Attention All Passengers (8 page)

Over the last two decades, most major domestic airlines have passed through Chapter 11 reorganization, including America West, Continental, Delta, Northwest, TWA, US Airways, United, and—as of last year—American. Some majors have filed more than once; US Airways, for example, sought Chapter 11 protection in 2002 and again in 2004. Amazingly—or perhaps not so amazingly—both Northwest and Delta filed on the exact same day, September 14, 2005, less than three years before those two carriers merged.

Among the largest carriers, the notable exception has been the Dallas-based airline Southwest, which has never filed. Last year former Southwest and Braniff CEO Howard Putnam said, “Now almost every airline has been through it. All but American, and they probably wish they had.” He could be right: back in 2003, American CEO Don Carty was forced to abruptly resign after a Securities and Exchange Commission filing revealed he had received a $1.6 million bonus. The
New York Times
reported that American had made a $41 million pretax payment into a trust fund created to protect the pensions of 45 executives.
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All this occurred as Carty was negotiating with American's unions for $1.62 billion in concessions.

In the years after the terrorist attacks in 2001, another wave of bankruptcies swept the airlines. But as industry expert Hubert Horan points out: “All the post-9/11 bankruptcies were due to the reckless overexpansion of the late 1990s, even though the airlines falsely blamed their losses on some combination of Osama bin Laden and evil unions.” In recent years U.S. airlines have been disciplined about “restraining capacity” by parking airplanes in the desert, laying off employees, and reducing the number of available seats. Airlines for America reported that in 2009 domestic seating capacity had fallen to its lowest point since 1942, when the airline industry was mobilized by the War Department.

The Same Old Victims: Employees and Passengers

Kenneth Goodpaster, an academic who specializes in business ethics, wrote a case study for Harvard Business School titled “Braniff International: The Ethics of Bankruptcy.” I asked Goodpaster if employees should be rewarded when and if the company does turn itself around; in other words, shouldn't executives give back the givebacks? “It certainly would be a nice gesture,” he said. “It could be seen as appreciating that labor gave back. As long as the company's financial health could sustain such increases. Is it a legal obligation? No, of course not. Is it a moral obligation? I'm not even sure. But it could be the morally admirable thing to do.”

Givebacks may be too much to seek. For workforces that have seen their jobs dissolve and their paychecks reduced, the salt in the wound has been that not everyone shares the pain, particularly in airline executive suites. In 2007 a lengthy article analyzing bankruptcy and executive compensation in the
Northwestern University Law Review
found that “recent reform efforts to limit executive pay in bankruptcy are largely misplaced.” However, even this report added that data show “disproportionately large grants” to CEOs in the years leading up to Chapter 11 filings; the report noted that such grants are better explained as severance payments, and courts should give them further scrutiny.

That same year, airline labor unions participated in the “Enough Is Enough” rally on the Mall in Washington, D.C., to protest out-of-control management self-interest. The Aircraft Mechanics Fraternal Association stated: “United Airlines' board bestowed $39.7 million in compensation on CEO Glenn Tilton in 2006, despite the airline's continued poor performance. AMFA recently used the UAL shares the union owns to give the UAL board a no-confidence vote.” Columnist Joe Brancatelli is blunt in his assessment: “This was a guy who knew zippo about the airline business—and after 120 days he bought into the conventional wisdom and he destroyed the employees' equity.”

Many hard-core free marketers scream that bankruptcy laws protect the weak from the Darwinian effects of capitalism. But that hasn't stopped airline CEOs from profiting at others' expense. “The point of bankruptcy laws is to get the most for the creditors who have been fucked and to keep the company alive in the interim,” says Hubert Horan. He also faults preferred creditors, such as Boeing and Airbus and jet engine manufacturers, for their role in airline bankruptcies: “It's like giving Tony Soprano control of all the waste disposal in North Jersey.” He is especially harsh in discussing United's reorganization, which lasted from 2002 to 2006 and was particularly contentious. Tilton came under heavy fire because despite widespread layoffs and the cancellation of United's pension plan, Forbes still ranked him as the highest-paid U.S. airline executive in 2005. “It was a group of clearly conflicted interests,” says Horan, who claims the court effectively “transferred assets to the personal account of Tilton.” Meanwhile, Horan contends the result was “a glut of capacity” for years that harmed the entire industry.

Bernadette McCulloch of the Teamsters speaks for many labor representatives when she argues that Chapter 11 has become a green light for airlines to wipe clean all obligations to employees: “The minute an airline goes into bankruptcy, that's when they really start outsourcing. The judge can nullify your contracts so they basically hold you hostage.” McCulloch notes that a long, drawn-out battle was waged to preserve a handful of employees at Frontier Airlines, but saving those 121 jobs came at a great cost. She also notes that railroad employees keep their pensions for life, even if they move from one company to another and even when the industry consolidates, a policy that airline executives would never allow.

Of course, the other victims in airline bankruptcies are passengers, and sometimes even whole communities. A decade later, St. Louis still hasn't recovered from the loss of TWA: the bankrupt carrier's former hub in St. Louis saw a reduction in total passenger traffic from 23 million in 2002 to 12 million in 2010. As passenger advocate Kate Hanni notes, many passengers don't realize their tickets become worthless when the airline goes bankrupt. Unfortunately, rival airlines often do not honor tickets from an airline that is shutting down, and members of frequent flyer programs can be left with worthless mileage as well. Oh, and don't count on travel insurance. Many underwriters maintain “black lists” of airlines they consider financial risks, so carriers undergoing Chapter 11 bankruptcy reorganization are always verboten as risks on travel policies.

Consolidation: Enough Shrinkage Is Never Enough

Within a three-week period in 2010, I appeared before the Senate and then the House to testify at hearings examining the proposed merger of United Airlines and Continental Airlines. On behalf of Consumers Union, I strongly urged Congress to support passengers by weighing in against that marriage, on the grounds there would be less choice and fewer flight frequencies for passengers, as well as a complete loss of service on some routes. As for airfares, it's an economic given that consolidation leads to higher prices; it's one of the few topics that virtually all economists agree on. And with fewer competitors, it's harder for any airline to resist matching an increase in fares or fees. But there are other ill effects as well, including reductions in service quality. After all, if there is no meaningful competition, what incentive is there to improve service or launch new service initiatives? Over time, consolidation also has a chilling effect on the launch of new start-up airlines, and consumers lose out on the benefits of additional service and lower fares there as well. Ultimately the threat of widespread disruptions increases, because the loss of a single carrier—whether it's due to bankruptcy, a labor action, or an FAA shutdown—could cripple large sections of the nation. Eventually a “too big to fail” scenario arises. And finally, each approved merger and acquisition leads to more rubber-stamping of additional couplings, as airlines argue that they should be afforded the same privileges given the last merger partners.

I provided detailed analysis of how fares rose and service decreased in case after case when the airline mergers were approved. Of course, Congress did nothing and the Justice Department approved United/Continental that summer, just as it has approved virtually every airline merger put before it in recent memory. That fall, I entered an FAAC Competition Subcommittee meeting in Denver chaired by Glenn Tilton, CEO of United, who was speaking enthusiastically about postmerger plans. I feigned naïveté and asked if the deal had been approved, to which Tilton replied, “Yeah, we'd like to thank you for your help, Bill.”

First, some needed context. The airline consolidation trend is nothing new; in fact, it's as old as the industry itself. Ever wonder why it's
United
Airlines? The company was formed by melding a series of smaller airmail and passenger carriers. Similarly, Delta didn't take shape until its acquisition of Chicago and Southern Air Lines in 1953. And back in 1962
Time
reported that Juan Trippe of Pan Am was seeking a merger with Howard Hughes's Trans World Airlines so that “Pan Am World Airlines” would become the “chosen instrument,” a single U.S. carrier designated by Washington to operate overseas.

Within a brief period between 1985 and 1987, the U.S. airline industry saw a wave of fourteen domestic mergers, including the acquisitions of venerable players such as Eastern, Frontier, Ozark, Piedmont, Republic, and Western. (Such a list can be confusing; commercial aviation has a long history of recycling brand names such as Allegheny, Frontier, Midway, Piedmont, National, Republic, and even Pan Am. For years I told industry veterans, “I used to work for National Airlines. No, not that one—the other one.”)

Now consider what has occurred in just the last decade:

• 2001: American acquired TWA's assets through bankruptcy

• 2005: US Airways and America West merged

• 2008: Delta and Northwest merged

• 2009: Republic acquired Midwest and Frontier

• 2010: United and Continental merged

• 2011: Southwest and AirTran merged

Put another way: in 2004, aviation journalist Jerome Greer Chandler noted that of the roughly forty domestic U.S. airlines that existed in 1929, just two—American and Northwest—continue flying under their own names. By 2010, Northwest was absorbed into Delta, leaving American as the lone survivor from that era.

The most honest assessments on consolidation usually come from the financial community. The website InvestingDaily.com stated in 2010: “Investors love airline mergers because consolidation means less competition and less competition means fuller planes (aka higher ‘passenger load factors'), higher airfares, and more profits for the remaining players.” Some, such as Dan McKenzie of Rodman & Renshaw, believe consolidation has made for a healthier industry. But nearly all economists agree it also leads to higher fares. “It's inevitable,” says airfare expert Bob Harrell. “You've got fewer people making the decisions. You go from ten to eight to six to four. They're going to behave in an oligopolistic way. The flip side is they have to do something to get a return to profitability.”

And there's more consolidation to come. Analyst Helane Becker of Dahlman Rose & Company predicts that there will be further shrinking within the competitive regional airline field. However, she defies conventional wisdom in that she does not predict an American/US Airways merger, and instead sees a Big Three consisting of United/Continental, Delta, and an ever-expanding Southwest.

And make no mistake: airline CEOs love the thrill of the deal. There are analysts who believe we're facing a shrinking airline industry because competing execs love comparing the size of their expanding . . . egos. Consider that within just two years, the title of “Largest Airline in America” was swiftly passed from American to Delta/Northwest to United/Continental.

Back in the mid-1990s I asked the head of a major domestic carrier if codesharing marketing agreements wasn't providing all the benefits of mergers, but without the messiness. This practice allows two or more airlines to sell seats on each other's flights, using multiple flight numbers. Heck, passive DOT regulators had even begun providing papal blessings in the form of antitrust immunity; that way “competing” airline executives could do what they had always done—illegally discuss price fixing—only now do it legally. What's not to like about codesharing if you're the CEO? The airline executive summed it up for me off the record: “You can have pure sex or you can jack off. That's kind of jerking off, okay? I mean, it really is.” I've never gotten a more honest answer from the head of an airline.

With one exception. Former American Airlines CEO Crandall has seen an awful lot, both before and after deregulation, and here's his take: “Up until 1978 we limited the number of participants by regulating. In the last three or four years we've limited the number of participants by approving every goddamn merger that has happened. So we're making a social choice, which I have long felt is the wrong social choice, and that is we're going to let the industry regulate itself by consolidating to the point where there are so few competitors that the price structure will support the costs. And that's the whole story of the airline business.”

Goodbye to Low Fares?

A year after we first met in Congress, I talked consolidation with Tilton. “There's not enough room left,” he told me. “What I think will happen is we'll have two fundamentally different business models. There will be network airlines, and they will be challenged on the periphery by Spirit, Allegiant, and Virgin America.”

However, if Tilton is right and Southwest/AirTran and JetBlue morph into quasi-network carriers, that means there will be less of a low-cost airline presence in the United States. And this will represent a huge step backward for consumers. That's troubling from a consumer perspective; Diana Moss, director of the American Antitrust Institute, puts it like this: “It's hard to say no to subsequent mergers when you've already said yes to the big guys. . . . When somebody decides to buy JetBlue or Frontier, they'll allow it. And that's unfortunate—because we'll wind up with three airlines, and that's a scary prospect.”