Holman W. Jenkins Jr., writing in the July 8 Wall Street Journal gets it right: "The new administration seemingly won't let companies fail, and won't let them succeed either," Jenkins wrote of Justice Department opposition to antitrust immunity for Continental Airlines and the Star Alliance. Such alliances, he argues, are the industry's "self-help solution" for companies looking "to share losses and preserve capacity in a downturn." By denying that option to struggling carriers, Obama may soon be forced to "add the airlines to the collection of failed industries being run out of the White House."
Sadly, What is Good for One is Not Good for the Other Two
Congress, of course, has a long-held penchant for meddling in the affairs of industries and organizations. This week, the Senate Judiciary Committee Subcommittee on Antitrust, Competition Policy and Consumer Rights spent taxpayer money to hold hearings on college football’s selection process for placing teams in its Bowl Championship Series. So we should not be surprised to see a growing government role in an industry that has managed to lose more than $30 billion over the past nine years.
If government oversight of the airline industry is going to stand in the way of corporate success, then there is no airline too big to fail. So why not let them fail? Airlines are criticized for not being innovative. True - and for the most part their innovations over the past 10 years amount to little more than finding ways to maximize revenue within a system of constraints.
Delta/Northwest is the largest carrier in the world, and even it commands less than a 5 percent share of the global airline market. No other U.S. airline claims more than a 3 percent share. Yet the government continues to treat the U.S. airline industry as if it is a threat to competition and slap the hands of airlines that attempt to improve/augment their business models through partnerships and alliances with foreign carriers.
Antitrust laws are designed to protect consumers from corporate power. Does a well-established trend line of fares falling at rates greater than inflation for three decades demonstrate corporate or industry pricing power? A passenger traveling from Greenville/Spartanburg to Los Angeles has a choice between more than 20 flight combinations to get from California and back. Does that demonstrate corporate or industry power? Does an industry that makes the price of its product fully transparent to the buyer sound like an abuse of the consumer?
The fact is that most U.S. air travelers still have plenty of choices when it comes to flying – albeit in an industry that still carries more capacity than it needs.
Southwest: The Wolf in Sheep’s Clothing
Let the record show that I have not joined the chorus of analysts and observers who predict rising fares by Fall. The recession holds. Many consumers are tapped out. Enter: Southwest Airlines.
Southwest has a long history of leveraging difficult financial times -- profiting at the expense of competing airlines because it could. It profited because of the chasm in its CASM versus it competitors; it profited because of the chasm in the RASM charged by competitors; it profited because it smartly used its balance sheet to make a wildly successful bet on the future of fuel prices . . . Southwest profited because it could. So this week’s fare sale in which the airline is selling tickets at $30, $60 and $90 says one of two things: either Southwest is struggling mightily with the forward booking curve, or the airline smells blood. I think the answer is both, but more the latter.
Southwest is now the big dog in the US domestic market and a player that must be reckoned with in any discussion of domestic market competition. If the nation’s lawmakers and policymakers continue to equate low fares with sufficient competition and consumer benefit, then deregulation has clearly come full circle.
Southwest is not now the big dog to those in Greenville/Spartanburg, Knoxville or Duluth. But most travelers can get in a car and drive less than a few hours to fly Southwest from these markets or more than 280 others not now served by LUV.
If this is what the regulators and policymakers really want, then that’s what they’ll get. Therefore, there is no reason to think that any airline flying today is too big to fail.
With Southwest adding the dots of the largest population centers where it did not previously fly to its route map, the industry could be at a tipping point. These markets also represent large sources of feed revenue to many legacy carrier hubs, and with Southwest offering fares too low for some legacies to match, this fall and winter may be a long, cold one for the traditional carriers.
Will the government continue to stand in the way of airlines that are desperately seeking new revenues? If so, no bailout will save an airline – not until U.S. airlines are allowed to act like other multinational industries serving a global economy. There already is enough taxpayer money bailing out other industries with similarly troubled attributes – adding airline rescues to the mix would only throw more good money after bad.
What’s behind Congressional opposition to these common-sense alliances? The loudest voice in the room is labor. Even at this financially treacherous time, the industry is split from within, the result in part of union leaders that refuse to recognize economic trends and realities when they don’t serve the union’s objectives. When are the unions going to recognize that the transfer of domestic market wealth from the incumbent carriers at the time of deregulation to the new wave of carriers that followed is largely complete? And that tomorrow’s opportunities do not reside inside the 48 contiguous states?
Now, in the years since airlines sought and won aggressive cuts in labor costs during restructuring, it is increasingly clear to me that continual change/modification to outdated collective bargaining agreements cannot overcome the structural seniority chasms that exist between the legacy carriers and their lower-cost, younger competitors – at least in the domestic market. For decades, as the network carriers have been forced to compete for ways to average down labor costs through protracted bargaining, the low-cost carriers simply use seniority arbitrage to facilitate their growth. And I think we are about to see another run of growth by the LCC sector.
When it comes to the airlines seeking immunity to maximize revenue and, in the case of United/Continental/Air Canada, address certain cost efficiencies as well, the strategy is to maintain as much of the current operation as is financially feasible. Unlike the US steel industry that lost nearly 400,000 jobs because producers in other countries could do it significantly cheaper, blame for the next round of airline job cuts most go in part to the airline unions that have been busy trying to convince the dinosaurs at the Department of Justice and on Capitol Hill that alliances will result in job loss and a further deterioration of wages and working conditions.
Between the time Eastern Airlines and Pan Am died and 2000, the industry’s high-water mark for employment, U.S. airlines added nearly 100,000 jobs. Since 2000, the industry has lost nearly 140,000 jobs - and it should have been more - mostly because nearly all the airlines and virtually all the existing hubs have been protected in one way or another by patrons on Washington. Indeed, many of the jobs lost from a failure of one or two of today’s carriers likely will be replaced as market positions in the largest cities are filled by new and more efficient carriers.
Let Some Airlines Die – And Then Let DOJ and Congress Rethink
At this point no one US airline is too big to die. Competition remains plentiful whether that competition comes from another ticket counter at the same airport or cheap fares at a nearby airport. Either way, the industry is still too big – with too many network carriers, too many regional carriers and too many hubs.
And, except for a few “up cycles” along the way, revenue has not supported the industry’s growth or size. The time is right for lawmakers to hear the new reality in the industry – one focused not on a false threat of monopolies and price gouging, but the very real threat in an industry so bloated, burdened and inefficient that it fails to provide the very thing a business must: a reliable return for investors and real job security for employees.