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Friday
Nov072008

« The Dinosaurs Are Extinct ... Right? »

You would think that in a week with this much news, I could find something to write about. Obama is elected. General Motors' October sales fell by 45 percent. GM loses $2.54 billion in the third quarter. A legacy industry seeks government help. US Airways bolstering liquidity through deals with the same regional partners that served as financing sources used in its second trip through Chapter 11. Economic warnings du jour coming from all continents. And of course, a story suggesting that Minnesota’s Jim Oberstar would be interested in becoming the new US Secretary of Transportation in the Obama administration.

There must be something of interest, right?

No, but just thinking of Oberstar and his lawmaking/regulating knee-jerk inclinations better fit for an airline industry structure closer to Jurassic Park than today’s structure designed to compete globally, I come across a piece in the Atlanta Journal Constitution citing previous academic studies that mergers may harm consumers. And I started having bad thoughts. My favorite cite in the article referred to a 1987 study done by two professors on the USAir – Piedmont merger. Now that has application to today’s world right? NOT.

Southwest had not crossed the Mississippi in 1987. Eastern, Pan Am, TWA, PEOPLExpress and Presidential were still flying. Air South and Air Atlanta would die in that year. ValuJet, AirTran, jetBlue and SkyBus were not close to being hatched to replace the capacity that would ultimately die. Mergers at that time were being done in order to build regional scope and scale in order to facilitate national competition. And create competition they did.

In 1987 the US airline industry paid an equivalent price per barrel for jet fuel of $23.50. Through September of 2008, the industry has paid an equivalent price per barrel of $136.81. In 1987, the average yield, (passenger revenue per revenue passenger mile) expressed in 1978 dollars, was 6.38 cents per mile. Today, the average inflation-adjusted yield is estimated at 4.30 cents per mile. The average compensation package for an airline worker in 1987 exceeded $42,000 per year. Today, the same package exceeds $76,000.

The fact that we still make these claims that mergers will somehow hurt consumers is old school. This market has demonstrated time and time again that competition will discipline those that exploit consumers. This market has proven that where there is a viable market and insufficient capacity is provided to that market, a new competitor will appear. How long did it take ValuJet to fly and begin replacing the Atlanta hub Eastern left vacant when it liquidated? Answer: roughly two years that included a recession.

None of that will change unless we stand in the way of the evolutionary process. The US airline industry has made progress in that the industry has rid itself of many, if not most, inefficiencies. The biggest inefficiency that remains is the infrastructure that guides the nation’s air traffic system each and every day and negatively impacts nearly every stakeholder. It is a dinosaur.

Things go extinct when they are unable to adapt to environmental change or compete within that new environment. Oberstar has had more than 30 years to ensure the adaptation of an air traffic system that might have mitigated some of the capacity cutting going on today, and it has not happened. Putting him in charge now would further damage those he professes to help – namely consumers and labor and small communities. President-elect Obama you said you would change things.

Delta and Northwest are designed to compete globally. United and Continental are sure to be stronger global competitors as their plans emerge. American is seeking anti-trust immunity that is necessary to ensure a playing field that enables it to be yet another US competitor that can carry the US flag around the world. Prohibiting this phase to fully develop would be an enormous mistake for even those stakeholders that believe they are being wronged in the evolutionary process.

Reader Comments (6)

Jim Oberstar? Transportation Secretary? Excellent idea! I hope he takes the job.

11.7.2008 | Unregistered CommenterAnonymous

We need a fresh face here.

The U.S. has to integrate its ground and air transport map to serve it concentrated population pools.

Labor needs to have a vested interest - such as partial ownership. The strike hasn't worked in the past decade and won't work in the future.

Hopefully the AA/BA deal will fly.

11.9.2008 | Unregistered Commenterbeth

You adjusted for inflation the price per barrel of oil and average yield but you didn’t adjust for inflation for the “average compensation package for an airline worker.” What does a wage of $42,000 in 1987 convert to in today dollars?

11.12.2008 | Unregistered CommenterChitragupta

Well?

11.18.2008 | Unregistered CommenterChitragupta

C

I thought I had responded. I have been publishing your comments from my blackberry in airport seating areas.

You are a smart guy/gal so you can do the math just as easy as I. True that labor comp has not kept pace with inflation but actually labor has done better than most other line items on the income statement. Comp converged with the CPI only during the 2001-2003period.

Got to break the cycle C. Got to break the cycle of historic negotiations being nothing more than a bridge loan to nowhere. Because ultimately big increases like those you are seeking cannot be paid.

Swelbar

11.19.2008 | Unregistered CommenterSwelbar

While I agree with Beth on integration, it will be interesting to see if it can be done. Already, you have a high speed rail proposal in California that is set up to run city center to city center vs an airport connector.

Even Europe has learned that to reduce air travel on truncated routes you have to actually be able to provide a seamless service, yet California wants to bypass LAX and SFO. Its nuts!!!!

Then there's Southwest. If I recall, they sued in Texas over HSR with an argument that HSR was anti-competitive due to its subsidization by the Government. Not sure what became of the issue, but the system was never built. No doubt the CA system will be subsidized substantially, they forecast 117 million riders by 2030. If they get that many riders it'll be a miracle. That's just an insane forecast and a recipe for a financial melt down.

12.6.2008 | Unregistered CommenterAnonymous

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