidays and health benifits. The airline industry is much more vital to the US Economy than passenger rail is, the time has to come when we are no longer forced to subsidize this industry.

AMTRAK would/could be quite profitable if it did not have interference from Congress. AMTRAK is not the model you should be striving for. Thanks to your tax dollars AMTRAK employees have better pensions, more holidays and more other benefits, which they probably would not,(should not?) have in a free market.

 

[Bob Owens]

Thanks. Directors and execs are grossly overpaid in all industries, IMO, with very few notable exceptions. And yet exec compensation rises much faster than inflation or GDP or any other reasonable measure.

Well there's something we agree upon.

I have no idea how to attack that problem.

The first step in attacking the problem is campaign finance reform that prevents these guys from using stockholder money in the political arena. Another is to pass a law preventing executives from holding multiple board positions.

Just like their counterparts at UAL or NWA or DAL (all of whom except for Grinstein took hundreds of millions of dollars of new stock, options and incentives when they emerged from CH 11), the AMR execs probably feel entitled to their "we kept the company going" reward.

Well arent they the ones who put the company in dire straits in the first place? SWA is in the same business yet they didnt have to rape their employees to save the company because they managed it well in the first place.

And to their credit, unlike UAL, the AMR execs didn't spend $660 million on bankruptcy lawyers, accountants, investment bankers and other bankruptcy parasites like UAL spent during their bankruptcy.

No that went towards their bonuses. Lets not forget that until the AA TWU debacle the BK granted concessions at other carriers were much less than what they ended up being. I think UAL was around 14% with no lost holdays, vacation, sick time, doubletime etc. It was only after AA that the other carriers went back for more cuts in order to match what AA got. Its probable that had AA gone BK at worst we would have matched what the courts had already granted and it would have stopped there-leaving us all with an additional 10% in or pockets for the last five years.

For all their horrible flaws, Arpey and Co. did it without spending that $660 million. Oh, and they didn't cancel the common stock, either. For that, the shareholders of AMR are eternally grateful and really don't mind the PUP/PSP greed. I made out like a bandit on AMR stock between early 2003 and early 2007. I can't get too worked up over the exec payouts.

Sure AA would have spent that money and YOU would have lost out on profiteering off our labor, perhaps losing a little of your excess capital in the process as well. Instead we lost 25% (and climbing- presently up to around 40%)of our income to save your investment. Basically you hired Arpey, he screwed up and we paid the bill and then some.At least you finally admittted that you have a vested interest in seeing us get paycuts-our paycuts go directly into your pocket.

So if and when the workers finally decide to tell the executives, the judges and even the President to pound salt and you are sitting stranded somewhere dont "get too worked up".

 

[FrugalFlyerv2.0]

3. Government should/could set fuel prices. Why is the suggestion of creating privatized company that sells fuel to all airlines, hence helping to level the playing field, a bad idea? A profit could be made and used to overhaul the infrastructure.

I'll bet you that if government bought and sold fuel, airlines would end up paying more than they are now. Don't believe me? Look at the USPS & compare their products with FedEx/UPS/DHL etc.

 

[FrugalFlyerv2.0]

So if and when the workers finally decide to tell the executives, the judges and even the President to pound salt ... ... ...

Where oh where is today's Che Guevara? How long must the the proletariat suffer?

 

[MCI transplant]

Is your answer to everything "the government should ..." Given the current state of the nation, economy, SS, Medicare .. and everything else they have their hands in you really think they can fix your airline? I have a bridge to sell you.

I agree with others that if an airline cannot meet its financial obligations, their doors should be shut. I believe that if the likes of UA, NWL and others knew that their doors would be closed if they failed to fix their problems, things would have turned out differently. If there are no consequences, they why worry about it.

Competition is part of what separated the US from the likes of the USSR. If American or UAL are protected by the government, then why should they strive to produce a better product? What will spur ingenuity? How could a carrier like SWA come into being?

It seems you want to protect your self and others from the risk of failure and you want the government to do what your company cannot. I wonder if the folks at SWA share your feelings. My guess would be know because the company they work for seems, at least for now, figured out how to play the game and win. That right their is proof enough to me that your idea is bankrupt from the get go.

Were it not for competition, Toyota, Honda, Hyundai and the like would never have taught the Big 3 how to build a car. Were it not for competition, Airbus would not be keeping Boeing on their toes.

I'm sorry if you, your union and the company you work for have not kept your eye on the future and adjusted accordingly. Penalizing those who have figured out how to play the game is not the way to level the playing field. The way to make it equal is to find someone who IS capable of playing the game and getting rid of those who cannot.

There will always be air transportation. If will probably look far different from the landscape we see now but it will exist. Perhaps the future will be a version of Virgin, SWA, JB type airlines doing the big stuff and small regional carriers or charter companies doing the small stuff. Perhaps rail will make a come back. For a short trip rail makes far more sense. Take a train to down town Berlin and then a subway or bus to your destination. I took the train from LAX to SAN. Far less of a hassle and IIRC less time.

Take away the safety net and let those who can ... do ... those who cannot ... buh bye.

<_< ------- Sounds good! But unfortunately it's not working that way! "There will always be air transportation" that may be true, but you won't like what it may turn into! Two or three Mega-Airlines flying domestically, and if you want to fly international, it'll be on a foreign Airline, subsidized by it's particular government! And as for completion, it's getting less everyday! And the price of ticket's will be where they should have been a long time ago! HIGHER!!!! It seems all those aposed to this can tell us why,-------- but, can not tell us how to fix it! They just say let the system work! Well we have! And we don't like where it's taking us!!!And if we let it play out the way it has, neither will you!!!

 

[Cosworth]

<_< ------- Sounds good! But unfortunately it's not working that way! "There will always be air transportation" that may be true, but you won't like what it may turn into! Two or three Mega-Airlines flying domestically, and if you want to fly international, it'll be on a foreign Airline, subsidized by it's particular government! And as for completion, it's getting less everyday! And the price of ticket's will be where they should have been a long time ago! HIGHER!!!! It seems all those aposed to this can tell us why,-------- but, can not tell us how to fix it! They just say let the system work! Well we have! And we don't like where it's taking us!!!And if we let it play out the way it has, neither will you!!!

That's the thing. The system has not been allowed to work. Failed airlines have been propped up and allowed to continue flying. Those airlines have made it more difficult for your airline to be successful. It is just like screwing with nature. Placing a damn in a river in and of it's self is of no consequence. When the water stats to back up and forces other creatures to move who do something for the land and predators start to move and .... Keeping people employed at bankrupt airline XX is nice in and of it's self but as we all see, it has far reaching ramifications.

I am not sure what the future of air travel will look like. Not sure if it will be a version of SWA or AA. Not sure it will be a bunch of regionals taking care of the local stuff and and some large corporation taking care of the larger stuff. Perhaps bullet trains will have a part in it.

I agree that the system is broken. What I disagree with is trying to fix the existing one as opposed to creating a new one. I believe that nature must be allowed to have it's way and that what ever and who ever survives will find away to create that new order. Not everyone can survive. Unfortunately a few will not make it.

 

[The Goose]

This is bull, Fwaa.
The government has been forgetting everything you talk about, as soon as a company enters bankruptcy(and this is only one example).
Free market goes out the window.The judges with the full support of government reward failure and protect capital
on the shoulders of everyone else.
Your capitalist BS only exists in your dreams.
If the government protects capitalists by practicing socialism ,why is it wrong to apply the same for labor?
I do not necessarily support one or the other ,its just that your writings are better fit for classroom utopias,rather than market world/US policy realities.

As an example, UAL wasn't allowed to fail for one simple reason; perhaps this type of agreement is with another bank also but - GE Capital bailed Tilton out in exchange for being a major provider of engine maintenance (CF-6, CFM-56). Citi probably got a chunk of that somewhere.

Large banks keep bailing out the airlines because they already have more than enough invested. There's plenty of money there to strip away (the damned execs have figured that out), but the banks want their "due" also. Until the banking industry is sidelined, there's no hope of an airline failing, except for the small and weak perhaps.

 

[upsilon]

As an example, UAL wasn't allowed to fail for one simple reason; perhaps this type of agreement is with another bank also but - GE Capital bailed Tilton out in exchange for being a major provider of engine maintenance (CF-6, CFM-56). Citi probably got a chunk of that somewhere.

Large banks keep bailing out the airlines because they already have more than enough invested. There's plenty of money there to strip away (the damned execs have figured that out), but the banks want their "due" also. Until the banking industry is sidelined, there's no hope of an airline failing, except for the small and weak perhaps.

It was probably not CitiBank - but Chase, since Chase issues the UAL affinity credit cards.

 

[The Goose]

It was probably not CitiBank - but Chase, since Chase issues the UAL affinity credit cards.

I usually get something wrong like that.

At least they both start with a "C".

 

[flyhigh]

The idea of re-regulating the airlines is terrible from so many perspectives. If you tried to, think about how you would do it. You'd have to tell AA, UA, CO, DL, NW, AS, and many others that all the money they've invested in their hubs has been wasted as your now going to be point to point operators. With that said, this big worker benefit goes out the window as many of the families now have to move to this re-allocated system we have. Part of regulation wasn't just fares, but routes as well.

I think the larger problem is that there is too much regulation in some areas and not enough in others. Anybody with a little bit of money by airline standards can open shop. There should be more rigor behind the start-up evaluation.

 

[The Goose]

Re-regulation would work because it would level the playing field for all airlines. The government would set prices for tickets. When contracts came up for ratification if an airline needed to raise prices they would go to the "CAB" and argue why they need to rise. Just like they did in the past.

Re-regulation would work because the "I can bleed longer than you can" analogy of current underpricing of tickets would not be an option for inept management. Just look at Aloha Airlines. Hawaiian and Aloha co-exhisted for years then comes along a third airline who lowers tickets so much THEY can't make a profit but do so so they can get "market share" and in turn bleed the competition dry/dead. This is wrong.

Re-regulation can work because it worked before. Greed and ineptness have run it's course at the expense of the public, employees and sharholders. With the fading away of some of aviation's legacy carriers, ie. TWA, Eastern, PanAm, and now AmericaWest/USAir = NWA/Delta = and possibly CO & UAL there will be even less airlines that need regulating. By re-regulating the airlines going into BK would not be an option. That airline would have to reorganize outside of court. If they can not then they fail. I do not mean to be cold but there needs to be a stop to this insanity.

At this point, I have to ask why anyone in their right (or left) mind would think the government that would regulate airlines now is capable of anything other than the same greed and ineptness. I don't see it - the Congress and Senate are out for themselves and their corporate sponsors; common sense need not ask for favors.

My idea of airlines buying fuel from the government is valid. I suggest that a privatized government organization could be created just as the US Post Office and the THRIFT Savings Plan for federal employees' retirement was created. This new organization would be able to purchase fuel in such large quantities it would give airlines no excuse for crying about fuel prices since EVERYONE would pay the same. This new organization would be accountable to Congress.

At this point, I have to ask why anyone in their right (or left) mind would think the government that would regulate airlines now is capable of anything other than the same greed and ineptness. I don't see it - the Congress and Senate are out for themselves and their corporate sponsors; common sense is irrelevant and those without millions to contribute to the politicians need not ask for favors.

The profits generated buy this new organization could then be used for rebuilding the infrastructure by providing better training for pilots and AMTs, dispatchers, new technology and for commercial Space. There could be an "Aviation Univeristy" created within this new organization that sells fuel to airlines.

I value your opinion and encourage others to post their concerns/ideas. If you "vote" please explain your point of view. This thread should not be filled with negative attacks but rather positive exchanges of intelligent ways to better the airline industry. Because we all know that that would never happen if left to the airlines themselves.

Some manner of regulation is needed but it's doubtful that any policy to the benefit of all concerned would be enacted, but most likely sidelined or canned by special interests.