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Jewish World Review May 10, 2002 / 28 Iyar, 5762

George Will

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Consumer Reports

Always a bumpy ride | DALLAS Donald Carty has lost one of life's lotteries. He is CEO of an airline -- American, the world's largest. The view from his office window, hard by Dallas-Fort Worth Airport, is flat and sunny. That is not the condition of the airline industry.

It may not have netted a nickel since the Wright brothers. It certainly had net losses from 1945 to '94. After the brief boom of the late 1990s, it was hemorrhaging money even before terrorists attacked the United States through the industry -- and two of the hijacked planes were American's.

The industry is still reverberating from deregulation in 1979: Many major competitors of Carty's airline no longer exist, including TWA (American bought it last year), Eastern, Pan Am, Braniff. Since 1979, 137 carriers have filed for bankruptcy.

The industry is labor intensive (senior pilots can earn $300,000 a year) and capital intensive ($100 million jets) and highly leveraged (planes idled in the Arizona desert since Sept. 11 still cost monthly payments of up to $500,000). Fixed costs are so high that a 12-week strike could bankrupt even the strongest carrier. Partly for that reason, the industry has constant labor problems.

The industry is subject to the political pressures that come with having the health of major cities dependent on particular carriers (e.g., Minneapolis on Northwest, Pittsburgh on US Airways). The industry is acutely sensitive to fluctuations in the price of a commodity -- petroleum -- much of which is imported from an unstable region, the Middle East.

For Carty, just the fifth CEO in American's 75 years, the immediate problem is that business travel, which generates nearly 80 percent of airlines' profits, has plummeted -- it was still off 30 percent in April -- first because of fear of flying, then because of the economic slowdown, now because of airport security hassles. American has responded by cutting capacity (it has reduced 11 kinds of aircraft to seven, heading toward five) and stimulating leisure travel.

Demand for such travel is, Carty says, price sensitive and potentially "insatiable." American, like other carriers, cut fares, and now its load factor is as high as a year ago. But its average ticket price is down 21 percent, a grim number in an industry with narrow profit margins. American lost $575 million in the first quarter. Eight of the nine largest carriers lost a total of $2.5 billion, on top of $3.2 billion in the fourth quarter.

The ninth carrier is "the Wal-Mart of the skies" -- no-frills, short-haul Southwest. It has a debt-to-capital ratio less than half the industry average and a stock market value ($14 billion) larger than that of the six largest carriers combined. It has only one kind of plane (Boeing 737s) and hence low training and maintenance costs. It unloads and reloads planes in 20 minutes, has a typical ticket price of $85, has made a profit for the last 29 of its 30 years and neither canceled a flight nor laid off an employee after Sept. 11.

But Southwest's economic model, brilliant for its market niche, is not a recipe for major international carriers. What they need most are . . . do not say more airports. "Won't be," is Carty's terse response to the question of whether there will be any more, although he says the reconfiguration of Chicago's O'Hare -- a 10-year project to add two runways -- will radiate efficiencies throughout the system.

What Carty says the industry needs most from government is help with labor relations. At the end of a multilayer rococo process, Congress has final say. But Congress, Carty says, carries "organized labor on one shoulder and the traveling public on the other."

Before deregulation, the Civil Aeronautics Board governed fares and generally allowed airlines to pass along labor costs. That, together with the dread of work stoppages, disposed the carriers to generous labor contracts. In the 1990s, wages went up. Today the process is protracted, workers become angry, then surly with customers (remember United's pilots sabotaging their airline in 2000, when they had a miserable 40 percent on-time rate and 20,000 flights were canceled), so profits decline with service.

The industry could benefit from mandatory, binding arbitration of the sort baseball has. Each side would make a proposal and the arbitrator would pick one or the other proposal. Because the arbitrator could not split the difference, the process would pull each side toward the other.

Meanwhile, United pilots recently won a 28 percent raise, just before the company lost $600 million in the first half of 2001. Other carriers' pilots want parity. Other workers want their earnings pulled up by those of the pilots. Turbulence ahead. Situation normal.

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