The Wall Street Journal
Wednesday, June 23, 2004
Page A17
Listen up and you can hear the rivets popping in one of Congress's more counterproductive creations of recent years. Only a failure of political nerve can explain last week's decision by the Air Transportation Stabilization Board not to deny outright United Airlines' bailout petition, close up shop and let the industry get on with shaking itself out. Two members of the bailout board turned down United's request for the second time. But also for the second time, they cast a wisp of hope in front of the carrier that by, say, dotting a few more umlauts it might yet able to avoid the harsher tweaks to its cost structure that a private investor would demand.
This act of muddle, attributed to frantic phone calls from House Speaker Denny Hastert of Chicago, strikes the naked eye as aimed at saving the Bush administration from owning up to a decision to throw United and its 62,500 employees and 27,000 retirees to the hyenas of Wall Street.
CEO Glenn Tilton has done better than many expected in bringing down costs and improving service. It might be a good thing if a few big, old-style airlines were to disappear, but United seems like an unlikely candidate to oblige, with or without a federal bailout. For one thing, it clings to lucrative Asian routes operated under an international cartel that forecloses any Jet Blues from interloping and cutting fares, just the kind of asset that always seems to entice another investor to take a chance.
"Network" and "legacy" are used interchangeably to describe airlines like United, American, Northwest, Delta, US Airways and Continental that operate extensive hub and spoke systems. But to blame hubbing and spoking as the reason these carriers are being eaten alive by low-cost, point-to-point carriers like Southwest, AirTran and Jet Blue is wrong.
"Legacy" is the damning adjective -- a euphemism for being in thrall to a corps of unionized pilots whose contract template (fat pay, short hours) was laid down in the days of federal airline regulation.
Don't bother sending us your cards and letters, pilots. The observation is not meant to denigrate the value of skilled and experienced personnel in the cockpit, but economics is in charge here. Two years ago, Southwest had costs per employee of $59,100, according to industry consultant Vaughn Cordle. The top five legacy carriers averaged $95,500. That's a problem of pay and productivity, not hubs and spokes.
Executives at these airlines recognize as much, but make a habit of saying and perhaps believing that, when it comes to getting costs down to comparable levels, "you can't get there from here" because ruinous strikes would quickly put any carrier that tried out of business. But American Airlines has shown it can be done. The carrier took a pass on seeking bankruptcy protection or a federal bailout and instead addressed employees in tough-minded fashion about the company's survival. Result: Last year it trimmed costs to $73,000 per employee (while Southwest's actually rose to $68,000).
What should be causing beads of sweat on the policymaking community's collective brow is a structural impasse that makes it nearly impossible for failing airlines to die. Blame the bankruptcy courts, international route regulation, foolish antitrust prejudices or misguided investors. Blame Congress, which shouts "oligopoly" at any hint of an airline disappearing. Whatever the culprit, the country's in a bad fix. It has too many network carriers trying to shrink their way to profitability when what we really need are fewer, bigger network airlines. Three such carriers would be plenty and two would probably be enough in a world where regional jets are coming on strong and where low-cost, entrepreneurial operators will show up on any route when money's to be made by undercutting the incumbent.
Until a few weeks back, all involved might have hoped the usual cyclical recovery would mean the industry's overdue restructuring could be postponed once again for somebody else's watch. After all, airlines have a way of appearing in the pink in between recessions, even though the whole industry tends to lose money in the long run. But this time around high fuel prices have intervened to prevent the old-line players from minting even temporary profits, especially given their need to service some $100 billion in debt borrowed to stay alive during the non-shakeout.
Meanwhile, low-cost airlines now account for 29% of the business, up from single digits 15 years ago. They're moving out onto the longer-hop routes (partly because fewer Americans rely on the plane for short trips since the security hassles tipped the balance in favor of driving). Frontier, Southwest and others are even developing what look suspiciously like hubs and spokes.
Still, these carriers will continue to focus mostly on a few hundred well-traveled city pairs that generate hundreds or thousands of direct passengers a day. That leaves the network carriers to provide vital connections between some 38,000 city pairs that each generate fewer than 50 direct passengers a day. But hundreds of passengers from each of these third-tier cities board a plane headed for somewhere each day, and can be collected and dispatched through a hub. That's a genuine strategic advantage to a network carrier, not to mention a boon to a sprawling country that needs air service to tie it together.
This is, by and large, a healthy picture except for one missing element. Failure is a crucial grease in the wheels of a market economy. By taking advantage of the post-9/11 crisis, the bailout board could have somehow overcome our sentimental refusal to let name-brand airlines die. Instead, look where we are now: Three years into a complete industry debacle, in which every major carrier is losing gobs of money, yet not one has bothered to disappear from the earth.
---
Mr. Jenkins edits "Political Diary," the editorial page's daily e-mail newsletter with commentary, analysis and gossip on election-year politics. With John Fund. Subscribe at www.politicaldiary.com.
Wednesday, June 23, 2004
Page A17
Listen up and you can hear the rivets popping in one of Congress's more counterproductive creations of recent years. Only a failure of political nerve can explain last week's decision by the Air Transportation Stabilization Board not to deny outright United Airlines' bailout petition, close up shop and let the industry get on with shaking itself out. Two members of the bailout board turned down United's request for the second time. But also for the second time, they cast a wisp of hope in front of the carrier that by, say, dotting a few more umlauts it might yet able to avoid the harsher tweaks to its cost structure that a private investor would demand.
This act of muddle, attributed to frantic phone calls from House Speaker Denny Hastert of Chicago, strikes the naked eye as aimed at saving the Bush administration from owning up to a decision to throw United and its 62,500 employees and 27,000 retirees to the hyenas of Wall Street.
CEO Glenn Tilton has done better than many expected in bringing down costs and improving service. It might be a good thing if a few big, old-style airlines were to disappear, but United seems like an unlikely candidate to oblige, with or without a federal bailout. For one thing, it clings to lucrative Asian routes operated under an international cartel that forecloses any Jet Blues from interloping and cutting fares, just the kind of asset that always seems to entice another investor to take a chance.
"Network" and "legacy" are used interchangeably to describe airlines like United, American, Northwest, Delta, US Airways and Continental that operate extensive hub and spoke systems. But to blame hubbing and spoking as the reason these carriers are being eaten alive by low-cost, point-to-point carriers like Southwest, AirTran and Jet Blue is wrong.
"Legacy" is the damning adjective -- a euphemism for being in thrall to a corps of unionized pilots whose contract template (fat pay, short hours) was laid down in the days of federal airline regulation.
Don't bother sending us your cards and letters, pilots. The observation is not meant to denigrate the value of skilled and experienced personnel in the cockpit, but economics is in charge here. Two years ago, Southwest had costs per employee of $59,100, according to industry consultant Vaughn Cordle. The top five legacy carriers averaged $95,500. That's a problem of pay and productivity, not hubs and spokes.
Executives at these airlines recognize as much, but make a habit of saying and perhaps believing that, when it comes to getting costs down to comparable levels, "you can't get there from here" because ruinous strikes would quickly put any carrier that tried out of business. But American Airlines has shown it can be done. The carrier took a pass on seeking bankruptcy protection or a federal bailout and instead addressed employees in tough-minded fashion about the company's survival. Result: Last year it trimmed costs to $73,000 per employee (while Southwest's actually rose to $68,000).
What should be causing beads of sweat on the policymaking community's collective brow is a structural impasse that makes it nearly impossible for failing airlines to die. Blame the bankruptcy courts, international route regulation, foolish antitrust prejudices or misguided investors. Blame Congress, which shouts "oligopoly" at any hint of an airline disappearing. Whatever the culprit, the country's in a bad fix. It has too many network carriers trying to shrink their way to profitability when what we really need are fewer, bigger network airlines. Three such carriers would be plenty and two would probably be enough in a world where regional jets are coming on strong and where low-cost, entrepreneurial operators will show up on any route when money's to be made by undercutting the incumbent.
Until a few weeks back, all involved might have hoped the usual cyclical recovery would mean the industry's overdue restructuring could be postponed once again for somebody else's watch. After all, airlines have a way of appearing in the pink in between recessions, even though the whole industry tends to lose money in the long run. But this time around high fuel prices have intervened to prevent the old-line players from minting even temporary profits, especially given their need to service some $100 billion in debt borrowed to stay alive during the non-shakeout.
Meanwhile, low-cost airlines now account for 29% of the business, up from single digits 15 years ago. They're moving out onto the longer-hop routes (partly because fewer Americans rely on the plane for short trips since the security hassles tipped the balance in favor of driving). Frontier, Southwest and others are even developing what look suspiciously like hubs and spokes.
Still, these carriers will continue to focus mostly on a few hundred well-traveled city pairs that generate hundreds or thousands of direct passengers a day. That leaves the network carriers to provide vital connections between some 38,000 city pairs that each generate fewer than 50 direct passengers a day. But hundreds of passengers from each of these third-tier cities board a plane headed for somewhere each day, and can be collected and dispatched through a hub. That's a genuine strategic advantage to a network carrier, not to mention a boon to a sprawling country that needs air service to tie it together.
This is, by and large, a healthy picture except for one missing element. Failure is a crucial grease in the wheels of a market economy. By taking advantage of the post-9/11 crisis, the bailout board could have somehow overcome our sentimental refusal to let name-brand airlines die. Instead, look where we are now: Three years into a complete industry debacle, in which every major carrier is losing gobs of money, yet not one has bothered to disappear from the earth.
---
Mr. Jenkins edits "Political Diary," the editorial page's daily e-mail newsletter with commentary, analysis and gossip on election-year politics. With John Fund. Subscribe at www.politicaldiary.com.
United's strength has been the FACT that they have the BEST global network of ANY carrier. Remember, you can't "shrink to profitability" Instead of shrinking, how about beefing up the international flying and dumping the sloppy seconds? Seeing that no one except the LCC's make any money domestically, isn't it about time one of the legacy carriers turns the domestic flying over to a LCC and concentrates on the international? As for you little slap against "United employees not biting"...every group accepted cuts except mechanics, fyi. I wonder, does it seem more REAL when you type it? Wishful thinking.
