Top of the News: Commentary
SOONER OR LATER, AIRLINES MUST LEARN TO FLY SOLO
Finally, the U.S. airline industry is getting the attention it craves. Responding to loud lamentations by carriers that have lost $8 billion over the past three years, Congress on Mar. 23 authorized a panel to assess the carnage. Hopefully christened the National Commission to Ensure a Strong Competitive Airline Industry, the group will have 90 days to issue its recommendations to the Hill and to President Clinton.
Certainly, the commission should seek out constructive solutions. But it might bear in mind, too, how the airlines got into this mess. The big carriers are hemorrhaging money now because they expanded wildly over the last decade. They borrowed too much, ordered too many planes, tried to serve too many routes, and often made poor acquisitions. Fare wars didn't help. So there's no reason to consider any major bailout. After all, Southwest Airlines Co., fighting the same recession as everyone else, has stayed in the black. Rivals can learn a thing or two about productivity and efficiency from the carrier.
HELPING HAND. Some issues, though, merit a hearing. Bankruptcy is one. The Big Three--American, Delta, and United--complain that, by artificially lowering carriers' cost structure, Chapter 11 protection lets weak airlines set prices according to their cash-flow needs--and forces solvent carriers to match unprofitable fares.
Bankrupt carriers typically counter that some of the most savage fare wars have been started by their stronger rivals. True. But it's undeniable that bankruptcy does help weaker companies charge lower fares and that airline seats are a commodity market driven by price. The solution: Set a limit on how long carriers may enjoy protection. A bill sponsored by Senator Howell Heflin (D-Ala.) that proposes a 180-day limit for submitting reorganization plans deserves consideration.
A rollback of the passenger ticket tax should also have a place on the agenda. In 1990, Congress hiked that levy from 8% to 10%. The money is supposed to go into the Aviation Trust Fund for air-system improvements. But that fund already has a surplus of $7 billion, and the extra 2%--which yields roughly $1 billion a year--has been used to offset the government's budget deficit. Why not drop the 2% and let the airlines keep the difference--or lower fares?
DEBT TRAP. Another problem: The industry-wide dearth of capital. American Airlines Chairman Robert L. Crandall proposes offering loan guarantees for jet purchases. But that's not the answer. Why offer incentives for airlines to add more debt? In the past four years, the Big Three airlines alone have doubled their leverage, to 80% of capitalization. Instead, the industry should seek equity. The commission should urge Congress to let foreign carriers acquire 49% voting control of U.S. airlines, and maybe more. Concerns about national security could be allayed with laws permitting seizure of assets during war.
If anything, the commission should err on the side of restraint. The airlines' hard times are, after all, largely self-inflicted. And now, finally, they are taking necessary steps to improve their lot. Already, some forecasters predict the industry will erase 1992's $3 billion loss and break even, thanks to stringent cost-cutting and greater pricing restraint. Some aid may be warranted, but airlines must fly themselves out of the storm they created.Andrea Rothman and Seth Payne Rothman and Payne watch the skies for BUSINESS WEEK.