April 19, 2004
by Irwin Stelzer
By the dreary standards of America’s airlines, things are looking up. The six biggest carriers cut their 2002 losses of $7.4 billion to a mere $5.3 billion last year, and some may actually be in the black this year—if we ignore pension obligations. United Airlines remains a bankrupt, U.S. Air recently emerged from bankruptcy but is again chalking up large losses, and Delta reports that a cash hemorrhage has left it with a balance sheet “severely damaged to the point of exhaustion”. Its management is asking the pilots to cut their pay by 30 percent; they reply that their contract guarantees them a 4.5 percent raise next month.
Things in the international market are a bit cheerier. Traffic at the seven U.K. airports run by BAA (formerly British Airports Authority) in March was up 10 percent on the war-depressed, year-earlier figure. The same was true at other airports around Europe. So some European carriers have moved from the intensive care units into the wards, and others have been discharged from hospital with a warning to change their lifestyles so as to avoid readmission.
But the industry’s ailments are not entirely of its own making. Standing between many of the airlines and a return to robust health are governments that can’t resist interfering in these markets. And when there is a role for government, as may be the case with antiterrorist procedures, it is often performed badly.
Our anti-terrorism law requires foreign airlines to supply data on passengers when they begin their journeys, so that our Homeland Security forces can properly greet any who might have an advanced degree in bomb-making from one of the institutions that abound in Afghanistan and, it seems, in parts of London. Despite the facts that most passengers would prefer to know that they are not seated next to some potential highjacker, and although many airlines have been exchanging such data for years, the EU parliament is considering going to court to prevent these data exchanges. We have warned them that if they prevail, they shouldn’t count on our allowing their planes to land at our airports. That bit of EU nonsense would cost private sector carriers dear.
That is only one instance of governments making life difficult for airlines. More important is their tendency to bail out their national carriers when poor management and truculent trade unions produce years of loss-making. Here in America, the bankruptcy laws allow firms such as United, famed for a succession of inept managers and a work force that refuses to recognize the new competitive pressures operating in American markets, keeps flying because the courts allow it to do so.
In Europe, governments seem determined to keep their national flag carriers in the air at all costs. The Italian government canned the CEO of Alitalia when he had the temerity to suggest cuts in manning levels to reduce the carrier’s losses. Politicians were stunned that anyone would suggest staff reductions so close to an election. That means that privately-owned airlines such as British Airways are often forced to compete with state-owned airlines that are held harmless from management inefficiency, overmanning, and uneconomic wage settlements.
As if that were not bad enough, governments manage their airports in a way that would amaze anyone even vaguely familiar with an elementary economics text. In Britain, for example, BAA has been given power not only over Heathrow, but also over Stansted and other airports close to London and therefore potential competitors for traffic. This immunizes it from competition, and allows it to subsidies the low-fare carriers operating out of Stansted by keeping charges at Heathrow at higher-than-necessary levels, distorting competition and, not incidentally, costing the millions of Americans who fly into Heathrow more than they would have to pay were competition permitted.
Our own authorities have found still other ways to interfere with market forces. Military and government personnel are required to use American airlines, as must the post office. That freezes competitors out of about 25 percent of the revenue available on the Washington-to-London route. Worse still from the point of view of American travelers, so-called cabotage restrictions prevent European and Asian airlines from serving domestic-U.S. routes, and offering their often superior service to our maltreated road warriors.
All of this gives Rod Eddington, BA’s CEO and the man who might serve as a model for America’s airline managers, fits. But he remains optimistic. He respects the managerial acumen and business model of the no-frills carriers. But he believes that they have gone about as far as they can go in cutting into his market, and will now concentrate on the continent, where they currently have a smaller slice of the market than they do in the U.K. The larger American market, of course, continues to present opportunities for no-frills carriers to cut themselves a bigger slice of the travel pie.
More important, Eddington feels that his company, and carriers such as Iberia and Aer Lingus, has learned how to meet the no-frills competition by cutting costs and adapting schedules to changing market demands. Those who haven’t—and note that there are no American carriers on his list of the flexible and efficient—he reckons, “will be run out of town”.
That probably sums up the fate of the U.S. carriers that don’t seem able to cope with Southwest, JetBlue and other no-frills airlines. Delta’s version, flying under the name of Song, is struggling, while AirTran, a low-cost airline operating out of Delta’s hub in Atlanta, is expanding vigorously. Its cost per seat-mile is said to be only one-third that of Delta’s, which among other mistakes decided not to hedge against the oil price increases against which some carriers insured themselves.
Back to Eddington. He sees the battle of the network, or legacy, carriers with the no-frills airlines as a never-ending one. He is probably right. After all, just when some of the old-line carriers have begun to get their costs down to competitive levels, some of the low-price upstarts are turning up the competitive heat by matching their rivals’ amenities by introducing in-flight entertainment systems. Consumers are the winners—and would be even bigger winners if governments would allow the competitive race to be won by whichever airlines offer the most attractive mix of service and price.
This article appeared in London’s Sunday Times on April 18, 2004.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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