Complacent America?

Wednesday, September 28, 2005

ACCORDING TO a noisy school of economic commentary, Americans are growing complacent. We don't learn enough or work enough; we take prosperity for granted. It's hard to square this view with the turmoil in the airline industry. This month Delta Air Lines and Northwest Airlines followed United Airlines and US Airways in filing for bankruptcy protection. Pension plans will be frozen and pay contracts canceled; Delta, which has already cut an extraordinary $4 billion from its annual operating costs and shrunk its workforce by a fifth, vows even tougher measures. All in all, the industry has shed about 135,000 jobs since 2000. This is complacency?

The latest bankruptcy filings reflect the unexpectedly high price of oil. But the airline industry has been seized with turmoil almost continuously since its deregulation in 1978. (The European Union didn't get around to deregulation until 19 years later; Asia is only just getting there.) Deregulation opened the door to upstart airlines that dispensed with free meals, saved money on training and maintenance by using only one model of aircraft, and were unburdened by pension and health care promises to retirees. At first, the upstarts failed: 32 out of 34 companies launched in the wake of deregulation went out of business. But now cut-price carriers have taken 30 percent of the market and are eating the old-timers' (free) lunch. They have figured out how to fly and support an aircraft with about 80 workers, whereas the old-timers need more than 100.

The competition unleashed by deregulation has been reinforced by the Internet. The Web has helped airlines connect directly with customers and sell seats, which is why occupancy rates on airlines are at record levels. But the Web also allows consumers to compare airline fares with a few clicks of the mouse, and this bargain-hunting forces prices down. Because airlines have low marginal costs (taking on an extra passenger is virtually free), Internet competition can depress the price of tickets especially dramatically. So airlines are delighting ever-more customers with ever-greater bargains while making ever-less money. Again, it's not exactly a picture of complacency.

The airline industry's turmoil does raise other concerns, however. It has tempted Congress into successive bailouts; in the current chapter of this saga, the airlines want to introduce an oil-shock surcharge on tickets without paying tax on the resulting revenue. Congress should resist this lobbying; because the industry is so competitive, subsidies will be passed through to customers in the form of lower fares, and there's no great need for lower fares given that market forces have pushed them down already. At the same time, the airlines' turmoil has led to the excessive use of Chapter 11 bankruptcy protection. Carriers such as US Airways have filed for protection from their creditors repeatedly, while United has so far spent 33 months under continuous protection -- a maneuver that puts unfair pressure on non-bankrupt airlines that hold on to the quaint dream of paying dividends to shareholders.

The declinists who worry that America is growing decadent sometimes decry Chapter 11. The system indulges managers who make irresponsible pledges to workers in the knowledge that, if things go wrong, they can use the courts to escape their obligations. But starting next month, changes in the bankruptcy law will force companies in Chapter 11 to restructure faster. Complacency, be banished.


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