No Reward for Failure

Congress sent President Bush a $3.1-billion aid package for the nation’s airlines this month. In their typical fashion, legislators appended the bailout to a veto-proof $78.5 billion bill to fund the Iraq war.

This means that the federal government is once again going to reward the airlines for their failure to adapt to the marketplace. Certainly war and the SARS outbreak have hurt bookings, especially on overseas flights. But the real problem lies with the airlines themselves.

Ever since airline deregulation, federal aid-administered at first in the form of protective legislation and now in cash payments-has led the big six "network" airlines like United and Delta to accept entrenched inefficiencies and featherbedding tolerated by virtually no other industry.

Meanwhile, these carriers could save themselves at any time by looking across the terminal at competitive low-fare carriers such as Southwest, JetBlue, and AirTran. These airlines form an entire second airline industry in the United States, operating at the same airports as the networks, but in different economic worlds.

Why are the network airlines bleeding billions? Part of it stems from their perennial failure to fully utilize their aircraft and the time of their employees who sit idle at the airport between arrivals and departures. But it is primarily because their model for labor-management relations dates back to when Federal regulators still chose routes and set fares.

Before the industry’s deregulation in 1978, government officials raised fares whenever airline management needed to buy peace with the labor unions. It worked well enough at the time: air travel was relatively new and glamorous, and passengers were mostly businessmen from corporations willing to pay almost whatever was charged.

Even after deregulation forced competition upon them, these airlines continued their habits, tolerating contracts that required, for instance, $70,000-per-year mechanics to operate gate pushback tugs.

Unions regularly blackmailed them into "industry leading" contracts. A notorious example is the 2000 "Summer of Hell" when United’s pilots assaulted passengers with random cancellations and won a 37% pay increase.

Meanwhile, the low-fare carriers are consistently profitable. How? Their very reason for existence is to stimulate new traffic with lower fares. Even those with unions have no use for featherbedding and labor blackmail, and they actually enjoy good labor relations.

Low-Fare Carriers

For example, Southwest’s pilots fly 54% more hours per month than United’s-all well within Federal safety limits. All Southwest employees are cross-trained to perform several of the airline’s tasks, such as baggage handling, gate service and attendants’ duties. JetBlue reservations agents work from home, saving the cost of reservations centers. The bottom line: these carriers’ cost to fly one seat one mile is between 6.5 and 8 cents, as opposed to 10 to 12 cents at the network carriers.

These airlines were mostly born after deregulation and lacked the networks’ advantages: ample cash and Congressional-spouse lobbyists such as Linda Daschle to look out for them. In some cases, they faced congressional hostility, as when House Speaker Jim Wright (D.-Tex.) forced through a 1979 amendment designed specifically to prevent Southwest from becoming a national carrier. Yet that company just posted its 47th consecutive quarterly profit.

Meanwhile, the network carriers are faced with extinction. Their unions have acceded to some concessions, but efforts have been too modest. US Airways emerged from bankruptcy with a 10.5 cent seat-mile cost (down from 12.5 in 2002 and 14 in 2000), but that is still 45% higher than Southwest’s costs. United remains in bankruptcy.

Moreover, even as the cartel carriers’ stock value plunged 50-90% in 2002, they lavished their executives with multimillion-dollar pay raises. Continental’s Gordon Bethune earned $4.2 million in 2001 and $14 million in 2002, despite an ocean of red ink. Delta’s Leo Mullin-fresh off a 600% pay raise-and American’s Donald Carty hastily took huge pay cuts this month in order to mollify an outraged Congress.

Federal payment of some airline security costs may be justified as a national security function. But welfare for the network airlines only supports their bad business habits. Rather than prop up the old regime, Congress should finally take deregulation to its rational conclusion.

By allowing the free market to resolve airline industry woes, Washington would allow a vital industry to take charge of its destiny and strengthen its vital role in modern life.