The bankruptcy of American Airlines begs the question: how
can an industry so important to the economy be such a financial mess?
Every major airline has now gone through Chapter 11, except
for Southwest. Ironically, Southwest doesn’t fly to where most people live: major cities. Their motto has long been: if you fly where everyone lives, you can’t make money. Go figure!
The ascent of consumer acceptance of flying began in earnest
with deregulation in the late 1970s. Prices dropped, demand picked up and new airlines entered the market. All-in-all, deregulation worked for the flyer.
But for equity investors and many employees, deregulation
proved to be a disaster. Equity holders lost fortunes, jobs were lost, salaries
slashed and serious questions were raised about the qualifications of the newer
pilots and whether they were making livable wages.
As Former AMR CEO Bob Crandall pointed out on CNBC, since
deregulation the industry never earned its cost of capital. Ergo, sooner or
later, virtually all the airlines were destined to wind up as financial
failures.
One of the first big movers in deregulation was Frank Lorenzo. He went after a company called Eastern Airlines, then headed up by Frank Borman. Borman was an astronaut and rightly carried hero status as one of the few to have orbited the moon. Lorenzo was a man of the eighties, he knew numbers and how to borrow huge sums of debt. I am pretty sure he was never tested if he had the ‘right stuff’ as a fighter pilot in the deserts out west like Borman.
Lorenzo built an airline empire on the premise that as he built scale, his cost would drop and he could then pay down the heavy debt load his companies accumulated. That never happened. Everything he touched wound up in bankruptcy court. A bunch of years later, I was in a room with American CEO Gerald Arpey and when asked about the odds of Jet Blue succeeding, he said the airline industry is unique: your cost go up, not down, as you become bigger. Whiz kid Lorenzo was slow to grasp that very important point.
Do airlines going bankrupt really matter? On the surface, it doesn’t seem to. When airlines go into bankruptcy, the planes still fly. For that matter, as long as the planes fly, no one seems to care. Crashing planes is like serving spoiled food: not good for business so companies try to avoid
it.
But, below the surface, the filings will likely mean something at some point in time. The crash-and-burn of unfettered capitalism caused prices to drop way below the cost to deliver one passenger to somewhere around the world at a profit. While there is always plenty of blame in hindsight, was everyone in the industry that incompetent? Properly not.
When every company in a sector files for bankruptcy – and the one company that has not, will not fly to where all the people are – then maybe its time for someone to say,”Hey, something is not working here.” Maybe there is a role for some better government regulation in the flying business.
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