Continental’s Kellner (and US’s Parker) revisit reregulation

TEMPE — US Airways’ media day program is about to begin, but I wanted to share this non-US related interview by Loren Steffy from the Houston Chronicle:

Larry Kellner served me a cup of coffee with the aplomb of a veteran flight attendant, and then, a few moments later, served up a stunning comment about the airline industry.

“If the government wanted to re-regulate the business, I wouldn’t be opposed to it,” he said.

While he didn’t mean the wholesale regulation of yesteryear, it’s still a surprise coming from the chief executive of Continental Airlines, the nation’s fourth-largest carrier by traffic.

Thirty years ago, airline executives battled fiercely to preserve government control of routes and pricing. Former American Airlines chairman Bob Crandall, then a rising executive, declared profanely that deregulation would ruin the business.

Fast-forward to today, and Kellner, agrees, at least up to a point.

“What we’ve got today doesn’t work,” he said in an exclusive meeting with me and several Chronicle colleagues. “It isn’t creating a stable industry.”

Kellner isn’t calling for a return to the good old days when fares were so high most people took the bus. Airline deregulation has always been about price, and in that sense, it’s been a roaring success.

Where it has failed, though, is on the cost side. Most airlines today have a cost structure that’s changed little since deregulation, which impedes consistent profitability. . . .

Read the whole article. It’s a good reminder that corporations are not inimical to regulation of their industry as long as it protects their profits and limits new entrants (for example, banks have been fighting tooth and nail to keep non-bank companies like Wal-Mart from horning in on their business, lest competition trim margins). The leading opposition to airline deregulation came from established national airlines and labor unions. Deregulation was (and remains) a consumer-friendly reform.

(H/T: ATW Daily News)

UPDATE, later today. Perry Flint of Air Transport World asked US Airways CEO Doug Parker about Kellner’s remarks. Parker said he had not read what Kellner said but that he would “disagree” about the need for reregulation. Indeed, he said, “I would hate to see us start moving back in the other direction at this point. . . . We’re still in the process of getting ourselves through a very lengthy deregulation process.” As part of this, he wants to ditch airport perimeter rules at DCA and LGA and reduce “barriers to investment.”

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Pension protection debate holds up FAA bill

The House’s version of the FAA reauthorization bill has been on the Senate floor for the past few weeks, but it’s currently stalled (although scheduled for a cloture vote today, May 6, which if passed would move it forward for consideration by the full Senate without more amendments or if lost would hold up the bill further). The major hangup in the legislation was an amendment offered by Senators Dick Durbin (D-Ill.) and Kay Bailey Hutchison (R-Tex.).

Here’s the procedural history: on April 29, Senator Jay Rockefeller (D-W.Va.) proposed a set of amendments to the House bill. Section 808, which affected required funding a new accruals under airline pension plans, was a sticking point. Current law calls for airlines to fund their defined-benefit pension plans under the assumption of 8.25 percent growth; the amendment adds to the 8.25 percent rate the requirement to fully fund their pension obligations each year.

On April 30, Durbin and Hutchison introduced an amendment to eliminate Section 808. They argued that it would have disadvantaged their home-state airlines American and Continental, which continue to offer defined-benefit plans as obligated by their contracts. (This is absolutely the right thing to do. A defined-benefit pension is nothing more than deferred compensation. To shred it in bankruptcy is like asking an employee to give back part of his paycheck.) (N.B.: All airlines offer a small defined benefit to pilots, the “b-fund,” because pilots have until now been forced to retire at sixty.) Durbin says that this new, stricter requirement in Section 808 disincentivizes airlines from offering pension benefits and that it especially rewards Delta and Northwest, who slipped out of their pension obligations in bankruptcy and handed off the liability to you and me. “It seems to me instead we encouraged companies to freeze their benefit plans,” said Durbin in remarks on the Senate floor.

Last year, Durbin said,

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Oberstar on mergers: “Hell no!”

In a BusinessWeek op-ed, House Transportation Committee chairman James Oberstar (D-Minn.) has come out firmly against airline mergers involving the big six.

Yet this latest round of rumored mergers, which includes a United-Continental scenario, as well as a Delta-Northwest combination, is significant. It would mean further consolidation in the airline industry, further reductions in choice for consumers, and probably fewer flights, fewer jobs, and higher fares.

I think Oberstar’s jumping the gun here. The Justice Department will do a full review of any proposed merger. (See here, and see my analyses of Delta-Northwest and United-Continental.)

Deregulation held out the promise of a market-driven industry that would give rise to a host of new entrants, bringing more competition, lower fares, and better service. The immediate aftermath of deregulation saw the expected flurry of airline startups and new market service. That activity, however, was short-lived.

Actually, deregulation did bring new entrants to markets, introduce more competition, and lower fares. Service may or may not have improved (premium service certainly has), but you get what you pay for. Lower fares are a form of better service. And what does he mean by “short-lived”? Changes in the industry have been pretty much constant since 1978. There has never been any shortage of airline startups and new service. It’s a very dynamic industry, and since deregulation, that has redounded to consumers’ benefit.

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Would a United-Continental merger pass muster?

As part of Merger Mania 2008, United and Continental are now in talks to merge. United has been eager to merge with someone — anyone — for a few years now, but Continental has been reluctant to do so, preferring to remain profitably independent and well-managed unless industry-wide consolidation forces its hand. There are any number of challenges to a merger, from labor to systems integration, but one of the biggest hurdles is the Justice Department’s antitrust division, which can put the kibosh on any proposed matchup. I previously wrote about the criteria the department uses to evaluate proposed mergers, so let’s look now at how a United-Continental merger would stack up.

As far as reducing competition in markets or city-pairs, United and Continental are unique in that all their hubs — save the smallest in a combined carrier, Cleveland — are in markets with two or three major airports and/or with lots of network and discount airline competition:

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