Airline Deregulation - A Total Disaster

[Mike from back east]

Let's add American Airlines to the bankruptcy list of deregulation victims. Back in November 2011 AMR entered court protection and today AMR announced major cuts of 13,000 employees, including 400 pilots.

As I've predicted for years about airline pension problems, AMR has $10B in unfunded pension costs that will now flop over onto the taxpayer plate via the PBGC.

Not to mention AMR's $10B in losses since 2001, averaging $1B year in losses.

Not to mention the 13,000 people who will be eligible for unemployment compensation for many weeks or months.

Not to mention destruction of stockholder value in the range of $12B (325M shares have dropped from $37/share in 2001 to $0.68/share today.

This era of cut-rate, unregulated fare competition is killing us. There should be a floor under airline fares to assure basic profitability, safety, and continuing service to the public.

[Mike from back east]

Now we get the story of how American Airlines offered "life time" passes for unlimited first class travel. Sounds like a deal until you learn how the pass holders took American to the cleaners, far in excess of the price paid for the lifetime deal.

Because of total deregulation in the 1979 timeframe, the airlines were already bleeding red ink in 1981 from fare wars, so AA implemented this gimmick to obtain quick infusions of cash. Smart looking at first, it later took its toll.

News lately has been leaning towards U.S.Airways taking over AA and deep-sixing the lousy AA management team.

[cpg35223]

I worked with a guy who was a higher-up at Eastern Airlines. Airlines, in his opinion, are their own worst enemies. It has nothing to do with deregulation, but rather a bunch of pinheads who keep perpetuating awful business practices. Meanwhile, Southwest Airlines makes a tidy profit year after year by keeping things simple, emphasizing good customer service, and insisting on superior operations.

Adjusted for inflation, air fares have dropped 30% since deregulation. I regard that as an unqualified good.

[Mike from back east]

Deregulation actually prevented bad management from destroying themselves.

Once airlines were deregulated, they lost the "rate floor" which was a CAB-controlled level of fares that assured basic profitability with the intent of preventing destructive fare wars. The CAB's oversight was in part due to the belief that a profitable airline is a SAFE airline.

Airlines also lost their exemption from anti-trust laws that allowed them to collectively set fares so they were all priced the same.

Thrown to the wolves of bare-knuckle competition, once one line cut fares, the others had to match it or they's lose all the business. It's just another form of Mutually Assured Destruction (MAD). We saw this in the 1880's with the railroads, and stepped in to apply enough regulation to assure the system worked well enough to survive and serve the shipping and traveling publics in proper fashion.

The pricing mechanisms allowed any decently-run airline to make a profit, pay their bills, pay good salaries, offer decent food, handle baggage at no charge (unless it was over weight/sized), change or cancel flights at no charge to the flyer, and support their pension plans. That's all gone now.

Eastern got into trouble when fare wars decimated their income; so they cut corners on safety. The FAA caught a lot of the safety violations and fined EA millions of dollars, which further fueled their slide down to bankruptcy. I often wonder that for every safety violation the FAA caught was there 5, 10, 50, 100 other violations that went unnoticed. EA was a disaster waiting to happen.

SWA is an aberration of sorts, with low wages and a lean structure to start with.

Off-setting the relative decline in air fares, the taxpayer had to eat most airline pension costs from the bankrupt carriers, creditors have lost billions, and many airline employees went up to ten years without a cost of living raise.

Definitely NOT good.

There will be more trouble until we're down to 2 national carriers to provide a minimum level of competition. At that time fares will stabilize on the high side to assure their survival. It's like a TV reality series; who can bankrupt the others first, and be left king of the island.

[markg91359]

Deregulation actually prevented bad management from destroying themselves.

How do you figure that? The regulated model--as you point out below--allowed carriers to charge artificially high fares. Limitations on which airlines could serve certain routes forced us to choose certain carriers, no matter how badly they were run. On the contrary, this model kept bad management and badly run airlines from making the reforms and changes that would have been made in any competitive business.

Once airlines were deregulated, they lost the "rate floor" which was a CAB-controlled level of fares that assured basic profitability with the intent of preventing destructive fare wars. The CAB's oversight was in part due to the belief that a profitable airline is a SAFE airline.

Are you going to try to raise some "straw man" safety issue. Give me a break. We haven't had a major airline disaster in five years or more. Those disasters have been prevented by a combination of technology and lawsuits that created such strong disincentives for accidents to occur that airlines--rightfully--drop everything to make certain they don't occur. Regulation may have been necessary at one time to insure safety. It no longer is.

Airlines also lost their exemption from anti-trust laws that allowed them to collectively set fares so they were all priced the same.

And that is a good thing. Its the consumer who suffers from price-fixing.

Thrown to the wolves of bare-knuckle competition, once one line cut fares, the others had to match it or they's lose all the business. It's just another form of Mutually Assured Destruction (MAD). We saw this in the 1880's with the railroads, and stepped in to apply enough regulation to assure the system worked well enough to survive and serve the shipping and traveling publics in proper fashion.

Railroads were regulated not to protect railroads, but to prevent them from taking advantage of conditions of "natural monopoly" to abuse the people along their lines who relied upon them to ship products. Competition works to lower fares (or the price of any good or service) to a point where excess profits are not made. Competition is the best antidote to inflation that exists. Walmart works the same way and I generally support Walmart's business model.

The pricing mechanisms allowed any decently-run airline to make a profit, pay their bills, pay good salaries, offer decent food, handle baggage at no charge (unless it was over weight/sized), change or cancel flights at no charge to the flyer, and support their pension plans. That's all gone now.

I remember flying before airline deregulation occurred. Most people couldn't afford it. Many people chose to drive 750 or 1000 miles simply because the airfares cost far more than the gasoline or wear and tear on their cars did. I could count one hand the times I flew between my birth and age 20 which was approximately when deregulation took place. When the airlines were deregulated, it opened many doors. Many people who could not afford to fly were able to do so. This created more opportunities for new pilots, flight attendants, baggage handlers, and flight crews.

Eastern got into trouble when fare wars decimated their income; so they cut corners on safety. The FAA caught a lot of the safety violations and fined EA millions of dollars, which further fueled their slide down to bankruptcy. I often wonder that for every safety violation the FAA caught was there 5, 10, 50, 100 other violations that went unnoticed. EA was a disaster waiting to happen.

The numbers speak loud and clear that the airlines are vastly more safe today than they were twenty years ago. Twenty years ago (with decreased flight volume) we seldom got through a year without a major airline disaster or two. Today, we've gone five years without one.

SWA is an aberration of sorts, with low wages and a lean structure to start with.

SWA works on several assumptions many businesses could learn from. First, treat your employees decently and they may not not want a union. Second, buy one model of aircraft to cut your maintenance costs. Third, eliminate a "hub and spoke" system. Fourth, adjust fares to fill every seat on the airplane. SWA is highly profitable because it does what other airlines were too stupid to do.

Off-setting the relative decline in air fares, the taxpayer had to eat most airline pension costs from the bankrupt carriers, creditors have lost billions, and many airline employees went up to ten years without a cost of living raise.

Show me the numbers. A statement like this is meaningless until you demonstrate exactly what was lost in dollars and cents. I will say this: The public shouldn't have to be concerned about pensions of people who work for airlines. Its a matter between employees and management. Pensions are probably lower or totally replaced by 401K's simply because airline profitability declines with deregulation. Its the consumer and not the person who works for the airline who was intended to reap the benefits of deregulation.

Definitely NOT good.

There will be more trouble until we're down to 2 national carriers to provide a minimum level of competition. At that time fares will stabilize on the high side to assure their survival. It's like a TV reality series; who can bankrupt the others first, and be left king of the island.

It won't happen. The entry barriers to getting into the airline business are not that high. If SWA, or any other carrier gets too greedy, its relatively easy for someone to enter the market and compete against them. This is far more of a concern with industries that have higher entry barriers. One example would be the steel industry. I can't enter that industry unless I spend $500 million on a steel plant. Therefore, competition is bound to be restricted. Its not true in the airline business. If I hire a few pilots, a few flight attendants, a few mechanics, lease some aircraft, and obtain some landing slots at airports than I'm in business.

Someone earlier indicated that airfares have decreased about 30% in real terms since the airlines were deregulated. That sounds about right to me.

[Wolfpacker]

Originally Posted by Mike from back east

An example of TOTALLY free markets was the mortgage business a few years ago. When some crooks started writing "liar loans" with no proof of income or even proof of employment, the abuse began. Without any government regulation to prevent liar loans, millions of such loans were written, it was a "free" market without even a minimum of oversight. Once one idiot offered no-doc / no-down / loans, everyone in the totally unregulated mortgage market had to follow suit or else lose business - so they all started writing the destructive loans.

You do realize the government was one of the main drivers behind this, correct?