Wednesday, November 30, 2011

It Worked Before

Okay we’re going to play that dumb little game where you complete the sentence.

If it worked before...___________.

That’s right, it will probably work again. Insert my standard lecture about how old sayings got to be old because they are true. And let’s move on. The reverse of that saying is that if it didn’t work before, it probably won’t work this time either. Okay, now all you airplane people stick around for a second and I’ll get back to you. First, we have to take a trip to England.

Those blessed with a memory longer than a month might remember that I chose the United Kingdom as my economic testing ground.

Krugman vs The United Kingdom

”The United Kingdom is acting early. No one really knows if it is right or wrong. We only have our opinions. I think it’s wrong. But if you think it’s the right thing to do for America -- cutting government spending and raising taxes to pay off the deficit -- you now have a test case to watch.”

If you don’t won’t to go back and read it, you need to know that was in June of 2010. Krugman updates us on the situation in his blog today.

Bleeding Britain

”And yet what’s happening in Britain now is that depressed estimates of long-run potential are being used to justify more austerity, which will depress the economy even further in the short run, leading to further depression of long-run potential, leading to …

It really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding.”

In short, austerity (slashing spending) didn’t work. And it probably won’t work this time either.

Now, back to the airplane business. I’m guessing most of you heard that American -- the last of the non-bankrupt Mohicans -- declared bankruptcy yesterday. Now, keep in mind...if it didn’t work before, it probably won’t work this time and if it did work before, it will probably work again.

In Chapter 11, a Bid to Cut Costs at American Airlines

”After resisting for a decade, the parent company of American Airlines announced Tuesday that it would now follow a strategy that the rest of the industry chose long ago: filing for bankruptcy protection so it can shed debt, cut labor costs and find a way back to profitability.”

Now, how did that work for other airlines? That, of course, depends on who you are. If you’re an airline CEO, it works great. If you’re an airline employee, not so great. (Here’s where I caution you to read the story before you jump to conclusions. The resigning CEO at American -- Gerard Arpey -- is evidently a horse of a different color.)

”“This is not a defensive move, but an offensive bankruptcy where they go after their labor groups to reduce costs,” said Bob McAdoo, an airline analyst at Avondale Partners. “They have a great franchise and a lot of cash. They are not being forced into bankruptcy here. They have a problem with their cost structure that they want to tackle.””

So, we all know what this is about. It’s time to put the screws to the employees. It’s time for American Airline employees to join the race to the bottom of the barrel. Does anyone think that CEO pay (I’m sorry, compensation) will be cut? Don’t be ridiculous.

Now, let’s put CEO and employees aside. Has this play worked out for the airline business -- the stockholders? Just a quick look at the 10 year graph of stock prices for airlines shows the tale.

Airline stock anyone?

Okay, I think we’ve determined that the current model doesn’t work for hardly anyone. (Same song for the consumer trope. Consumers have to have a job before they can enjoy “cheap” airfares.) And yet, we -- like England’s bankers/politicians -- keep doing the same thing. If it didn’t work before, it probably won’t work this time.

On the other hand, we have seen what works before. Massive government spending of borrowed money got us out of the Great Depression. Regulation gave us a healthy, vibrant airline industry. We had new planes with well-paid employees. It wasn’t perfect. But it was better than this.

No one is saying we need to resurrect Franklin D. Roosevelt or William P. MacCracken. We can’t recreate the men or the times. We just need to acknowledge what has worked and what hasn’t. Deregulation hasn’t.

Don Brown
November 30, 2011


bob said...

I remember a past interview from Robert L Crandall, who was quoted as saying that he made his fortune from investments, and his living from the airline.

Why anyone would knowingly by stock in an airline is a complete mystery.

To quote Crandall again

"This is a nasty rotten business."

"The game we are playing her is closest to the old game of 'Christians and lions.'

Another round to the lions.

Thank you Alfred Kahn, unfortunately you lived long enough to screw up the industry.

bob said...

I remember an interview many years ago where Robert Crandall, stated that he made his fortune in investments, but that he only made a living in the airlines.

Some of his other quotes concerning airlines

"The game we are playing here is closest to the old game of 'Christians and lions.'"

"This is a nasty, rotten business"

Unfortunately Alfred Kahn lived long enough to screw this industry. It just took longer than expected.