The U.S. Economy and the Airline Industry
With Steven Pearlstein
Washington Post Financial Staff Writer
Wednesday, April 2, 2003; 11 a.m. ET
Ever since the Sept. 11, 2001, terrorist attacks, the nation's major airlines have been struggling. Fewer air travelers, higher security costs and a generally lackluster economy have knocked nearly all of big carriers against the ropes.
In his April 2 column, Pearlstein writes: The Bush administration's response to the airline industry meltdown can be summed up simply: We have no policy. Actually, that's not quite fair. The administration has half a dozen airline policies. None are coordinated, though, and a few look downright contradictory. Taken as a whole, they're not working." Read More.
Steven Pearlstein was online on Wednesday, April 2 to discuss the current state of the airline industry and what options the government could pursue.
A Transcript of the Discussion Follows:
Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Arlington, Va.: Could it be that the White House is actually trying to let the free market do what it needs to do the airlines?
Steven Pearlstein: Yes, its likely that is just what the White House is doing, letting the free market work this thing out with the airlines. But we now have some evidence, 20 years after deregulation began, that the market has not been able to do it. These kind of market failures happen in a number of industries, particularly after deregulation, and they require the government to intervene, both in terms of temporary assistance and tweaking the rules. And the argument can be made that is appropriate in this instance.
Baltimore: Didn't we just bail the airlines out last year after 9/11?
Steven Pearlstein: Yes, we bailed them out after 9/11, when there was a big reduction in demand, to the tune of $5 billion plus the $10 billion loan guarantee program. Now we have a similar situation of bookings falling off. Ideally, the industry should be robust enough to be able to withstand these kind of shocks, like other industries. But it is not, for reasons that would take a long time to discuss. In the short run, the only choice is either to help them out of their cash squeeze or suffer the consequences of even more bankruptcy filings and reorganizations. Either way, the industry will eventually reorganize and survive. It is a question of what economic and social costs we will suffer taking either route.
Washington, D.C.: Today you write: "Unfortunately, the administration's failure to take the lead and come up with a comprehensive approach means we'll wind up with yet another industry bailout that has more to do with politics and special-interest pleading than with nudging the airlines toward long-term sustainability."
What, in your opinion, would make this industry sustainable in the long term? Seems like this industry has never found a profitable model.
Steven Pearlstein: As I just said, this is a big question. First, however, we probably have to let the industry consolidate to three large national network carriers plus a whole bunch of point-to-point carriers and regional carriers. Then we have to make sure that the big three compete vigorously with each other and aren't allowed to keep out competition in the places where they have incumbent advantages. And as I said in the piece, there is probably a need to take a look at the labor laws affecting the industry and the way gates and slots are allocated at airports. We would have to look at how terrorism insurance and security costs are paid for, to see what portions of those should be societal costs and what portion should be paid by passengers through taxes. Finally, we might want to look at how airplane purchases are financed: one reason airlines get into these pickles is that they buy too many planes in flush times. Markets have to take the lead in solving these problems, but there may be some things government can do to change the rules by which these markets operate. There are elements of the airplane market that don't lend themselves to the kind of free, open competition you find in the market for tomatoes or sneakers.
Bethesda, Md.: Is there a case to be made that the airlines are as much a part of our vital national infrastructure as the interstate highways? If such, shouldn't the government do more to help them, not less?
Steven Pearlstein: There is a more of a parallel than you perhaps understand. We pay for highways through a fuel tax. And we pay for the airline infrastructure largely through the various fuel and other taxes on airplane tickets. In other words, taxes already pay for the infrastructure in both instances. Whether the airlines should get extra help beyond that is what we are debating right now. It's not a question of whether they deserve it. It is a question of what harm will the rest of us suffer in terms of disruption and economic downturn if the entire industry winds up in bankruptcy.
Falls Church, Va.: The newspaper today says Congress is preparing a $3 billion aid package for the airlines. Three billion? Seems like a drop in the bucket. What's your take on the package being debated on the Hill?
Steven Pearlstein: I have no idea whether $3 billion is the right number but what I said in the column was that if we spend the $3 billion, we should get something for it in terms of changes in the structure of the industry that will help solve its underlying problems. The money should be conditional on changes.
New York: OK, I've read all the papers today and I think I understand what Congress is proposing for the airlines. But for the life of me, I can't get a read on the White House. Who's calling the shots?
Steven Pearlstein: Nobody is calling the shots at the White House about this. That's the problem. They have not laid out their view of what is really wrong with the industry and where it needs to get to to become viable over the long term. Once they do that, then it should be easier to make these case by case decisions on pensions or mergers or security costs or even short-term bailout funds. Otherwise, each decision is considered in a policy vacuum and there is no coherence.
Silver Spring, Md.: In your column today, you seem to be saying that the Transportation Dept. should have approved some big airline mergers and joint operating agreements -- in other words, that more centralization in the industry is a good thing. Is that what you believe? If so, could you walk me through your reasoning?
Steven Pearlstein: I know this is controversial. I'm a big believer in antitrust law and a skeptic of most mergers. But in this case, I've come to conclude that the small, network carriers are not viable -- and the longer they hang around, they insure that NOBODY will make money. The problem here is that capacity has to be taken out of the industry, but the only proven way to do that in this industry is through mergers. The reasons are complicated but it turns out that, unless you kill an airline through merger (like American's purchase of TWA), these airlines go through bankruptcy and come back again with nearly all their planes and employees and routes. And the resulting price competition insures not only that the weak lose money but EVERYONE loses money because ticket prices are too low. That's right, too low. We may like it as passengers that prices are too low for the moment. But in the long run you can't sustain an industry by having them sell air service at below what it costs to provide it. Of course, some of their costs are too high and must come down. But that's not the whole story.
Arlington, Va.: The airline industry seems to be structured in such a way that the collection of individual airlines cannot, with the presently accepted constraints on cooperation and collaboration, present the public with a total industry that can prosper and provide the country with really efficient transportation. I have been trying to get sponsorship for ways to solve this problem. Any ideas?
Steven Pearlstein: I've tried to deal with this in response to earlier questions. But you've hit it on the head. That's what the administration should be trying to do right now, in answer that question and come up with some possible fixes. We can't expect to get it totally right, but we can surely get it righter than we've got it so far. The answer, I suspect, is some combination of looser regulation (i.e. antitrust, auctioning off gates and slots on a regular basis) and greater regulation (really cracking down on thuggish anticompetitive behavior by the big airlines when they try to drive upstart competitors out of a route, as is often the case).
Washington, D.C.: Steven, Your columns are great -- especially the ones on the airlines. Two questions: first, is there any chance that the government will simply stay out of industry reform and let the market work? Second, you mentioned previously that the big carriers shouldn't try to beat small, specialized ones at their own game; isn't there a danger, as well, of the smaller airlines trying to expand and compete with the bloated ones?
Steven Pearlstein: Thanks for the nice comment. Yes, the government could simply stay on the sideline, but there are too many political pressures being brought on Congress to save jobs, so some involvement is inevitable. Given that, we should get something in terms of long term restructuring in exchange for our largess. Your second question is the a good one too. Yes, Southwest is now getting to the point where it is so big in some markets, like Baltimore, that it has become a network carrier, with people traveling through its Baltimore hub to get from California to Providence, R.I., for example. There is a limit to how big an airline can get simply flying points to points. And if airlines want to grow beyond that, they'll have to adopt some aspects of a network system. Eventually, I think you'll see three models: network, point-to-point, and hybrid.
Washington, D.C.: You wrote today that a real plan would look at changing "the way airport gates and slots are allocated." I don't know a lot about how the industry works. How exactly are those allocated now and what would you change about it?
Steven Pearlstein: There is no simple answer to that because much of it is done on an airport by airport basis. There are a number of key airports, like Reagan and LaGuardia, where the government has cap on the number of takeoffs and landings. These slots, as they are called, were given out long ago and can now be bought and sold. The problem is that incumbent airlines use their control over slots to keep upstart competition out. Some economists question whether airlines should be able to hold these in perpetuity, or whether they should be auctioned off every couple of years. As for gates, there are a limited number of gates at any airport, most of which are leased out on a long-term basis. Again, some incumbent airlines sometimes keep these gates, even if they underuse them, as a way of keeping out competition.
Manassas, Va.: I get the impression that airline policymaking is made on a carrier-by-carrier basis. How else could you explain US Airways getting the pension deal it got?
Steven Pearlstein: You can make a case for the pension deal for US Airways. But there is no doubting that this gives that carrier a cost advantage over its competitors who haven't shifted much of their pension obligation to the government. It tends to encourage everyone now to file for bankruptcy to get the same deal. And if it does, shouldn't the PBGC tell everyone in advance what its policy will be in this regard.
Arlington, Va.: "At a time when the industry is literally dying from excess competition." Sorry steve - 9 out of 10 I agree with you.
The airlines are dying because of their business model, not because of competition. There business model, except for Southwest, is set up for business travelers. When they went away, the airlines went bankrupt.
Taxpayers should not have to foot the bill for such business mistakes. Let them go under, renegotiate contracts, and come out with a new model, or with the same model. But the taxpayers, should not continue to support this industry.
Even several years before 9/11, the airlines were only MARGINALLY profitable, and that was when business travel and the economy was booming. In the best of times, it wasn't that good of a business model, it certainly isn't now.
Steven Pearlstein: You're right -- we are generally in agreement. These business models are not sustainable and need to be revised, which is what an industry restructuring is all about. The only question is how to get through that in the most efficient way. Sometimes, a little money can help grease the wheels, both politically and economically, and in the long run deliver the best outcome. This may be such a situation, if handled right. My point this morning was that it was not being handled right, meaning that the $3 billion or whatever will just be more good money after bad. If we could use the money to induce some better and quicker restructuring, it may be worth the price.
Arlington, Va.: People are always saying that airlines have never made profits (with which I disagree), but if that is the case, why not let them fail until someone comes up with a better model? Or if it's important enough to the country to keep them afloat, nationalize them? It would be cheaper than the subsidies we currently pay, plus we could stop pretending that the government isn't involved.
Steven Pearlstein: Nationalization is a bad word but think of it this way: you could buy all of the airlines other than southwest for the $3.5 billion the Congress is proposing to spend. In effect, we are nationalizing the airlines: it is just a question of what terms they are being nationalized on. And my point today is that the terms aren't in the best interest of the taxpayers. We give them the money and we get no control or no call on future profits. Now the Airline Stabilization Board has thought about this some, which is why their loan guarantee to US Airways came with it some call on the carrier's stock if the company survives and prospers. Its a variation on the Chrysler bailout, where the government not only got its money back but made a profit. And surely that is one model we could use here with several of the carriers.
Herndon, Va.: I'm starting to think that the problem is that the U.S. consistently fails to come up with a holistic transportation policy. Every year, we have an airline crisis, an Amtrak crisis, a highway crisis, etc. Why can't we look at this as one big problem?
Steven Pearlstein: You got that right. The reason is that the free market ideologues have convinced us that the markets always deliver the best outcome. Usually that is the case. But in many of these transportation markets, there are natural monopoly elements. That's why they were regulated in the first place. And while we don't have to go back to that kind of heavy regulation, we should realize that these are not perfect markets and they require some continuing government involvement and monitoring.
Washington, DC: Steve: Are there any segments of the industry -- individual carriers or associations -- that are actually advocating the type of big-picture solutions you wrote about today?
Steven Pearlstein: Not sure. Industry wants assistance and tax relief without any strings, naturally.
Fairfax, Va.: Will the government let one or more of the Big 6 go under? Will it be United? Won't that be a huge psychological blow for many and appear that the terrorists are winning?
Steven Pearlstein: I don't know about the terrorist thing but it will be a big psychological blow to the economy if United goes under. At some point, the planes and the personnel and the gates will all be redeployed. But that will take time and the transition will be costly to suppliers, employees, creditors, investors, passengers. It would also be a blow to economic confidence. The question before the house is whether that cost is acceptable, or whether it can be mitigated with some combination of aid and restructuring.
Arlington, Va.: I'm all in favor of letting the free market, rather than the government, figure out how to fix the industry. My calculations indicate that a "fixed" industry could be making a profit of $5B a year, rather than a loss of $12B. But somebody has to figure out how to do this, and the airlines are presented with too many governmental constraints to pull this off without more cooperation from the government.
Steven Pearlstein: You voice a common belief among conservatives that what ails the airline industry is not too much deregulation but too much continued regulation. That is the same argument they use for the electric power industry following the california debacle. I guess I don't agree. I don't think these markets can be fully deregulated yet. We need to take it in steps.
Dulles, Va.: What is your take on the provision in the House version (I believe) of the airline industry aid bill that requires that executive compensation be capped if aid is provided? As a capitalist, I have ideological problems with that, but from a practical standpoint, I fail to see how airline execs should be rewarded with multi-million dollar pay packages while they lead their carriers into bankruptcy and lay off thousands of workers.
Steven Pearlstein: I suppose it satisfies a populist urge, but excessive executive salaries are not a big contributor to the airlines' problems. It would be better, though, if Congress attached other strings to its aid, like a few I've already mentioned. My nominee: changing the seniority rules to allow pilots and others to switch airlines without having to go to the bottom of the list.
Ashburn, Va.: When Washington National Airport was closed 3 weeks following 9/11, ten thousand people were furloughed and another 80,000 jobs were threatened. If most the air transportation system collapses financially we will see this situation repeated nationwide. Isn't that enough incentive for Congress to act quickly and effectively?" We seem to have billions to put into Turkey, so why not $4 or $5 billion to save our own airline industry and economy?
Steven Pearlstein: That's one way of looking at it (although Turkey didn't take the $4 billion deal, by the way).
Washington, D.C.: As you pointed out this morning, the Dept. of Transportation seems to be intent on saving the airlines at all cost -- without regard for the consumers of air transportation who should be the DOT's primary concern. We can see this in DOT's recent proposed rule for Computer Reservation Systems, where they have turned the original purpose of the rules, which was to protect consumers from airline owned distribution systems, on its head to the point that a majority of commenters have now suggested that deregulation is better than DOT oversight. Shouldn't we have expected a deregulatory proposal from the Bush Administration? Do you think deregulation makes sense?
Steven Pearlstein: Smart deregulation makes sense, which is not necessarily immediate and total deregulation.
Williamsburg VA: With so many airlines skirting around bankruptcy it would seem that they should be raising their prices on most fares. Even with concerns of terrorism and war isn't now the time to stop looking for volume and start looking at the bottom line?
Steven Pearlstein: You betcha. The problem is that in an industry such as this, with lots of fixed costs and lots of overcapacity, crazy competitive dynamics develop where it is better for everyone to charge prices below cost rather than risk having no passengers and going immediately out of business.
Dulles, Va.: So, how do the Europeans or East Asian countries regulate airlines? Is there anything we can learn from them, or is it apples and oranges?
Steven Pearlstein: They generally have much more regulated systems.
Somewhere, USA: Aren't the airlines kind of their own worst enemy? I mean, I'm not about to pay $1,000 one way to fly to Boston but they can't survive if I don't. Is that about right?
Steven Pearlstein: The Boston situation is a bit idiosyncratic because Boston is slot constrained and the incumbents can get away with charging high fares. In generally, however, fares are too low to put the industry on a sustainable basis. That's a reality that the politicians don't want to admit because passengers (voters) won't want to hear it.
Washington, DC: Follow up to my question on industry-proposed solutions: Are any of the labor groups trying to come up with solutions that involve sacrifices on everyone's part -- even their own?
Steven Pearlstein: I think the unions haven't gotten enough credit in recent months for the degree to which they have been willing to work with management to put their airlines on a sustainable footing. They may not have been so responsible in the past, but they are the unsung heroes of these restructurings.
Somewhere, USA: Why can't the airline executives put some of their multimillion bonus money back into the airline? Why do they have to get those huge bonuses at all? No wonder the airlines are broke!
Steven Pearlstein: Its a nice thought but a couple of million dollars in exec bonuses is not gonna do the trick. These airlines are losing five, ten million dollars a day.
Steven Pearlstein: This was fun, folks. Gotta go. We'll pick up again next week.
That wraps up today's show. Thanks to everyone who joined the discussion.
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