Fourth in a series on deregulation.
This month, in honor of the 30th anniversary of deregulation, I’m focusing on where deregulation got it right; wrong; backwards; and indifferent. Today we look at what is right. In the most simple of objectives, the deregulators sought to make air travel available to the masses. That was a success. But was it a market failure as well?
Deregulation of the US airline industry created a free market, right? Wrong. Because the industry operates in something far different from a from a free marktet. Government intervention -- whether through the imposition of taxes, or regulation, or interference by legislators and regulators to tinker with the market -- have created more imperfection than not.
But as we look back, the market has had it right for the most part. Not to say it hasn’t been a bumpy ride. Over the course of 30 years, we’ve seen bubbles emerge, inflate and burst as the market has worked to rein in the high costs of distribution, reduce the use of intermediaries like travel agents, and ratchet down labor costs by better balancing pay and productivity (an objective achieved mostly by those airlines who used the bankruptcy courts to wipe out debt and lower structural costs) As a result, airlines continue to find efficiencies as the model evolves, even if most of the gains have been “competed away” in the form of lower and lower ticket prices. And many of the industry’s stakeholders have generally fared well – even in turbulent times, as the market itself determines winners and losers. Which was, after all, the point of deregulation.
Examining the Stakeholders
Labor: Thirty years of boom and bust cycles have created enormous instability in terms of labor costs and labor relations– an area I believe requires a major overhaul. Union leaders may point to the loss of jobs, wages and benefits since 2000 as an example of how airline workers have been losers in a deregulated market. But neither the job number in 2000 nor the total compensation package paid in that year reflected a healthy market. A core attribute of innovative industries over the past decades is productivity growth that outpaced wage growth. That is not the case in the airline industry. Where labor in other legacy industries like autos and steel has shrunk in the face of growing competition, both in terms of the size of workforce and overall wages, airline labor has grown employment and has maintained many high paying jobs. Labor has largely won, but at the cost of productivity.
Bottom Line: Winner
Airports: Airports have largely been winners in the evolution of competition, whether through the growth of the low cost sector, new aircraft technology that promoted hub competition or the changing nature of a market’s economic and demographic underpinnings that led to increased airline service. Thirty years ago, international gateways were largely centered on the most populated centers, including New York JFK, Miami, Chicago, Los Angeles and San Francisco. We now can add Washington Dulles, Detroit, Atlanta, Dallas/Ft. Worth, Newark, Boston and others. Over the coming years, some airport markets are sure to lose service, continuing a trend that already has begun in places like Pittsburgh and the secondary markets in some of the largest US metro areas. And as in any free market, the ability of those markets to attract air carriers will depend on their success in attracting business and industry, offer appropriate facilities and sustain a healthy regional economy.
Bottom Line: Winner
Aircraft Manufacturers: For manufacturers, the US is but one consuming world region. And consume the US market did as deregulation unfolded, new carriers emerged, and hubs were built, driving demand for large numbers of narrowbody equipment. But the US is less and less an aircraft consumer today, except perhaps for the growing use of smaller planes that many airlines have added to their fleets to serve markets they couldn’t fly profitably with larger aircraft. As the US industry continues to mature, most aircraft purchases will be geared toward replacing aircraft rather than expanding fleets – an equation that only will change depending on who ultimately controls and inherits the North American markets in an era of “Open Skies” and growing consolidations. It is hard to call manufacturers a total winner, particularly given the airline bankruptcies that have significantly depressed orders, but they are certainly not losers either.
Bottom Line: Toss Up
Vendors/Service Providers: There are more winners than losers among those who serve and supply an industry that has nearly tripled in size. Along the way, we’ve also witnessed nearly 180 bankruptcies, multiple restructuring efforts, new information technology, and the outsourcing of multiple functions that were historically performed in-house -- all of which benefit the firms that operate on the periphery of the industry.
Bottom Line: Winner
Lenders/Bankers: Capital has been abundant over the past 30 years, both in funding the industry’s successes and more than a few of its bad ideas. But every time a dollar changes hand, whether as a result of mergers, restructuring, new information systems, construction, overhauls, retrofits and aircraft purchases, that capital has been made available with the lenders and bank collecting a fee. The downside for the finance folks has been the billions of dollars of capital destroyed by bankruptcy and/or bad business plans in an evolving industry that has little durability in its operating model. So far, even cash-strapped and under-capitalized legacy carriers have been able to structure deals that enhance each carrier’s respective liquidity position despite the unknowns of the economy and an unpredictable oil environment.
Bottom Line: Toss-up
Shareholders: The Biggest Loser. The only question remains is at what point the shareholder demands that the industry create and execute an investment thesis for the long-term? I don’t believe that airline equities will continue to be mere trading vehicles for tomorrow’s industry, particularly as airline management teams sharpen their focus on building a durable industry. With little room remaining to remove much more by way of structural costs, airline executives will look to improve fortunes by ensuring that yesterday’s excesses do not find their way into tomorrow’s operating models. With fewer barriers to efficiency, there may soon be a brighter investment prospectus for airline equity holders.
Bottom Line: Loser
Consumers: The Biggest Winner. It has been a great ride for the intended beneficiary of the deregulated industry – the passengers that enjoyed unprecedented growth and choice in affordable air travel. The consumer has won on price as real airfares have declined nearly 50 percent over the past 30 years. The consumer has won on choice whether it be the airline, the airport or the routing. In fact, consumers have won on nearly every measure except for reliability. As airlines now cut back, unbundle the product and attach new fees for various services, the consumer will pay more for the privilege of flying. But the market will continue to discipline non-competitive behavior and protect consumer interests as airlines compete in the manner deregulators intended 30 years ago.
Bottom Line: Winner
Alfred Kahn may be the father of deregulation, but I always considered Robert Crandall, the former American Airlines CEO, the Don of deregulated competition. Now that Crandall, in his retirement years, advocates some form of re-regulation, the industry may look anew at a system that clearly is not working for all stakeholders.
I believe that today’s CEOs are different than those in the executive suite 15, 20 or 30 years ago. Many are “agents of change” not wedded to, nor overly concerned with, the industry’s legacy past.
This year’s oil price scare may turn out to be the greatest catalyst for change this industry has experienced since deregulation. Fuel could turn out to be the factor that finishes the job as the industry works to rid itself of uneconomic capacity. Excess capacity that was born under the past generations of airline CEO’s in a single-minded effort to drive market-share all the while capitulating to legacy stakeholder interests along the way.
Ultimately, the US government remains the single-most important impediment to economic success for airlines – based in part on, if and how, a new administration and Congress manage the competing demands and political war zones ahead with foreign competition, labor relations, safety, security and access to capital.
The government could begin by living up to its promise to build an infrastructure that will actually support the modern air travel system with new generation air traffic control and technology, freeing up air space that otherwise constricts the very efficiency and reliability a healthy and durable airline industry demands.
Bottom Line: The market works for most. We just have to get out of the way and let it do its job.