|Another Airline Bailout? Just Say No!|
The major airlines don't seem to have the simplest clue as to how to make money, but they sure know how to spend it. Loss making Delta announced massive bonus payments to its senior executives this week as rewards for jobs well done in 2002 - a year in which it lost $1.3 billion!
Delta's CEO enjoyed total pay for 2002 of about $13 million. Loss making Continental's CEO got about $12 million. But the airlines are simultaneously pleading poverty and asking for a taxpayer bailout!
Airlines such as JetBlue, Southwest and AirTran truly are profitable and growing. And while the major airlines claim to be going broke, other foreign airlines - such as UK carrier Virgin, renowned for its high quality service - are refused the opportunity to start up here.
There is nothing sacred or special about the airlines. Let the bad ones fail and let the better ones take their place. We'll all be better off.
Almost before the dust had settled after 9/11, US
airlines were given an outright gift of $5 billion in cash by the US
government. Profitable airlines were given gifts as well as
unprofitable ones. Airlines did not have to show or prove anything
to receive their share of the handout. Some airlines even estimated
their losses, as a result of 9/11, were less than the unasked for gift
And now, like a drug addict who has developed a taste for heroin, the airlines are asking for more. Their latest request was for $9 billion, then they adjusted it to $4 billion, and it currently looks like they might get perhaps $3 billion.
What value did we - the taxpayers - get for our first payment of $5 billion? And what additional value will we get for another similar payment? Would the collapse of all the major airlines mean the end of civilization as we know it? Read on for the answers to these and other questions. :)
Should Airlines Get Special Treatment?
Many different parts of the travel industry have suffered from the general downturn in travel. Every person that doesn't fly somewhere also doesn't then hire a car, stay in a hotel, eat in a restaurant, or spend money in an amusement park.
Not only are all these types of travel businesses similarly affected (and there have been bankruptcies in other parts of the travel industry too) but so are the companies that supply them, and so on, with economic ripples flowing all across the country. We're in a national recession, which is why people are now refusing to pay ridiculously inflated fares for ridiculously bad flying experiences. We're all experiencing hardships.
Some people might point out that the airlines have been affected a lot more than other industries by the recession and downturn in business expenditure. I have two words to say to those people. High tech. Judging from what has happened to my own share portfolio, the airlines haven't suffered nearly as much as the high tech industry has, but no-one is suggesting a government bailout for the dot com collapse.
Some people might point out that the airlines have been impacted by the rising cost of oil. But we're all affected by that, every time we fill up at the pump. And how about bus companies and freight companies? Don't they buy a lot of fuel, too?
Some people might say that it isn't the airlines' fault, suggesting that their problems were first a result of 9/11 and now a result of the Gulf War. Well, it is too soon to know what will happen with the Gulf War - sure, forward travel bookings are down, but typically they rebound up to an even higher level at the end of such conflicts. And as for 9/11, the airline industry was in trouble long before 9/11. The events of 9/11 have just become a convenient scapegoat to hang all their other problems on; besides which, they were given $5 billion by the government after 9/11, but the only thing that has happened in the eighteen months since then is that the airline industry's problems have got worse, not better.
Some people might say that the airlines need help paying their insurance premiums, which have massively increased since 9/11. I find it hard to believe that increased insurance premiums were the reason why airlines like UA and DL each lost well over $1 billion last year! Furthermore, ask any owner of any downtown high-rise what happened to his insurance premium in the last year - they've also increased. The airlines are not in a unique situation, but in asking for a government handout, they're seeking a unique solution.
Some people might say that the government can't fairly stand by and watch an entire industry crumble. But, it isn't an entire industry. It is just the dead wood dinosaurs that are crumbling. At the same time that the dinosaurs are making a big noise about their financial problems, a new breed of airlines are quietly growing and thriving, adding on more flights, taking more market share, and earning more profits. The problem is not an industry wide problem. It is merely a problem of bad management, and over many years, at selected individual airlines.
There is nothing unique about the problems within the airline industry, and no special reason why they alone should receive compensation from the taxpayers.
Prior to the new Transportation Security Administration (TSA), the airlines paid the costs of providing their security, directly, themselves. The new TSA is providing vastly greater and better security services, but all the airlines have to do is to make payments to the TSA at the same level as what they paid directly themselves in 2000 for security. There is no extra cost to the airlines for the better security.
Now for an interesting development. The airlines repeatedly claimed, in public, both prior to and after 9/11, that they were paying about $1 billion every year for security related costs. So, not unreasonably, the TSA was expecting to get an annual $1 billion reimbursement from the airlines.
But after it was made clear that the airlines would have to make future payments based on this historical cost, all of a sudden, they changed their tune and started saying that they were only paying $300 million a year for relevant security costs!
The government required the airlines to get their true security costs audited independently. This information was due by 1 July 2002 but was not provided. Instead, in August, the airlines suggested a compromise that they should pay $500 million a year. The Inspector General of the Department of Transportation wrote a letter (click the link and read the letter - it is about as close to a government official politely calling someone a cheat and a liar as I've ever seen) to the Air Transport Association on 13 September pointing out that if the airlines truly were paying only $300 million a year, surely they'd simply provide the audited statements to prove this, rather than offering to pay $500 million a year ($200 million more than they needed to pay)! He asked them to make good on their obligation to provide proof of their levels of expenditure.
Interpret this any way you like, but two things seem plain. The kindest thing is that the airlines aren't paying any more for security now than they were in 2000. The other thing is that there has been some 'confusion' amongst the airlines as to how much they actually do spend on security - an unkind person would wonder if this confusion was anything more than a clumsy attempt at outright lying.
Anyway, bottom line - the airlines have no reason to seek $5 billion due to increased security costs, because their costs have not gone up at all. We - as taxpayers and as passengers - are already paying for these costs ourselves.
Won't Prices Go Up if Airlines Close Down?
Absolutely not. The big airlines are trying to terrify us with tales that if major airlines close down, there will be less competition and the few remaining dominant carriers will start gouging the public with much higher ticket prices.
This is nonsense. Well, sure, of course the remaining obsolete carriers will attempt to gouge us, but what is new about that? They do it whenever they can anyway!
There is a noticeable lack of competition already at major hub airports. How much competition is there in Denver, or Chicago, or Atlanta, or Dallas? If Delta ceased to fly out of Atlanta, or American out of Dallas, or United out of Denver, the net result would be a more level playing field and it would be easier, not harder, for other airlines to provide competing service!
What will happen is that the old inefficient airlines will be replaced by the new generation of airlines - those that are quietly growing and making profits at present. Airlines such as Southwest, which boasts an incredible 30 years of unbroken annual profits. Airlines such as wunderkind JetBlue that proves it is possible to provide excellent service at low price. Along with other successful airlines such as AirTran, these are the airlines of the future.
The thought that I might be 'forced' to fly JetBlue and enjoy their leather seats, personal videos, and consistently friendly service, instead of enduring another uncomfortable flight on a nasty old plane with even nastier flight attendants - well, bring on the day!
If remaining airlines start to charge too high a fare, then, very simply, low cost carriers will appear on the route and bring prices back down to fair and reasonable levels. With the loss of some of the dinosaurs, it will be harder, not easier, for the remaining dinosaurs to dictate to the market, because they'll be collectively controlling less market share than at present, while the new high quality low cost carriers will be controlling proportionately more.
And if it gets into an airfare war between one of the dinosaurs and a Southwest or JetBlue, guess who will win this time. No longer can the dinosaurs crush the little guys. As of today, Southwest has a market capitalization of $11.2 billion. JetBlue has the second highest capitalization, $1.8 billion. The six dinosaurs (American, Continental, Delta, Northwest, United and US Airways) in total are worth only $2.51 billion - Southwest is more than four times larger than the six dinosaurs combined.
We have nothing to fear, and everything to wish for, from the failure of some dinosaurs.
Why Don't Foreign Airlines Compete?
We all recognize the fundamental value of competition in any industry. Indeed, the dinosaurs have been using that to try and bully Congress to give them money - 'if we close down, there will be less competition'.
But there are plenty of potential competitors, begging for a chance at the US market. Foreign owned airlines, such as UK's high quality carrier, Virgin, already want to bring their innovative approaches to high service to our skies.
But at present, the US government does not allow any airline that provides domestic services in the US to have more than 25% foreign ownership. Why?
There are historical (but not valid) reasons why this is so, and there are complicated bilateral treaties that the dinosaurs now hide behind in an attempt to perpetuate this restraint of fair trade. Who cares if some other country will or won't allow US carriers to fly domestically in their home market? Everyone acknowledges that competition in the US is good for us - the traveling public - so let's allow as much of it as possible!
The auto industry has no restrictions on foreign ownership of car assembly plants in the US. Neither does any other substantial industry. Why should we protect the dinosaur airlines when we didn't protect the Detroit auto manufacturers? Just as the response to fair competition was to see Ford and GM vastly improve their operations, with a net benefit to the auto companies and definitely to us as car owners, surely the same result would occur with airlines, too.
Plainly, based on the dreadful state of the airline industry today, protectionism hasn't helped the industry. It has merely perpetuated inappropriate activities of moribund dinosaurs. Let's now establish an 'open skies' arrangement and welcome in any foreign carrier that is brave enough to choose to do business here.
Can you imagine a future landscape with product-driven airlines such as JetBlue, Southwest and Virgin dueling for supremacy in the domestic market? It is an exciting vision, for me as a traveler, and truly a terrifying one for the dinosaurs!
What about Smaller Towns - Won't They Lose Service Entirely?
There is good and bad news for towns with minimal airline service at present. The bad news is that airlines are already discontinuing services anywhere that they don't make money.
The good news is that lower cost airlines can more readily break even on marginal services than the high cost dinosaurs. More good news is in the form of the growing prevalence of new small 'regional jet' services that makes it easier for airlines to profitably fly on low traffic routes.
The bottom line is that if a route is unprofitable, then, soon enough, no airline will offer service on it. But if a route is profitable, then if one airline withdraws, another will replace it. The death of the dinosaurs will not affect this reality.
What about the Tens of Thousands of Airline Employees that will Lose their Jobs?
There are two answers to this question. The first answer is a bit harsh, but needs to be said. The government has never given $5 billion to any other industry so as to temporarily save some jobs. Why should airline employees get something the rest of us have never been given?
Fortunately, the second answer is a kinder one. As discussed above, the loss of one or more dinosaur airlines doesn't mean the US public will stop flying. It means that the new breed of airline will step into their shoes, providing better service, and probably at lower cost to us as well. The worst case scenario is that passenger numbers will stay the same, and, more likely, in response to better service and better fares, passenger numbers will increase.
The airlines that replace the dinosaurs will need to buy new planes and will need to hire more staff to service their expanding networks. Staff that were laid off by a dinosaur will have an equal opportunity to apply for similar jobs with the new carriers.
Aren't the Airlines drowning in Taxes?
No more so than any of the rest of us!
Please read Joe Brancatelli's definitive rebuttal of the suggestion that the airlines are unfairly paying too much tax, and some similar material on the ARTA (Association of Retail Travel Agents) website.
The airlines are collecting taxes from us and forwarding them to the government (the $2.50 per flight security surcharges). They're now asking that they be allowed to keep those taxes rather than pass them on to the government. That is not relieving them of a taxation burden, because it was never their burden in the first place - it was ours!
What happened to the first $5 billion? What would the next $5 billion be used for?
I truly don't know what happened to the first $5 billion. It was a 'no strings attached' gift, given to the airlines to use any way they wished. An Associated Press article on 3/27/03 said some industry analysts believe the $5 billion meant that US carriers did not respond as quickly or positively to their failing business models as they otherwise would have and should have. The $5 billion actually did no good at all!
And, for sure, when you look at the airline trading losses for 2002, and their projections for the first quarter of 2003 (before the effect of the Gulf War!), there is precious little sign of the $5 billion having been used for anything other than a temporary cash transfusion to the dinosaurs that are bleeding cash out of every possible orifice.
What would the next $5 billion (or $9 or $4 or $3 or however many billion it might end up as) be used for? What assurances and guarantees do we - the taxpayers funding this charity - have that our money will buy us anything other than more consumer unfriendly behavior from airlines that act as though they hate us?
The next $5 billion will go either to profitable new breed airlines that don't need our support, or as a 'reward for bad behavior' to unprofitable dinosaurs that don't deserve our support, and who will use this money to perpetuate, a bit longer, their bad practices.
And who is to say that even a second $5 billion would be the end of it. When an airline turns around and rewards their senior executives with as much as $13 million each in total annual remuneration after losing $1.3 billion in what was probably their worst trading year ever, what reason do we have to believe that the airline is being careful with how it spends its money? That same airline - Delta - doesn't expect to return to profit in 2003 and doubts if it will be profitable in 2004. Chances are - like the drug addict - they'll be back and asking for another, even bigger, fix of cash, yet again.
So What Should We Do?
Put the dinosaurs out of their misery. Let them die off cleanly and quickly.
The sooner that we can enjoy the pleasure of having JetBlue, Southwest and Virgin all aggressively competing for our domestic travel business, the happier we'll all be.
Do you think the airlines should be bailed out or allowed to die? Do you think foreign airlines should be allowed to provide domestic services? Don't tell me - but please tell your Congressman and Senators. This link will get you to your local Congressman. And this link will get you to your two Senators. Phone them, write them a letter, and email them.
Please, hurry. The airlines are trying to sneak through as much money as they can within the week, probably as part of the funding for the Iraqi war, before we have the chance to mobilize our outrage. Key senators are currently floating 'trial balloons' to see how the public is reacting to the idea. Now is when our representatives are most willing to hear our opinions to help shape their views.
So, go ahead, react! Click the links above and let them know.
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written 28 March 2003, last update
21 Jul 2020