Fraher writes: “Although US air carriers took in over $2 trillion in revenue between 2000 and 2012, much of it untaxed, entire books have been written about the airline industry’s inability to make a profit. The topic never seems to lose its appeal for economists, consultants, academics, and journalists—each trying to crack the code on the cryptic industry.”
The Growing Perils of Airline Deregulation
By Amy L. Fraher, Salon
02 June 14
Just like Wall Street before the '08 financial crisis, risks have been escalating in the airline industry for years
lthough US air carriers took in over $2 trillion in revenue between 2000 and 2012, much of it untaxed, entire books have been written about the airline industry’s inability to make a profit. The topic never seems to lose its appeal for economists, consultants, academics, and journalists—each trying to crack the code on the cryptic industry. The findings are typically the same: employees are overpaid, labor unions obstinate, airplanes expensive, fuel costs volatile, economies unpredictable, and regulations restrictive; weather, recession, travel scares, and war hurt business; and competition is high because internet websites allow passengers to lock in the cheapest possible airfares. However interesting this perennial debate is, it misses a key point: some people are making big money working for US airlines, just not employees.
The evidence indicates that while US air carriers may have floundered in the immediate post-9/11 period, airline executives managed to maximize their own profits without much trouble. As it turns out, putting in a few years as an airline CEO is an excellent ticket punch on the way up the corporate ladder. And, just like Wall Street bankers, airline executives seem to believe that as long as they lock in their own take, the market will sort out the rest. Meanwhile, at the same time that airline executives furloughed employees, eliminated pensions, and cut workers’ wages and benefits, they authorized costly expenditures such as $200 million for legal advice and consulting fees during bankruptcy and merger, and $20 million for Business Education Training to acculturate employees. Even post-merger paint schemes came with a high price tag. At about $30,000 an airplane, most major airlines spent around $200 million stripping and repainting their fleet in the post-9/11 period.
Although awareness of the details of these fiscal magic tricks may still be emerging for the general public, the high costs were not overlooked by airline employees. Ralph, a senior captain and former military pilot hired in the mid-1980s, noted how much has changed in the airline business during his tenure:
The business model was so badly broken after 1978, it probably took twenty years just to rationalize what kind of business this business wanted to be, and I think they’re still doing it. But it has certainly become all about the MBAs and their management techniques. . . . We used to have people in this industry who loved this industry, who loved aviation, who wanted to build great companies. . . . And they have been supplanted by MBAs and professional managers—we’ve had seven CEOs at [my airline] since I’ve been here. . . . We’ve become just like every other business in America where the management teams and the board of directors float in and out and try to maximize “shareholder value”—although it seems they shrink shareholder value as much as they maximize it. They certainly maximize their own value. That seems to be the only common theme.
Captain Jasper has thirty-five years of aviation experience and a valuable insider’s perspective on industry developments and their cause, and he spoke similarly:
Deregulation was a horrible mistake. . . . If you value commercial aviation as something that deserves the public trust, you’ve got to regulate it. The only way to make it stable and sustainable is to regulate it. To make sure that greed doesn’t drive where the industry’s going. Unfortunately, for the last twenty years, that’s all it’s been: greed has driven where the industry has gone.
Could things get even worse in the US airline industry if we don’t change course soon? A look across the Atlantic at the Irish low-frills airline Ryanair gives us a glimpse into the possible future for US airlines.
In 2013, Ryanair Pilot Group, the pilots’ union, developed a safety petition expressing concern about airline working conditions and air safety to be submitted to the Irish Aviation Authority. Rather than proactively addressing these deficiencies, Ryanair management instead warned pilots if they signed the document they risked dismissal. At most airlines this warning might have been discounted, however Ryanair pilots were fearful because they had recently been recategorized as “self-employed” subcontractors—not airline employees. Thus, pilots were not provided a guaranteed salary, pension, or medical insurance and were required to pay for all their own business expenses from uniforms and ID cards to ground transport and hotel accommodations costs typically covered by airlines directly. Could employee subcontracting be the next cost-cutting strategy for US airlines too? Many US air carriers already employ the tactic for mechanics, caterers, and aircraft cleaners. Why not pilots?
As long as airlines appear safe on paper and airfares remain cheap online, no one seems to care much about employees’ concerns. Seventy percent of pilots interviewed believe it is likely that a major airline accident will occur in the coming years due to post-9/11 airline cost cutting, and 24% think an airline crash is very likely. One captain I interviewed summed up the situation:
[Airlines today aren’t] doing things the right way. They are doing things that are economically expedient for them because they are foolish about safety. . . . We haven’t had any [major airline] accidents. . . . But, I still say I think it’s going to happen sometime. . . . Nobody would be surprised. We would all go back and look at the data and say, “Yeah, of course.”
Just like Wall Street before the 2008 financial industry implosion, risks have been escalating in the US aviation industry, and airline employees today are primed for the next crash. However, general awareness of this growing problem has been spreading only gradually. Most of us now recognize that 9/11 did not create this airline industry instability—weak regulatory oversight, ineffective managerial strategies, and self-serving executives did. It is time to stop allowing profit seeking to trump safety concerns and to reconceptualize the idea of air safety before it is too late. So what should be done to address this problem now?
Major US airlines need a new business paradigm. In the current environment, any air carrier that does not follow the crowd into downsizing, cost cutting, and merger will be annihilated by the others, particularly air carriers allowed to operate for years under bankruptcy protection. What seemed to be economies of scale provided by these large airlines and their vast networks have become burdens of size in the new flexible economy.
Although not a new theoretical construct, per se, conscious capitalism has made a resurgence in the literature over the past decade, with American business scholars calling for improved ethics, sustainability, servant leadership, and value-driven decision making. The underlying argument is that companies can do well financially while also behaving ethically, creating sustainability in their market. By subscribing to five characteristics, companies can be purpose driven and create benefit not only for shareholders but for employees, customers, the community, and the environment.
First, companies need a higher purpose. Company profitability needs to be directed toward a greater end than making CEOs wealthy, as was the case with early airline pioneers who tried to create a safe and reliable aviation industry for America. Second, airlines must commit to meeting the needs of all stakeholders, including employees and customers, not just investors. Any passenger who has flown commercially over the last decade knows what a frustrating and dismal experience air travel has become. Third, executives must integrate ethics, social responsibility, and sustainability into their core business strategies. Fourth, airlines must foster a healthy organizational culture through a strong sense of community. And fifth, CEOs and senior managers must become “servant-leaders,” committed to the long-term health of the company, not celebrity names passing through on the way to their next impressive title and seven figure paycheck.
Southwest Airlines has been touted as a good example of conscious capitalism, and it is a great airline. However, for several reasons, Southwest’s low-frills model will never work for major US air carriers and, after chasing after this image since airline deregulation in 1978, it is time for government policymakers to face this fact. For example, Southwest keeps training, maintenance, and other overhead costs down by flying one type of aircraft on largely short-haul point-to-point routes to airports in cheaper cities on the outskirts of major metropolitan areas. In contrast, major airlines fly a variety of domestic and international routes, which requires a range of airplane sizes to meet different operational needs. It cannot be done with just one type of airplane.
Larger aircraft require a different infrastructure than Southwest’s planes do, such as longer runways capable of supporting more weight, ground obstacles to clear wider wingspans, terminal jetways to meet higher airplane doors, and refueling capabilities to meet high international fuel loads. Many smaller airports cannot accommodate this, so major airlines must land at bigger airports with higher landing fees. In addition, flying a variety of aircraft requires different training protocols and larger stockpiles of spare parts. The list of expensive challenges goes on. However, these are unavoidable costs for major air carriers. Southwest’s 737s are never going to fly from the United States to Europe, Asia, or the many other international destinations passengers demand.
Yet, that does not mean that major airlines cannot follow Southwest Airline’s example of conscious capitalism. It would be to their benefit. A 2009 book about US air carriers after 9/11 found that the managers who paid attention to the connection between relational reserves and financial reserves before and during the crisis best contributed to organizational resilience after the crisis. More specifically, this book explained why Southwest—an air carrier that has never furloughed employees—recovered the fastest of all US airlines after 9/11, while United and US Airways—air carriers that laid off the most employees—recovered the slowest. By 2005, Southwest’s stock traded at 92 percent of its pre-9/11 level, while United and US Airways stock remained at 12 percent and 23 percent, respectively.
A key difference during the post-9/11 period was Southwest’s “employees first” philosophy. As CEO Jim Parker observed, “We are willing to suffer some damage, even to our stock price, to protect the jobs of our people.” This prioritization of employees’ rights over shareholder interests is obviously in opposition to many managerial strategies and economists’ opinions. However, Southwest’s founder Herb Kelleher explained it this way: “Nothing kills your company’s culture like layoffs. [It is] shortsighted.” In contrast, refraining from furloughing, particularly when times are tough, “breeds loyalty,” “a sense of security,” and “trust.” As a manager, he said, “you want to show your people that you value them and you’re not going to hurt them just to get a little more money in the short term.”
In order for major airlines to accomplish this shift to conscious capitalism, there are three major areas warranting immediate attention: government, regulators, and the flying public.
Government
The US government has had a love-hate relationship with aviation from the beginning. While foreign countries were eager to invest in and develop their commercial airlines, the United States was dragged reluctantly into supporting the fledgling industry through airmail and other subsidies. This ambiguous beginning in some ways colors government’s engagement even today. Nevertheless, a country of the size and wealth of the United States needs a strong and vibrant commercial air transportation infrastructure to support interstate commerce and the travel needs of its citizens, as well as for national defense in wartime. To support this safe and vibrant industry, America needs a national aviation policy that addresses all its needs—not a one-size-fits-all business model. It’s time to recognize that Alfred Kahn’s deregulation experiment has run its course and that the federal government should at least partially re-regulate the airline industry. It is in every American’s best interest to increase safety and decrease risk, and government action is required because, just like Wall Street, airline executives have shown they can’t—or won’t—control themselves. As outspoken aviation leader Robert Crandall, retired CEO of American Airlines, noted:
[The airline industry] is simply not an industry where the market will produce a solution. Leadership needs to come from the government. We need a coherent national transportation policy, new labor law, new bankruptcy law . . . [with] the objectives of preserving reasonable competition and an acceptable standard of service and taking the needed steps to ensure US airlines are competitive on the world stage. If the Germans and French can do it, we can do it. There is a national interest involved here.
The reason why this has not happened is a lack of leadership at the federal level. Just like in the days of Alfred Kahn, Crandall observed, the United States is “in the grips of ideologues” who are “convinced the market will solve the problem.” That will never happen, therefore the solution is “sensible government regulation,” he said. But how should we get started?
First, government should make bankruptcy a less convenient path for airline executives by restricting their ability to declare Chapter 11 , pay lavish fees to consultants, and reap millions in bonuses for themselves while employees’ wages and benefits are slashed. Aviation deserves leaders committed to safety, stability, and the long-term health of the industry like the airline pioneers, not short-sighted opportunists eager to game the system. Second, Congress should display the same interest in airline safety as they have shown in airport security in the post-9/11 period. They should commission a study by the Government Accounting Office of airline employees’ opinions and experiences. The research questions could be simple: Have post-9/11 airline industry cost-cutting strategies—such as bankruptcy, outsourcing, downsizing, merging, and restructuring—affected employees’ health and work performance? What are the long-term implications for risk and air safety? Then develop a plan to address the study’s findings.
Regulators
One of the most glaring similarities between the Wall Street crash of 2008 and the evolving crisis in aviation is the mismatch of intentions and differing views of regulator’s roles and responsibilities within the wider system. Financial industry regulators erroneously assumed that investment banks would police themselves, insurers would provide protection, credit-rating agencies would be objective, and market forces would keep increasingly risky deals in check. Similarly, transportation industry regulators like the DOT and FAA have assumed that airline managers will monitor safety, labor unions will police management’s risk taking, and market forces such as passenger demand will keep things in check. After all, they assumed, airline employees would not fly for unsafe airlines and passengers would not buy tickets solely based on the lowest price. We know from the 2008 financial industry implosion and Great Recession that followed that this system of balancing forces did not work effectively on Wall Street. And we now know it is not keeping commercial airline safety in balance either. This is not the first time the FAA has been criticized.
The airline regulatory structure has been under attack for decades for its inability to accomplish its wide variety of missions. Like the CAB in the 1970s, the time has come to update aviation’s regulatory system. Developed over fifty years ago, the FAA was simply never intended to provide all of the services it is burdened with today. It is time for the pilot training and airline policing functions to be separated from the FAA and assigned to new government agencies that can provide the leadership and attention these important functions rightly deserve. To echo Captain Sullenberger’s comments, it is time for government, regulators, and airlines to refocus their attention and resources on the recruitment and retention of highly experienced, well-trained pilots with safety a priority at least equal to the financial bottom line. The only way this can be accomplished is through government intervention.
Military-trained pilots, previously the backbone of the commercial airline industry, will no longer be available either because they are increasingly staying in the service or because they are now trained in remotely piloted aircraft. This means the future of airline safety lies in civilian training programs, and this is an area that warrants intense restructuring. Although the FAA has increased airline pilot flight-time minimums, it remains unclear how other identified problems, such as a lack of professionalism, poor cockpit discipline, or a general devaluing of the seriousness and responsibilities of the piloting profession will be addressed. During World War II, President Roosevelt instituted the Civilian Pilot Training Program to provide a pool of well-trained civilian pilots from all walks of life—across gender, ethnicity, and class lines—to support America’s aviation needs. It is time to reconsider this approach and take control of airline pilot training away from airport flight schools and companies like Gulfstream academy so as to provide well-trained pilots for our commercial infrastructure. Without an industry-wide commitment to attracting—and retaining—the best and brightest for our airlines, Asian and Middle Eastern air carriers will likely benefit while US air safety suffers.
The Flying Public
The changes I propose will not happen unless the flying public embraces its collective power. We need to pressure airlines to prioritize safety and the federal government to increase accountability, just like during the New Deal in the 1930s. As consumers, we must be willing to pay more, if need be, to ensure that pilots are well trained, rested, and safe.
Although my arguments may be persuasive, I know the next question will be: How can Americans pay for these regulatory changes? It is not as difficult as one may think. Here are five steps I suggest to get started:
1. After 9/11, every roundtrip airfare in the United States incurred a $5 surcharge to pay for the establishment of the TSA. 11 With over 800 million passengers embarking in 2012, 12 and an anticipated 1.2 billion flying by 2032, a small surcharge could help subsidize the changes I have recommended here.
2. In 2011 alone, the flying public paid over $12 billion in untaxed airline ancillary fees—fees like checked baggage, seat assignments, and rebooking—pure profit for airlines. Tax this profit, just like the government taxes airfare revenue.
3. Stop subsidizing flights through Essential Air Service, a program developed in the 1970s and never intended to still be in place thirty years later. Instead, urge airlines to make these routes profitable by meeting customer demand. This would have saved taxpayers $143 million for fiscal year 2012 alone.
4. Separate the FAA’s dual mandate to both supervise and promote aviation into separate government agencies. This will allow regulators to develop a successful pilot-training pipeline and to properly police airlines. Enforcement actions will increase revenue.
5. Aviation industry fines must be paid in full, not negotiated down like Gulfstream’s reduction from $1.3 million to $550,000.
The airline industry once shone like a beacon on the horizon, solid and steady. Airlines were a place where generations of employees dedicated their lives and worked with pride, happy to provide a service and enjoy a shared identity. For many airline employees, it’s now a nightmare from which no awakening is in sight. The economic tsunami, as Captain Sully described it, hit the aviation industry in the post-9/11 period and has left employees reeling. Although airlines have returned to profitability and executives earn handsomely, airline employees continue to give up more than $12 billion a year in wages, benefits, pensions, and various work rules. As of 2010, nearly 200,000 airline employees remain out of work and over 10,000 pilot jobs at major air carriers have disappeared, many outsourced to questionably safe air carriers like Colgan Air. Airlines have become the discount stores of the travel industry—“Expect More. Pay Less,” as the Target slogan goes. Employees and passengers may expect more, but airlines will provide less. Meanwhile, industry leaders continue to hope no one will “alarm the passengers” about these secrets.
Looking back on that crisp fall day in 2001 when my flight was forced to land in Omaha for four days while the national airspace system shut down, it becomes clear how fragile America’s aviation industry really is. Although the industry may be pretty good at managing routine operations, getting planes and passengers from departure to destination, when confronted with an abnormal situation the fractures widen and the system breaks down. Awareness about this fragility may be coming to each of us at different times in varying ways. Yet one thing seems certain: post- 9/11 short-term profit seeking continues to trump safety in aviation and, like Wall Street before 2008, few measures are currently in place to significantly change this pattern anytime soon. Airline executives’ fixation on maximizing short-term profits at the expense of long-term safety—and government regulators’ inability to stop them—has created a period of increased risk to the flying public as well as airline employees. As one airline captain confessed, “I don’t want to see an accident happen. But part of me thinks that maybe that’s the only thing that will convince people where we are at. . . . It’s just too complex a system for something not to fail.”
Like Wall Street, airlines have counted on the fog of war in the post- 9/11 period to keep the government supportive, citizens sympathetic, bankruptcy courts lenient, employees desperate, unions befuddled, and customers in muppet-like pacification. However, at some point, awareness about what is really happening in the airline industry will come to all of us, and if passengers do not trust an airline, they will eventually stop flying.
The only question that remains is will the airline industry follow Wall Street as the next crash on America’s horizon?
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