"Coffee, Tea or Another Airline Merger?"

Tuesday, November 28, 2006

Coffee, Tea or Another Airline Merger?  
By Nicholas von Hoffman
The Nation
  
  
When the New York Times ran a headline triumphantly declaring "Entrees Break
the $40 Barrier, and, Sorry, the Sides Are Extra," not even the interns on
Wall Street noticed. Wall Streeters don't eat in cheap restaurants where
lunch costs less than $100. 

You may be wondering how to pay your bills, but on Wall Street they are
making money faster than the computers can count it, not only because
they've got themselves a nice stock market bubble going but also because of
all the mergers and acquisitions. You cannot count all the ways they make
money out of this form of corporate activity, one that is usually sterile
from the point of view of profits or enhanced productivity. 

One of the more promising acquisitions from a Wall Street perspective is the
ongoing attempt by US Airways to buy Delta Airlines for more than $8
billion. Delta is in bankruptcy at the moment, but in the airline industry
that means nothing. US Air has been there and back twice already. 

Delta's managers do not cotton to the idea of being taken over and losing
their jobs; Delta's creditors seem to have split on the subject; Delta's
unionized employees will have to take whatever they're given and make the
best of it; Delta's customers, US Air's too for that matter, may not come
off much better than the airlines' unions. 

Assuming the government lets the takeover go ahead, the new combined airline
would be the largest in the country. Something close to one out of every
five passengers would have to fly on it. In some Southern cities like
Charleston, South Carolina, the US-Delta airline, or whatever they might
call it, will have a near monopoly. But from the noises emanating from that
region it appears the people there love unfettered capitalism, so they may
not object to the fares monopolies charge. 

The industry has long held that there are too many airlines, and that too
many airlines cause too much competition, and too much competition causes
airfares to be reduced, and therefore competition must be eliminated or
drastically curtailed by creating semi-monopolies through mergers and
acquisitions. Believe it or not, they have a point. After some thirty years
of experiment, it has been conclusively shown that a free market in airlines
brings economic devastation. A free market in the skies does not work.
Instead of fat profits, low fares and the employees serenading the
management, turmoil and bankruptcy stalk the industry. Employees have lost
their pensions and suffered massive pay cuts; passengers have enjoyed
progressively worse service; and stockholders, unless they are on the inside
track, have taken something close to a horrendous beating. 

This misery closely parallels the story of the American railroad industry a
century ago. If you go back to circa 1906, you will discover that something
like half the trackage in the country was bankrupt. Like today's airlines,
yesterday's choo-choos were free-marketing themselves into extinction, and,
mind you, this was back in the era when they had no competition from other
forms of transportation. Like the airlines, they tried creating monopolies
and, when that proved difficult, they attempted secret agreements for
splitting the business and fixing prices. 

Nothing worked. Finally, resort was made to Washington, and federal
regulation imposed a degree of stability on the industry. Airlines, however,
have gone in the other direction. Until 1978 the now-defunct Civil
Aeronautics Board (CAB) controlled competition in the industry by assigning
routes and controlling prices. Of bankruptcies there were almost none. The
service was good, the profits satisfactory and the industry was in a
roly-poly condition. Compared to what we have now, however, the fares were
high. You had to save up to take a plane trip. Yet if the airlines have
their way, the era of cheap, mass air travel is coming to an end without
government regulation. 

Whether allowing carriers to merge and create semi-monopolistic conditions
will work is far from certain. While Wall Street makes the big bucks from
mergers and acquisitions, at the managerial and operational level they are
hard to pull off successfully. Labor problems abound, equipment does not
match, the promised cost savings disappoint and on and on. 

Some industries may not be suited to an unregulated existence. Commercial
transportation may be one of them. Another is the electric utility industry,
which has been liberated from the chains of regulation in a number of
states, with painful and expensive consequences for anybody who depends on
electricity for such nonessentials as light, heat and refrigeration. 

For many years now, doubting the efficacy of the free market under any and
all conditions has been tantamount to shouting a racial slur in public. The
very word "regulation" is anathema. As for the word "socialism," it is
unutterable, even if people who live in cities with municipally supplied
power enjoy cheaper, better service. 

Thus you may expect no corrective action on the government's part anytime
soon. Airline companies will continue to be prone to sudden crash landings.
As for the passengers, it's a bright future of less leg room, higher ticket
prices, filthier cabins and more lost luggage. Oh, yes, one more thing.
Nursing mothers be warned--stay away from Delta. The other day the airline
threw one such woman off a plane after the flight attendant told her, "You
are offending me." (The airline later apologized, but still...)

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Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/dcfp/dcboard.php


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