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Archive for November, 2007

The Dallas Morning News ran an in-depth report on American Airlines’ current woes, wondering “what if American hadn’t avoided bankruptcy?” The Ft. Worth-based airline was one of the only ones to avoid Chapter 11 in the early 2000s, and now it is being punished by Wall Street analysts for having (relatively) high labor costs and pension obligations, compared to its competitors, who mostly shedded pensions and gutted contracts while under bankruptcy protection. The article provides a good background of the acrimonious disputes leading up to a 2003 agreement by three AA unions to agree to big pay cuts–over $1.5 billion annually. That affair was dominated by the resignation of CEO Donald Carty, who, along with several other top executives, were to receive several million dollars in bonuses as a “reward” for winning the concessions.

Most of the other major airlines used bankruptcy as a cudgel to trim down. When they emerged, leaner and cheaper, Wall Street applauded. AA managed to return to profitability too, but it did so more gracefully, with less hurt to employees. Now that all the major airlines are out of bankruptcy and in the black, unions are calling for profits to be directed toward restoring compensation lost in the lean years. Unions at AA are calling for this too, and they have a special argument: their concessions saved the company. “‘We didn’t just bail out American Airlines and AMR Corp.,’ [pilots union spokeman Karl] Schricker said. ‘We bailed out the leaseholders. We bailed out the debt holders. We bailed out the shareholders. We bailed out everyone.’”

But why avoid bankruptcy? According to the DMN, it became “a part of business strategy” after deregulation in 1978. According to one academic they cite, bankruptcy is “a corporate restructuring device, just like a spin-off, a divestiture, an equity carve-out, a merger. . . . Really, Chapter 11 reorganizations are really no different than hostile takeovers or a leveraged recapitalization as a device for improving a company.” According to research presented last fall by Aparna Mathur, lenient bankruptcy laws stimulate entrepreneurship, and U.S. bankruptcy laws are well-suited to our business climate: “America’s bankruptcy law is rooted in the “fresh start”—the idea that honest debtors experiencing a spot of bad luck, such as temporary job loss, illness, or divorce, are capable of putting the past behind them and moving on. This concept works especially well for owners of small businesses. By wiping out debts and pardoning failure, American bankruptcy gives the entrepreneur a chance to bounce back.”

So why did AA work so hard to avoid Chapter 11? According to a former exec at US Airways (a two-time post-2001 bankruptcy vet), “The problem is that bankruptcy leaves a lot of carcasses around. You have shareholders who are wiped out. You have employees whose contracts are severely modified and end up being incredibly disgruntled and unhappy coming out of it. You have a slew of other vendors and outside people whose contracts have been abrogated or severely modified. You don’t create a situation where you’ve got a lot of constituents on your side when you go into bankruptcy.”

Furthermore, there’s a social norming stigma associated with bankruptcy that’s healthy to preserve. In Monopoly, bankruptcy=defeat. It’s not a position of strength. And bankruptcy, even if it is through no fault of the petitioner, involves “erasing” debts–a misnomer, because the creditor still eats the loss. In the case of large companies, like airlines, it also involves breaking promises to employees and perhaps fatally wounding morale. “‘It amazes me that bankruptcy has lost its stigma in business,’ said Mr. Schricker of the pilots’ union. ‘It used to be, a company went bankrupt and all these senior managers went away. Now it’s like bankruptcy is just a business strategy–and that’s not what America is about.’”

George Will once wrote two very different columns on these issues, separated by four years. In 2002, he castigated United’s employee-owners and urged the airline into Chapter 11, singing the praises of bankruptcy all the way. Then, interviewing AA clean-up CEO Gerard Arpey in January 2007, he asked:

Is it irresponsible for American not to use bankruptcy to lighten legacy costs — shredding labor contracts and reducing obligations to retired employees?

Gerard Arpey, American’s chief executive, replies with a laconic “no.” He considers it unseemly and shortsighted — and unnecessary — to seize short-term competitive advantages by reneging on labor contracts freely consented to, and to escape commitments to investors who lent you money in good faith. Furthermore, the damage to employee relations makes bankruptcy more costly than some companies realize when they use it as a routine management tool.

So, readers and commenters: should airlines try at all costs to avoid bankruptcy, or should they embrace it as a business practice?

What if American hadn’t avoided bankruptcy? [Dallas Morning News]

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Your humble blogger on TV

I was recently interviewed about the Essential Air Service by Medill News for a TV station in West Virginia. You can watch the video here.

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Smithsonian’s “America by Air”

I attended the media preview for the National Air and Space Museum’s new permanent exhibition today. “America by Air” opens on Saturday. It’s a great installation, and I highly recommend it. I’m writing a review or two and will post links here when they’re published.

Until then, enjoy this choice quotation from Alfred Kahn, the economist who deregulated the airline industry:  “I really don’t know one plane from the other. To me, they are all marginal costs with wings.”

America by Air [NASM]

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Daily departures: Carol Gotbaum, Philly to China, dollar woes, and more

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Flash: Will Congress raid the FAA trust fund?

News flash from the Wall Street Journal editorial page:

We’re told that senior Democrats are preparing a raid on the Federal Aviation Administration (FAA) trust fund to offset the [Alternative Minimum Tax] assault on the middle class.

This is a big deal. The FAA relies on its trust fund–$10 billion collected from excise taxes on airline tickets each year–to fund needed improvements in air traffic control, airport operations, and capital improvements. This is where the money for NextGen, the package of new initiatives that will improve air traffic management, many of which are already long-expected. It’s funded through excise taxes so that those who use the ATC system will be the ones to pay for it (that is, if you never fly, fewer of your tax dollars go to the FAA than if the agency was funded through general revenues), although whether excise taxes actually distribute the costs fairly is a matter of some debate between the airlines and general aviation users.

The Alternative Minimum Tax, which was meant to snag the top taxpayers, has steadily crept down to affect the middle class (see here for why). It will cost $50 billion to relieve the middle class and keep things revenue-neutral, as the Democrats bound themselves to do earlier this year under pay-as-you-go rules. If the Dems apply five years of projected trust fund receipts to the AMT shortfall, they’re even. The WSJ comments:

Even better for Democrats, this would mean they don’t have to take the political heat for raising taxes on anybody else to offset the AMT. They could thus avoid taxing New York Senator Chuck Schumer’s private-equity pals, who are donating so much money this year so Mr. Schumer can elect more Senate Democrats next year.

This leaves the FAA unfunded (which it will be soon anyway unless temporary authorizations are passed; the Senate has not yet passed its FAA reauthorization bill). The Journal says that Congress will pour general-revenue dollars into the FAA. This puts the FAA into direct competition with every other agency for funds, leaving NextGen and other improvements vulnerable. I’ve said before that any flight caps at overcrowded airports should be temporary while the FAA attempts to put systems in place to meet the great demand for air travel. This “chicanery,” as the Journal calls it, will only make that more difficult.

So amid growing airline flight delays and congestion, Congress may pilfer that airline money and use it instead to solve a political problem of its own making.

Air Traffic Heist [Wall Street Journal, subscription required]

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It’s a broken wingtip, not a broken wing

When I saw the Daily Mail item about the passengers who refused to fly on a plane whose wing tip had been broken off, I thought it was not really worth my blogging attention. Then I got emails about it, and replied that it really wasn’t a big deal. But with the blogosphere’s attention to the incident, I thought I’d throw in my two cents. This is what I emailed one of my correspondents:

Wingtips primarily function to increase range and fuel efficiency. They may be “blended” into the wing, but they’re not part of the actual wing structure. I suppose if the pilots thought the airplane was airworthy, it would be OK. They generally don’t have death wishes and will not hesitate to scratch a flight if the aircraft is unsafe.

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The Cranky Flier draws attention to a little-noticed aspect of this past weekend’s end of daylight savings time: its effects on airline schedules. Normally airlines deal with these sorts of things by making necessary adjustments (especially complicated, he says, for flights between the northern and southern hemisphere, where daylight savings is going on when it’s not for us.). But Congress’s extension of DST for two weeks in October is really throwing a monkey wrench into transatlantic scheduling:

[A]t congested airports like London/Heathrow or Frankfurt, the airlines don’t have slot flexibility so I assumed they’d have to just change around their flights in the US. But what about when that involves flights at New York/JFK or Chicago/O’Hare, also congested airports? This gets very tricky and the result is a hodgepodge of schedule changes for some airlines. . . .

Look at JFK, however, and the London flights change both their US departure and arrival times. As you can imagine, arriving into the US an hour later means missed connections and longer waits for the next flight.

Aviation policy turns up where you least expect it

How Daylight Savings Time Impacts the Airlines [The Cranky Flier]

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