From his office window, Thomas W. Horton, in his fifth month as CEO of American Airlines, can see in the distance the Manhattan-size footprint of Dallas-Fort Worth airport, where American has 85 percent market share; it also has 68 percent in Miami, gateway to South America’s booming market. A few miles from here, however, sits one of the reasons why his company nevertheless entered bankruptcy recently — the corporate headquarters of Southwest Airlines.
Southwest, the most successful of the “low-cost” carriers that proliferated after the 1978 deregulation of the industry, has been profitable for 39 consecutive years, while the rest of the industry was losing $60 billion between deregulation and 2009. Southwest, JetBlue and the others have 30 percent of the domestic market, up from 10 percent in 1999. The “two-tier” airline industry is, however, becoming a thing of the past. All carriers are going to have low costs because of what Horton calls “fear-based discipline,” a.k.a. competition.
In the last three decades, there have been 192 airline bankruptcies. Not coincidentally, fares, adjusted for inflation, are 18 percent lower than in 2000. Forty years ago, a majority of Americans had never taken an airplane trip. Now everyone is more free than ever to move about the country, air travel having been democratized by liberating it from government.
In 1938, the Civil Aeronautics Act codified a government-managed cartel. Reason magazine’s Nick Gillespie and Matt Welch report that, 34 years later, United’s percentage of market share had gone from 22.9 to 22, Eastern’s from 14.9 to 11.6 and TWA’s from 15.1 to 11.9. Why this bureaucrat’s dream of near-stasis? Because between 1950 and 1974, the Civil Aeronautics Board (CAB) received 79 applications for startup airlines and rejected them all, believing that if even one passenger would be taken from an existing carrier, competition would be excessive.
Intellectuals are often the last to learn things, so John Kenneth Galbraith, Harvard’s celebrity economist and one of liberalism’s pinups in the 1950s and 1960s, argued in his 1958 book “The Affluent Society” that modern marketing — advertising and other supposedly dark arts — is so powerful that big corporations could manufacture demand for whatever they manufactured. In 1958, Ford put all its marketing muscle behind the Edsel.
Undiscouraged by evidence, in 1967 Galbraith, full of the progressive’s enthusiasm for the administrative state, asserted in “The New Industrial State” that the U.S. economy would soon be dominated by large corporations essentially immune from competition and hence from market turbulence. Four years later, Southwest launched its first flight. The “legacy carriers” — those that had operated under the CAB regime — were in for heavy weather.
American bought TWA shortly before 9/11, adding capacity just when less capacity was suddenly required. American is the last of the six legacy carriers to enter bankruptcy. The other five are United and Continental, now merged, Delta and Northwest, also merged, and US Airways, which entered bankruptcy twice before merging with America West.
Airlines have resembled those local governments that have given unsustainable contracts to unionized public employees and now are contemplating bankruptcy. (Watch Stockton, Calif., which may soon be the biggest municipal bankruptcy since the Depression.) Bankruptcy has been a management tool for airlines that cannot stand strikes — there has been no strike at a major airline since 2005 — because they must amortize their aircraft even when not flying. Bankruptcy has enabled carriers to shred improvident contracts entered into to purchase labor peace.
If American’s pilots had the work rules covering Continental pilots before the merger with United, American could have hundreds fewer pilots, and more earnings: A senior captain flying a wide-body plane makes more than $200,000 a year and has rich pension and medical plans.
Horton has done taxpayers a favor by deciding not to turn American’s non-pilot pensions over to the Pension Benefit Guaranty Corp., the deeply underfunded federal agency that would pay only a portion of what employees were expecting. American will pay benefits already accrued, but henceforth employees will have defined-contribution rather than defined-benefit plans.
Airline bankruptcies are peculiar: Just last July American bought $38 billion worth of new fuel-efficient aircraft. It takes money to save money and an airline.
Horton is imperturbably noncommittal about the possibility that the industry’s next consolidation will meld American with perhaps US Airways or Delta: “Our plan is to create the best outcome for our stakeholders.” Which is a nice way of saying, “Please leave your seatbelts fastened.” Turbulence is normal, and normally good for travelers.