Facts of Life – Example 2 – American Airlines

American Airlines is in bankruptcy and proposing to cut employment, outsource some work, and shed some pension obligations.  Is this “fair”?  From the perspective of American ‘s employees and retirees, it probably isn’t.  They have done everything that they contracted or committed to do, and now through no fault of their on, they are facing loss of a job and/or loss of pension benefits.   They are not getting what they deserve.

The problem of course is that American’s revenues are not covering their expenses; their debts exceed their assets; and so something needs to change for the company to survive.  The next question is whose fault is this?  The employees obviously – with some justification – don’t believe it is their fault.  The fact that many are demonstrating in protest at the Tulsa airport would lead one to suppose that they may believe that its American Management’s fault.  Life is not fair, but things are never as simple as they seem.

Industry Deregulation:

American is the last of the “legacy airlines” to declare bankruptcy since deregulation of the airline industry occurred in 1978.  Most observers have ascribed the difficulties of the legacy airlines (those that were in existence during the long period of time that the airline industry was regulated) to difficulties that they have had making the transition to a deregulated environment.  Generally companies operating in a regulated environment are in essence guaranteed to make a return on investment – to make a profit – although they may be limited as to how much a return they can have.  But survival is guaranteed, as long as they follow the regulations and provide the product or service required.  In this environment, competition is limited and cost of service is not usually the organization’s primary concern.  Thus, before 1978, airline travel was relatively expensive.  Most Americans had never flown.  The airline passenger was generally an employee of a corporation who was traveling on a company expense account or was someone making above average income.  The U.S. Federal Government passed the airline industry deregulation in 1978 in the hope that a competitive environment would bring ticket prices down and make airline travel more available to the average citizen

This objective seems to have been accomplished.  Government data indicates that airline passenger volume increased from 205 million in 1975 to 297 million in 1980 and at the end of the century was 638 million.  Airline ticket prices (adjusted for inflation) were reduced by one-third between 1977 and 1992.  An MIT study reported that in 2005 ticket prices “remained at less than half of 1978 levels … with no statistical evidence that airline safety deteriorated.”  deregulation has obviously benefited many travelers in this country.  It’s a benefit that they did not have to work to earn, so have they gotten more than they deserve?  But we know there is no free lunch.  In 2011, Supreme Court Justice Stephen Breyer wrote:

…No one foresaw the industry’s spectacular growth, with the number of air passengers increasing from 207.5 million in 1974 to  721.1 million last year…Nor did anyone foresee the extent to which change might unfairly harm workers in the industry.  Still, fares have come down.  Airline passenger revenue has declined from an inflation-adjusted 33.3 cents in 1974, to 13 cents in the first half of 2010…

Not all the pain was felt by employees of the airlines that existed in 1978. Continental has been in and out of bankruptcy more that once.  By end of the 1990s, Pan Am, Eastern and TWA had disappeared.  From 2001 to 2005, US Airways, United, Delta, and Northwest filed Chapter 11 bankruptcy.  Being a stockholder/owner of those airlines has not been easy either.  So American, as the last of the “legacy” carriers to file for bankruptcy, has survived better than most.

Not in all cases is the cost of lunch paid for by the person receiving it.  At least, not initially.  In this case, the benefit being received is apparently being paid for by the owners and  employees of the airlines that existed at the time of deregulation.  But the taxpayers who help fund the Pension Benefit Guarantee Corporation and the unemployment benefits are also in for a share.  In that case, one might ask, “Is government deregulation fair?”  Based on the numbers involved, more have benefited by deregulation than have been hurt, so maybe that in the larger context, it is “fair”.  A corollary to the rule that “things are not as simple as they seem” is that “life is full of little trade-offs”.  The fact that there are rarely simple or perfect solutions means that there will be negative consequences to most anything that we do to fix an undesireable situation.

Where things with American stand at the moment it seems is that American management is in negotiation with the unions concerning what action will be taken to reduce costs.  Progress is reported to be “slow” with both sides blaming the other.  In the end, a judge may have to adjudicate the outcome.  Whatever ruling he makes will be based on a legal standard of measure.  In the broader sense, the judgement of fairness needs to be based on some a commonly recognized rule or standard of measure.  In this country, I think we have historically and ideally made those judgements in the political arena, hopefully based on what is in the best long-tem good of the total population.  But  as a friend of mine reminded me recently, it sometimes depends on “whose ox is being gored”.

For my part, I believe that deregulation was the right thing to do, despite the what seems to be some long tem “unintended consequences”.  Personally when it comes to American Airlines, I have a fairly sizable number of frequent flyer points that I sure hope I don’t lose.


About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
This entry was posted in Economics, Management and tagged , , , . Bookmark the permalink.

2 Responses to Facts of Life – Example 2 – American Airlines

  1. Bob says:

    I too had a lot of American Airline frequent flyer points. I managed to sell them to someone else since I was never able to use for flights that went where I wanted to go or when I wanted to fly.


  2. Good posts with a lot of depth and detail. I too hope I don’t lose the miles I have left (used some for an upcoming trip I would normally have paid for!). Ah, the law of unintended consequences…not unlike Murphy’s Law, yet so easily forgotten by those in charge! Hope you keep up your blog.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s