Tuesday, August 13, 2002

08.13.2002
8:02 PM EDT

ITEMS:
--USAir files for bankruptcy
--United may be next
--American lays off 7,000


What's going on here? Obviously the airlines are doing terribly since 9.11, and the economy is sluggish, business travel is down, people are taking close-to-home vacations, etc.

But there's a lot more to it than that.

A friend of mine has a theory that all busniesses based on moving people across significant distances eventually fail. Coaches gave way to trains, trains gave way to private cars and airplanes. Cruise ships, too, fell victim to the airplane.

Along those lines, consider this: Long-distance air travel became viable, when? The 1940s, or so? One could argue that airlines only made consistent money while oil prices were historically very very low. As soon as the first oil price shock hit in 1973, the airlines have never been the same, and have in one way or another struggled to make a go of it. There were other complicating factors, of course. Labor costs went up also. The airlines got some relief from deregulation, which theroetically allowed them to reduce some costs, but long term, the price of oil dangles over their heads like the sword of Damocles, constantly. An event like 9.11 and and economic slump are more than enough to send a couple of airlines out of business.

What this means is that, quite possibly, the business of transporting people by airplane is not economically viable in the post-1973 world. National airlines are heavily subsidized in other countires, suggesting that acorss the world, it may not be possible to run an airline and break even without charging fares that people feel are too high to
pay.

What's to be done about this?

First, there are most likely too many airlines in the US. The airlines that are making money are the so-called no-frills carriers, who stick to profitable routes and keep their costs down. The full-service airlines (full-service is a cruel joke to ayone who's ever flown on a major US airline in hte last few years) can't complete for business on those routes, so they are largely left with a lot of routes that are not nearly as profitable. Some major airlines will most likely have to go under -- they won't get bought by other carriers, becasue who's healthy enough to buy them? [A few years ago, another airline could've used the infalted value of its stock to purchase a rival without using any actual money . . . those days are over, with a vengance.]

The survivors will have to extract even more concessions from their unionized work forces, and hope like hell that oil prices don't spike. The unions will most likely not be amenable to more givebacks, but their options they be severely limited.

Case in point: United is trying to get the government to issue it $1.8 billion in loan guarantees. The government, to its credit, has told United that it must lower its cost basis more before the loan guarnatee will be apporved. This means more concessions form the unions. United has thus far been unable to get the machinists and flight attendants unions to agree. If they don't gree, United will more than likely file for bankruptcy, also. If that happens, the United that emerges from backruptcy will be much smaller. The unions are looking at more concessions, or a lot fewer members.

But that's just a band-aid anyway. The inherent problems in the business will always be there. And I don't see corporate travel budgets getting increased (or even holding steady) any time soon.

It would help if Washingon had a clue, also. A couple of years back, some airline executives were testifying before Congress. A legislator from North Dakota started lecutring them about following "market forces" and not always relying on the government for help.

One of airline executives, as politely as he could, pointed out to the Senator that if "market forces" were allowed to take their course, no airline would have any flights into or out of North Dakota, since no one could possibly make a profit doing so. Which gets us back to a subsidized national airline(s). Good idea? I tend to think not, but if an industry is not economically viable, and we deem it important enough that a person who lives in Fargo should have access to air travel the same way a person in New York does . . . then what's the alternative?

What could save the airline industry as we know it? Precious little, I'm afraid. Some sort of technological miracle that makes airlines engines 1000% more efficient than they already are, perhaps. But that doesn't seem too likely. . . .