Headed for a crash landing
While everyone but Washington policymakers and regulators is watching, the entire airline industry in this country is on the verge of an outright collapse. The airlines are hemorrhaging cash and slashing jobs. The major airlines have burned through $30 billion since 2000 and are now forecast to lose $5 billion more this year and next. And that doesn't include the more than
$20 billion investors have lost in the past four years or the $15 billion that taxpayers have provided the airlines since 9/11. Since then, air carriers have cut 110,000 jobs, and many are either planning more job cuts or seeking deeper wage concessions--or both.
Many legacy carriers have either filed for bankruptcy protection or are very close to doing so. Three of the nation's top 10 airlines--United Airlines, US Airways, for the second time in just two years, and ATA--are bankrupt, while drastic cost-cutting programs have for now at least saved Delta, American, Continental, and Northwest. But they may soon face the same financial fate as well.
Crisis mode. Given the industry's financial and economic challenges and bankruptcies, an economy that has yet to return to its full growth potential, soaring fuel costs, and heightened travel security, the airline industry is in nothing short of a crisis. The airlines are responding as they always have: cutting costs, whether trivial or profound. Some carriers have quit serving even a bag of peanuts or pretzels to their passengers, and now, on some flights, American Airlines has taken pillows away. But airlines are making their deepest cuts in the only real expense they control, and that, of course, is wages and benefits. Airline employees who get to keep their jobs are now working longer hours with less rest, even as their wages and benefits are being slashed.
Delta Airlines, which has lost $6 billion since 2001, recently struck a five-year deal with its pilots union that included $1 billion in wage and salary cuts per year. Most other major carriers have also reached concession agreements from their employees to either emerge from bankruptcy or prevent it, and those agreements total billions of dollars. Delta's pilots agreed to a pay reduction of 32.5 percent, with no contractual raises over the length of the deal.
The pay cuts at Delta will not only affect household budgets but also cut into consumer spending in Atlanta, according to Rajeev Dhawan, director of the Economic Forecasting Center at the Robinson College of Business in Atlanta. The $1 billion in concessions translates to approximately $625 million lost in consumer spending in the area, which could lead to a potential loss of 9,000 jobs. And these calculations do not include any future planned job or pay cuts. The same economics apply for the other legacy carriers and their employees all across the country.
The Airline Deregulation Act of 1978 can claim success in lowering ticket prices for passengers, but it has also caused disaster within an essential and fundamental American industry. There have been more than 130 bankruptcies since the deregulation of the industry, and by far the most were low-cost domestic carriers that squandered tens of billions of dollars in investment capital while forcing legacy carriers to try to survive with either the slimmest of margins or operating losses. The airlines will carry around 600 million passengers this year, a nearly 7 percent increase from a year ago. But expenses are also surging, and because of competition from low-fare carriers, these costs cannot be passed through to the customers. Jet fuel prices have risen 74 percent this year, but the airlines can't raise ticket prices to reflect higher costs.
Re-regulating the industry through an agency like the Civil Aeronautics Board may not be the ideal solution to solve this major problem, but radical action must be taken before the airlines collapse, leaving hundreds of thousands of workers unemployed and the nation without one of its most critical industries. Re-regulation may not be the best solution, but so long as we insist on propping up failed carriers through bankruptcy protection and government bailouts, it is the only solution available.
This story appears in the December 6, 2004 print edition of U.S. News & World Report.