Attention All Passengers, page 7
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.”
Unlike many organizations that focused primarily on consolidation of legacy carriers, the AAI raised concerns about the “novel issues” generated by the first major merger of low-cost carriers, Southwest and AirTran. As Moss says, “The real worry is if you take out the low-cost carriers—then where are we? The prices creep back up to the legacy levels. As there is more consolidation it’s harder to enter the airline industry. Who wants to compete against eight-hundred-pound gorillas?”
During those United/Continental hearings, then congressman James Oberstar—a Democrat from Minnesota—fought against consolidation, but within months he was voted out of office after thirty-six years (and beaten by a former Northwest Airlines pilot).
As for the future wedded bliss of United and Continental, former Continental CEO Gordon Bethune is painfully blunt in recalling an earlier occasion when United attempted to acquire his old carrier: “I told them, you can’t run water.” He believes the real challenge now is cultural, as the two company workgroups are slugging it out to determine which group is stronger. But he pulls no punches in detailing United’s shortcomings: “It’s the same malaise as [at Continental] in 1994 and 1995 when I got there. Employees treated each other like shit. We turned it around. They don’t have that culture at United.” He should know: before Glenn Tilton became CEO of United, the company’s board approached Bethune about taking the job.
What’s particularly compelling is that the same pattern is repeated over and over and over: Airline CEOs promise Congress, local politicians, unions, and the media that they will not downsize in a given city and they will not cut jobs. And then once the merger is approved, they do just that. It was demonstrated yet again last year, when Minnesota politicians howled after Delta announced it would move several hundred training and technical jobs from Northwest’s former home state to Delta’s hometown of Atlanta. Of course, there’s a bit of a dog-bites-man aspect to such stories. Any analyst could have pointed out that Delta did not need two sets of pilot training centers, flight attendant training centers, and flight simulators. Consolidation is all about economies of scale, so why the shock when Delta did just that—consolidate?
The Politics of Merging
As for the “too big to fail” argument raised by me and others, some experts believe we’re rapidly approaching that threshold, while others think we’re already there. I agree with this second group, and think that if United/Continental is in danger of collapsing, then the government will have to step in and prevent that. Unfortunately, there is a lot of misinformation supplied by the media when airlines consolidate or shut down, as detailed in chapter 12. But Horan points out the “experts” who are quoted are often in the tank as well: “The Wall Street analysts never saw a merger they didn’t like because they want the [merger-and-acquisition] fees.”
Loyalty program expert Tim Winship points out that “consolidation is all about pricing power, and pricing power, by definition, benefits the airline, not the consumer. So all of this chatter about benefits to consumers is overstated at best and downright false at worst.” He continues: “What additional value does a consumer get after the merger? For every benefit there’s probably a countervailing negative. Ultimately it takes a competitor out of the market, and anyone who says that won’t lead to higher prices has never studied economics. The net effect is negative.”
In June 2011 the American Customer Satisfaction Index stated that airline mergers typically have a “destructive effect” on customer satisfaction, citing the examples of US Airways and Delta following their respective mergers. Although the jury remains out on United/Continental and Southwest/AirTran, the historical record is not good from a passenger perspective.5
In early 2007 US Airways warned of “hiccups” during the integration of the computer reservations systems used by US Airways and America West during their merger. In fact, during the melding of these systems, only about half of the new carrier’s flights arrived on time. We’ve come to expect such problems when airlines merge, but employees point out there are potential safety risks as well.
Philomena Larsen was a longtime employee of Northwest Airlines, but she began her career at Republic Airlines in the mid-1980s just prior to that carrier’s acquisition by Northwest in 1986. She calls that merger “horrendous” and notes there were widespread problems with lost bags when the two airlines’ baggage tracking systems were melded. But Larsen also points out that mergers and acquisitions have a safety component as well: employees unfamiliar with new aircraft, ground vehicles, ramp equipment, and baggage belts are often rushed through training. In the case of Northwest/Republic, Larsen says the integration of two very different weight-and-balance systems meant employees were learning the new system on the job—a dangerous proposition for such a critical safety function. “We were lucky there wasn’t an airplane accident,” Larsen recalls.
3
Collusion and Confusion:
How Airlines Don’t Play by the Rules—and How Passengers Pay
ROBERT CRANDALL, CEO OF AMERICAN AIRLINES: Raise your goddamn fares 20 percent! I’ll raise mine the next morning!
HOWARD PUTNAM, CEO OF BRANIFF AIRLINES: Robert! We—
CRANDALL: You’ll make more money and I will too!
PUTNAM: We can’t talk about pricing.
CRANDALL: Oh, bullshit, Howard! We can talk about any goddamn thing we want to talk about!
—Taped telephone conversation submitted as evidence by U.S. Department of Justice in Antitrust Division civil lawsuit, 1993
Airline executives like to talk about the need for a “level playing field.” On the other hand, many of these same execs do their best at all times to unlevel the corporate playing field. And it can take many forms: industry lobbying (both on and off the record), predatory pricing and dirty tricks against competitors, biased distribution that taints airfare shopping, codesharing and airline alliances, and antitrust exemptions and violations.
The key is buying influence. The transfer of wealth—and we’re talking “regressive distribution” here, where money flows from the poor to the rich and not vice versa—remains the most important and underdiscussed issue in American life, at least until the Occupy Wall Street movement shone a light on it. There is a growing library of documentation illustrating how government and corporations work hand in hand to redistribute wealth through “trickle up” economics, under both Republican and Democratic administrations and majorities in Congress. In February 2011, CNN.com compared Internal Revenue Service data from 1988 and 2008 and found that, adjusted for inflation, the average American income fell slightly from $33,400 to $33,000. But during that same twenty-year period, the incomes of the richest 1 percent of Americans rose by 33 percent.
These issues not only cross party lines but permeate the entire American political system, in all branches and at every level. In January 2010 the U.S. Supreme Court officially granted the right of free speech to corporations, by lifting all restrictions on how much companies can spend to support and assail political candidates. Meanwhile, executive compensation soars.
The flow of money to politicians from the aviation industry remains a tangible fact of life. I began joking about it during FAAC meetings: the airlines have a permanent lobbying presence in Washington; consumers take what they can get from passenger advocates who can’t compete on staffing and budgets and contributions.
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.”
Unlike many organizations that focused primarily on consolidation of legacy carriers, the AAI raised concerns about the “novel issues” generated by the first major merger of low-cost carriers, Southwest and AirTran. As Moss says, “The real worry is if you take out the low-cost carriers—then where are we? The prices creep back up to the legacy levels. As there is more consolidation it’s harder to enter the airline industry. Who wants to compete against eight-hundred-pound gorillas?”
During those United/Continental hearings, then congressman James Oberstar—a Democrat from Minnesota—fought against consolidation, but within months he was voted out of office after thirty-six years (and beaten by a former Northwest Airlines pilot).
As for the future wedded bliss of United and Continental, former Continental CEO Gordon Bethune is painfully blunt in recalling an earlier occasion when United attempted to acquire his old carrier: “I told them, you can’t run water.” He believes the real challenge now is cultural, as the two company workgroups are slugging it out to determine which group is stronger. But he pulls no punches in detailing United’s shortcomings: “It’s the same malaise as [at Continental] in 1994 and 1995 when I got there. Employees treated each other like shit. We turned it around. They don’t have that culture at United.” He should know: before Glenn Tilton became CEO of United, the company’s board approached Bethune about taking the job.
What’s particularly compelling is that the same pattern is repeated over and over and over: Airline CEOs promise Congress, local politicians, unions, and the media that they will not downsize in a given city and they will not cut jobs. And then once the merger is approved, they do just that. It was demonstrated yet again last year, when Minnesota politicians howled after Delta announced it would move several hundred training and technical jobs from Northwest’s former home state to Delta’s hometown of Atlanta. Of course, there’s a bit of a dog-bites-man aspect to such stories. Any analyst could have pointed out that Delta did not need two sets of pilot training centers, flight attendant training centers, and flight simulators. Consolidation is all about economies of scale, so why the shock when Delta did just that—consolidate?
The Politics of Merging
As for the “too big to fail” argument raised by me and others, some experts believe we’re rapidly approaching that threshold, while others think we’re already there. I agree with this second group, and think that if United/Continental is in danger of collapsing, then the government will have to step in and prevent that. Unfortunately, there is a lot of misinformation supplied by the media when airlines consolidate or shut down, as detailed in chapter 12. But Horan points out the “experts” who are quoted are often in the tank as well: “The Wall Street analysts never saw a merger they didn’t like because they want the [merger-and-acquisition] fees.”
Loyalty program expert Tim Winship points out that “consolidation is all about pricing power, and pricing power, by definition, benefits the airline, not the consumer. So all of this chatter about benefits to consumers is overstated at best and downright false at worst.” He continues: “What additional value does a consumer get after the merger? For every benefit there’s probably a countervailing negative. Ultimately it takes a competitor out of the market, and anyone who says that won’t lead to higher prices has never studied economics. The net effect is negative.”
In June 2011 the American Customer Satisfaction Index stated that airline mergers typically have a “destructive effect” on customer satisfaction, citing the examples of US Airways and Delta following their respective mergers. Although the jury remains out on United/Continental and Southwest/AirTran, the historical record is not good from a passenger perspective.5
In early 2007 US Airways warned of “hiccups” during the integration of the computer reservations systems used by US Airways and America West during their merger. In fact, during the melding of these systems, only about half of the new carrier’s flights arrived on time. We’ve come to expect such problems when airlines merge, but employees point out there are potential safety risks as well.
Philomena Larsen was a longtime employee of Northwest Airlines, but she began her career at Republic Airlines in the mid-1980s just prior to that carrier’s acquisition by Northwest in 1986. She calls that merger “horrendous” and notes there were widespread problems with lost bags when the two airlines’ baggage tracking systems were melded. But Larsen also points out that mergers and acquisitions have a safety component as well: employees unfamiliar with new aircraft, ground vehicles, ramp equipment, and baggage belts are often rushed through training. In the case of Northwest/Republic, Larsen says the integration of two very different weight-and-balance systems meant employees were learning the new system on the job—a dangerous proposition for such a critical safety function. “We were lucky there wasn’t an airplane accident,” Larsen recalls.
3
Collusion and Confusion:
How Airlines Don’t Play by the Rules—and How Passengers Pay
ROBERT CRANDALL, CEO OF AMERICAN AIRLINES: Raise your goddamn fares 20 percent! I’ll raise mine the next morning!
HOWARD PUTNAM, CEO OF BRANIFF AIRLINES: Robert! We—
CRANDALL: You’ll make more money and I will too!
PUTNAM: We can’t talk about pricing.
CRANDALL: Oh, bullshit, Howard! We can talk about any goddamn thing we want to talk about!
—Taped telephone conversation submitted as evidence by U.S. Department of Justice in Antitrust Division civil lawsuit, 1993
Airline executives like to talk about the need for a “level playing field.” On the other hand, many of these same execs do their best at all times to unlevel the corporate playing field. And it can take many forms: industry lobbying (both on and off the record), predatory pricing and dirty tricks against competitors, biased distribution that taints airfare shopping, codesharing and airline alliances, and antitrust exemptions and violations.
The key is buying influence. The transfer of wealth—and we’re talking “regressive distribution” here, where money flows from the poor to the rich and not vice versa—remains the most important and underdiscussed issue in American life, at least until the Occupy Wall Street movement shone a light on it. There is a growing library of documentation illustrating how government and corporations work hand in hand to redistribute wealth through “trickle up” economics, under both Republican and Democratic administrations and majorities in Congress. In February 2011, CNN.com compared Internal Revenue Service data from 1988 and 2008 and found that, adjusted for inflation, the average American income fell slightly from $33,400 to $33,000. But during that same twenty-year period, the incomes of the richest 1 percent of Americans rose by 33 percent.
These issues not only cross party lines but permeate the entire American political system, in all branches and at every level. In January 2010 the U.S. Supreme Court officially granted the right of free speech to corporations, by lifting all restrictions on how much companies can spend to support and assail political candidates. Meanwhile, executive compensation soars.
The flow of money to politicians from the aviation industry remains a tangible fact of life. I began joking about it during FAAC meetings: the airlines have a permanent lobbying presence in Washington; consumers take what they can get from passenger advocates who can’t compete on staffing and budgets and contributions.
