WSJ: Coffee, Tea … or Bankruptcy? - Chapter 11 saves airlines but puts the industry at risk.

Wall Street Journal ^ | September 16, 2005 | ROBERT CRANDALL

[OESY]

Delta and Northwest Airlines' bankruptcy filings are the latest consequences of the troubles afflicting the long-established, or "legacy," airlines. Inflexible work rules, above-market wage rates, under-funded fixed benefit pension plans, huge debt burdens, outdated business practices and high fuel costs burden the legacy carriers with enormous disadvantages relative to newer carriers who are flying by different rules.

To deal with these burdens, the legacy carriers have made dramatic changes....

Sky-high fuel prices have recently made things worse, but lower fuel prices will not solve the industry's problems. In most industries, producers are able to pass on raw material price increases to their customers, as they are doing today. For a variety of reasons, including very intense competition which limits any one carrier's pricing power, the airline industry has consistently failed to earn adequate profits; cumulatively, the industry has lost money since its inception.

While analysts are closely focused on fuel prices -- and occasionally note the major cost differences between low-lost carriers and their legacy competitors-- little is said about the many unique burdens imposed on airlines by inappropriate laws and regulations. These include taxes and fees representing more than 25% of a typical ticket's purchase price; labor laws enabling unions to drive compensation far above the amounts paid in other industries for similar work; and continuing underinvestment in the operation and construction of the air traffic control system and aviation infrastructure.

Among the most egregious of these burdens are those imposed by the nation's bankruptcy statutes, which allow a failed carrier to use Chapter 11 to dramatically reduce its costs. In bankruptcy, airlines renegotiate aircraft and facility leases, disavow selected contractual obligations, revise or abrogate labor contracts, and even repudiate pension obligations -- all the while continuing to operate. Airlines often remain in bankruptcy for extended periods of time....

[saveliberty]

Great post. If only the less efficient airlines would make the difficult decisions that have to be made once a government payment is made. But they don't, so after getting a bail out, the inefficient airlines continue to spend other peoples' money unwisely and soon wind up exactly where we are now.

[saveliberty]

PS I agree with the burdensome regulations comments in the article. But other airlines make it and it is no small task to make a large organization work as effectively as a small one.