Kill the Airlines …

… In order to save them.

The airline industry, which always seems to be in crisis, has been teetering since 9/11. Now it may be heading toward collapse. Since hostilities with Iraq started, air traffic has dropped 10 percent. On Tuesday, with his airline’s domestic bookings down 20 percent from the previous year, Continental Airlines Chief Executive Gordon Bethune suggested he might have to shutter the Cleveland hub. Delta and Northwest have both recently announced capacity cuts of 12 percent, while United announced an 8 percent capacity reduction.

With three of the 12 largest airlines in Chapter 11 bankruptcy and several more on its doorstep, pleas for government aid are rising in volume and urgency. But so far, the Bush administration’s approach has been hands-off. Treasury Secretary John Snow and Office of Management and Budget Director Mitchell Daniels are said to be laissez-fairewhile White House Chief of Staff Andrew Card and Transportation Secretary Norman Mineta are pro-intervention.

Snow and Daniels are right to resist the beggars. Chapter 11 bankruptcies and capacity cuts are stopgaps: Airlines don’t yet have the courage to do what crisis-ridden industries are supposed to do—consolidate. The problem in the friendly skies isn’t simply too many planes and employees serving too few flyers. The problem is too many airlines.

It’s obvious that there isn’t enough business to go around for today’s large airlines. According to the Wall Street Journal,revenues for the nine major U.S. airlines fell 17 percent to $79.6 billion in 2002 from $96.4 billion in 2000. Global aviation traffic fell in both 2001 and 2002, and it appears likely to fall again in 2003.

And so the skies are ruled by an ugly regime: intense competition in heavily traveled routes with multiple carriers and effective monopolies or duopolies on routes less traveled. Airlines are forced to make up for low margins on competitive routes by sticking it to business fliers on non-competitive routes. Which is one of the reasons you can fly New York to London round-trip for as little as $300 on any of several carriers, whereas you pay $605 to go round-trip from Atlanta to Indianapolis on Delta.

With enormous fixed costs—planes, expansive late-1990s-vintage labor agreements, expensive jet fuel—airlines have little ability to cut their way to profitability. Grounding jetliners and eliminating routes helps a little. (The U.S. airlines’ collective capacity in February 2003 was down nearly 20 percent from February 2001, according to the Air Transport Association.)

But because of low-cost competitors like JetBlue and Southwest, transparent Internet fares, and the economic downturn, airlines can’t hike fares to take advantage of the reduced capacity. The average domestic airfare in February 2003 was about 18 percent less than the average in February 2001.

The aviation industry thinks the federal government should step in, and the feds probably should assume responsibility for security at all airports and eliminate the $2.50-per-flight post-9/11 security surcharge.

That would help airlines, but not as much as the big carriers seem to think. JetBlue and Southwest are proving that you can make money in the airline business even amid this horrid climate. But American, Delta, USAirways, United, Continental, and Northwest plainly can’t.Indeed, for many of the majors, the structural gaps between revenues and liabilities are so large that even a combination of generous government aid and a rapid return to prosperity wouldn’t solve their problems.

The slimmed-down airlines now must rely on their smaller revenue base to pay high operating costs, service debt, and fund the pensions for thousands of unionized pilots, flight attendants, and machinists. But most of the large airlines don’t even generate enough cash to pay for their basic operating costs, let alone deal with massive liabilities. Delta’s pension plan is underfunded by $4.9 billion. USAirways was able to shed much of its debt in Chapter 11, but it will emerge from bankruptcy only if the Pension Benefit Guaranty Corp. allows it to halve its responsibility for the pilots’ $1.6 billion pension plan and picks up part of the remaining half.

When an industry experiences wholesale shock, excess capacity, and bankruptcy, consolidation typically follows quickly. A healthy company or opportunistic investors cherry-pick the assets of the failed firms. That’s what’s going on in the fiber-optic field right now, for example.

But there have been no significant mergers or liquidations among domestic airlines since 2001. (The decision of the Justice Department to block the proposed USAirways-United merger in the summer of 2001 now seems really misguided.) There are too many entrenched and interested parties intent on preserving the airlines as independent entities. Congressmen with airline headquarters in their states, airport authorities, airline executives, unions, and financial institutions holding leases on the jets all would prefer to see the major airlines enter Chapter 11, restructure, and re-emerge, rather than enter Chapter 7, liquidate, or get folded into a healthier carrier.

Chapter 11 is, perversely, a crutch for the airline industry because it keeps too many airlines alive. Chapter 11 gives the opportunity for rebirth. It is an airline’s best hope for restructuring unprofitable operating assumptions and agreements. The three major airlines that are now in Chapter 11—United, USAirways, and Hawaiian Airlines—all want to emerge as independent entities.

But maybe they shouldn’t. What if we’re in the midst of a several-years-long era of lower demand, transparent pricing, and rising competition from upstarts free of expensive contracts and airplane leases? These airlines might emerge from bankruptcy with lower debt loads and better union contracts and find they still can’t compete. They might be setting the stage for a round-trip journey to Chapter 11—call it Chapter 22. Perhaps instead of trying to save all our airlines we should let some of them die off.