Airline deregulation redux

Louis Proyect lnp3 at
Fri Feb 22 06:48:50 MST 2002

Comrades might remember the article I posted here on airline deregulation a
while back:

Last Sunday, the NY Times Magazine section had an article that covered the
same terrain but from the opposite side of the barricades. Essentially, the
article claims that the airline industry faces a profit crunch because of
the huge fixed capital costs associated with doing business. The only way
to resolve the crisis is to attack variable capital (wages). Which adds up
to serious trade union struggles in the coming period, if you ask me.


NY Times Magazine, February 17, 2002

Into Thin Air

On the evening of Sept. 10, negotiators for the C.E.O. of United Airlines,
James Goodwin, huddled in Washington with union officials representing
United's 30,000 baggage handlers, customer-service representatives and
reservation agents. They were putting the finishing touches on an agreement
for a hefty double-digit wage increase, and Goodwin, a tall, likable West
Virginian who had been with the company 34 years, was waiting for a call to
give his O.K. It didn't matter that United, which had lost $605 million in
the first half of 2001, was in a financial tailspin: when airline unions
are due for a raise, they get one. If you don't understand why, then you
don't understand the airline business.

As it happened, the talks dragged on, and at 5:30 on the morning of the
11th, the negotiators trudged off to get a few winks. Randy Canale, a union
negotiator, returned to his hotel, the Capital Hilton, not far from the
Pentagon, figuring they would sign later that day. He awoke earlier than
expected, to the sound of sirens. ''Boy, it sounds awful close,'' Canale
murmured. Someone was banging on his door, and puffs of smoke were visible
from the hotel window. Two of United's jets were down, the wage hike was
history and so was the 57-year-old Goodwin's career. Seven weeks later, he
was dismissed by United's board. It hardly mattered that United's directors
would have approved the agreement and were as much to blame as Goodwin.
They were letting him go for a way of doing business that has tormented
United and the entire industry for decades.

Since 1978, when commercial aviation was deregulated, no fewer than 137
carriers have filed for bankruptcy protection. And from the end of World
War II, when aviation started to become big business, through 1994, the sum
of the industry's profits and losses was less than zero. Warren E. Buffett
once remarked that it would have been a blessing for shareholders if
someone had thought to shoot down Orville Wright at Kitty Hawk.

This is the industry that Congress has rushed to save, and this is the
record that -- failing basic changes -- it will have helped to perpetuate.
Indeed, even as it reels from last year's record $3.8 billion operating
loss, United is facing the possibility of a strike by its mechanics,
pending a vote on a proposed 37 percent wage hike this past week. If this
rings faintly of ''Alice in Wonderland,'' well, that is because airlines
are not like other businesses, where competition breeds variety and choice
for consumers and profits for business. They are more like flying
utilities. As passengers, we demand quality service -- on-time takeoffs,
edible food, plenty of leg room -- and don't much care who provides it, as
long as they make it cheap. That leaves the airlines with the dubious honor
of competing to be the Ma Bell, the Con Ed, of the sky.

One reason the major airlines find themselves in this predicament is that
they use huge amounts of fixed capital -- wide-body jets go for $100
million each and can't be readily liquidated. They also depend on a skilled
labor force. The two problems exacerbate each other. Since airlines cannot
afford to let planes sit idle, they can ill suffer strikes. That makes
their unions unusually powerful. Consider some other businesses for a
moment: Microsoft has highly skilled programmers but little invested
capital. Merrill Lynch has both, but its assets -- stocks and bonds mostly
-- could be liquidated overnight. Steel has high fixed capital, but it can
replace its workers more easily.


Louis Proyect
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