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Press Release

    Antitrust Bureaucrats Hijack Airline Industry

    05/28/2002

    As United Airlines and US Airways plunge further into debt, both airlines have little choice but to seek concessions from employees, apply for government-guaranteed loans, and potentially file for legal relief from debts through Chapter 11 bankruptcy. While the effects of September 11th on airline travel cannot be underestimated, particularly for US Airways which has a traffic hub at Ronald Reagan Washington National Airport, much of the airlines’ financial turmoil could have been averted had the Bush administration allowed the two airlines to merge. Instead, the Justice Department demanded concessions that would have nullified the benefits of the union and United decided to terminate the deal in July of 2001.

    The consumer benefits of airline deregulation are estimated to equal $12.4 billion annually. Competition has increased flights, lowered fares, and transformed commercial air travel from a luxury service experienced by an elite few, to a routine travel choice for three-quarters of all Americans. Yet, economic regulation – government-set ticket prices, routes, food service, etc. – is but one element of the regulations faced by commercial airliners. They must still confront the inefficiencies of a bureaucratic and technologically backward air traffic control system, municipally owned and operated airports with politically set gate assignments, and, of course, antitrust officiousness masquerading as law enforcement.

    Politicians largely have ignored well-crafted plans for air traffic control privatization. So too have they refused to address plans for creating property rights in gate assignments, or implementing congestion pricing to relieve stress at optimal departure and arrival times. But antitrust relief is an unmentionable in Congress, partly because of the alacrity with which state attorneys general would step in to sue. Had the DoJ not stopped the merger, no fewer than 13 AGs were prepared to take the matter to court.

    Since passage of the “Air Transportation Safety and System Stabilization Act,” only one carrier, Arizona-based America West, has received a guaranteed federal loan, which was finalized only after the carrier arranged for $600 million in financing and concessions from employees, vendors, and lessors and granted the federal government warrants that translate to a one-third ownership stake in the company. The bill provided a direct $5 billion cash infusion to the airlines, war-risk insurance for their continued operation, and a financing system whereby carriers would receive federal assistance in exchange for equity in the companies.

    Over the past two quarters since the attacks, domestic airlines have lost $5.7 billion. In 2001, United lost $2.1 billion and US Airways saw its cash reserves fall by 50 percent of the carrier’s 2001 revenues. Both are expected to apply for a federally backed loan before the June 28th deadline.

    Under the terms of the July 2000 acquisition, United’s parent, UAL, agreed to pay $60 a share for US Airways. When the deal was blocked, US Airways shares fell to $16 and are now hovering at about $3. UAL’s shares have witnessed a similar decline: $61 in July 2000, $42 in June 2001, and $12 today. Both companies stress the need for relief from labor, but such restructurings are often accomplished through stock options; yet, given the performance of both companies’ stock and potential for bankruptcy, it is difficult to see how such a deal could be reconciled.

    United Chief Executive Jack Creighton has said the airline spends $4 million to $5 million more each day than it gets from customers buying tickets. US Airways loses a similar amount of money – relative to revenue – each day it continues operations. Such financials come as no surprise in the airline industry, which has witnessed 137 bankruptcies since deregulation. Allowing less-efficient carriers to fail is a key component of a market-based economic system, but so too is private property and private control of such property.

    When the government prevents industry rationalization through some level of consolidation, it supplants private decisions with political ones. How many non-stop flights a day should there be between Denver and Charlotte? What is a fair price for a roundtrip ticket between Baltimore and Los Angeles? Should there be two or three carriers offering service between Boston and Greensboro, N.C., Roanoke, Va., and Albany, N.Y?

    Who knows? And the lack of definitive answers is precisely why shareholders should be allowed to use – or dispose of – their property as they see fit. With dramatic losses mounting, and more taxpayer-financed bailouts on the horizon, it is clear that this private-public airline partnership is not working.

    As a Northeast regional carrier in a world of low-fare competitors – Southwest Airlines’ market capitalization is larger than that of the six largest carriers combined – and international mega-carriers, US Airways badly needs a partner. As USA Today airlines reporter Marilyn Adams recently noted, to survive, US Airways must “forge a marketing alliance with another airline whose routes are concentrated outside the East Coast, so one airline could ‘feed’ passengers to the other.” Of course, United has hubs in Denver, Los Angeles, San Francisco, and Chicago, which would have complemented US Airways’ Northeast holdings quite nicely.

    Given its fixed costs, regulatory layers, labor problems, and political sensitivity, it is very difficult to make sense of the commercial airline industry. The government will extend taxpayer handouts to stop hemorrhaging in the short term, but will not allow airlines to take the necessary steps to ensure long-run solvency. The greatest irony is that this industry is the one most cited as an exemplar of the consumer benefits of “total deregulation.” One can only suspect how little room there is for private decisions in “partially deregulated” industries.