Media Distractions
By Aviation LawProf
Sunday's edition of The Chicago Tribune ran a comprehensive piece on recent shakeups in the U.S. airline industry and its potential impact on prices. Entitled, "Is This the End for Cheap Airline Fares?," the article sounds the usual tocsins that mergers (e.g., Delta/Northwest) mean less competition which will inevitably lead to hikes in ticket prices. To its great credit, the piece also extended its analysis to the realities of exorbitant fuel prices and the senselessly cheap rates which came about as a result of the low-cost carrier boom-rates that few, if any, airlines can afford to sustain in today's economic environment. This is good to keep in focus, especially during a time where the media appears saturated with apocalyptic pronouncements concerning U.S. aviation and the doomed place of theconsumer. This unfortunate reality is no doubt why Richard Anderson and Doug Steenland, CEOs of Delta Air Lines and Northwest Airlines, felt compelled to rebuke six myths concerning airline mergers in the pages of The Wall Street Journal last week.
Obviously, it is nothing new to see sensationalist reporting overtaking critical analysis, due reflection, and the publication of reliable, cogently reasoned, results. The latter, of course, takes time; the former rides a wave of understandable public concern, amplifying it back tenfold so that the final result is the perception of an industry animated by unbridled greed and mindless inefficiency. That these two characteristics are, in fact, contradictory is passed by on the rush to pound another nail in thecasket of aviation's public image. There are two very damaging, intertwined, prospects which may well appear in reality should this media-fueled tarring n' feathering of the airline industry continue. The first is that the public eye will be further diverted from the issue of foreign investment restrictions-restrictionswhich are arguably crippling the U.S. airline industry by not allowing it to find new sources of investment capital. The second is that a new movement to reregulate the airline industry will be encouraged despite the fact that one of the last vestiges of economic regulation-strict caps on foreign investment and control-lies at the heart of current airline woes. Without the removal of these restrictions, U.S. airlines will still be constrained in the route options they offer to customers and, therefore, less likely to find themselves in a position to offer reduced air fares. Further, without foreign carriers having the option to compete in the U.S. market, choices for consumers will remain limited-perhaps increasingly so given the rising number of airline collapses. It would be a dark irony indeed if the outcry against increasing airline prices, reduced routes, and sub-par service overshadowed the very thing which above all else could rectify them.
More Mergers?
Yesterday's big announcement of a Delta/Northwest Airlines merger has already sparked industry observers to start speculating that more will be on the horizon. According to a piece in today's New York Times, yesterday's announced merger "is likely to spur other carriers to go after the cost savings and global brand recognition required to survive amid soaring fuel prices and a weak U.S. economy." Currently, most speculation revolves around a potential merger of United Airlines with Continental. However, other possibilities, such as a Continental and the Alaska Air Group should not be discounted. While future merger talks seem likely at this point, John Pincavage, an airline financial advisor, told the Chicago Tribune that "[i]t's a dangerous time to be making mergers when you're heavily dependent on exogenous variables over which you have no control [e.g., fuel prices] . . . . Make the wrong moves and you could be building a bigger Titanic."
Not everyone is entirely pleased about the merger, of course. Aside from the reports of labor disputes, some critics are wondering if the Delta/Northwest merger will translate into fewer choices and higher prices. Yet, amidst the criticisms, there is a paucity of suggested alternatives. Industry watchdogs and consumer groups want frequent, affordable, high-quality air service while simultaneously knocking the industry as a whole for being unprofitable. On the other end of the spectrum, investors see the move towards consolidation as a necessary step in a volatile aviation marketplace. Even if consolidation means fewer planes overall or the elimination of unprofitable routes, observers point out that the Delta/Northwest deal combines Delta's strong Atlantic routes with Northwest's Pacific network. The outcome could be a more streamlined global service for consumers. Additionally, both carriers' relationship with Air France-KLM also opens up further possibilities for travelers. While it is no doubt true that mergers can have adverse consequences for consumers, a "Gloom n' Doom" scenario is not the only one available.
Surprisingly, one critical fact missing from most of the media discussion over airline mergers is the restriction on foreign ownership of U.S. carriers. With the second stage of "Open Skies" talks between the U.S. and European Union set to begin in a month, it is important to take notice of the fact that the current environment for airlines in the U.S. practically begs for the removal of those restrictions. As is evident from the news reporting itself, U.S. carriers are faced with a very limited number of options when it comes to mergers or even generating fresh capital. Having access to the deep pockets of potential European investors could give them the protection they need to weather the storm of an economic downturn. With EU Member States already announcing that they would cancel rights under the first "Open Skies" agreement should foreign investment restrictions not be eased, U.S. airlines may have some real hope of getting access to foreign capital. Whether or not that access comes quickly enough is still an open question. With more low cost carriers now staring at bankrutpcy or worse, even the smoothest talks may not be able to reach, sign, and execute an agreement before more fall by the wayside.
The American Fallout
American Airlines announced today that it was canceling nearly 600 more flights on Friday due to delays in checking and repairing their fleet of MD-80 aircraft. Standard & Poor's has come forward to project that the costs associated with the groundings, cancellations, and rebookings will exceed $30 million. Additionally, S&P stated that the cancellations are likely to impact any decision on the part of the airline to raise its rates to offset rising fuel costs. Not surprisingly, the media has jumped on the bandwagon of airline bashing in the wake of American's problems. For example, the business news outlet CNBC ran a video report suggesting that airlines in the United States should be nationalized. The report, "Time to Deregulate [sic] the Airlines?," featured CNBC anchoress Erin Burnett conflating issues as diverse and complicated as airline service, safety, infrastructural constraints, and business losses into a pseudo-argument for radical, government-mandated, changes to the industry. On the opposite end were aviation reporters Matthew Wald of the New York Times and CNBC's own Phil LeBeau. Both made strong cases for the clear benefits of deregulation and pointed out the detrimental impact a nationalized airline industry would have on the U.S. economy. While Burnett's "reporting" was inexcusable for its flagrant disregard of setting forth the issues in a coherent manner, her attitude bespeaks a larger problem that concerns the public's perception of the airline industry. Too often, in the face of manifest problems, there is a call for government to step in and manacle the airlines. What is overlooked is the fact that many of these complications are not the result of some cavalier attitude on the part of airlines, but rather linked to a series of complex problems with infrastructure itself. So long as the U.S. continues to manage its air traffic with an antiquated air traffic control system, issues involving long delays, cancellations, and inefficient flights will not be rectified. On the safety end, an FAA that decides to run hot and cold on oversight willalmost invariably have a severe impact on the grounding of airplanes each time it decides a "crack down" is due in order to save its public image.
An editorial from yesterday's New York Times put it best: "If there can be any good news in hundreds of thousands of passengers being stranded as airlines ground fleets of planes for urgent inspection, it is that the Federal Aviation Administration is doing its job. Unfortunately, it is trying to make up for years of not doing its job in keeping them safe, and travelers are the victims." Even more unfortunate is that those victims, understandably irate as they are, seem more inclined to blame the airlinesrather than the government. With the fervor over passenger rights still running high, it is not unforeseeable that these problems will add up to swift legislative action. The looming question remains whether such legislation will be rationally drawn and built into a larger package of reforms to improve infrastructure and oversight, or whether it will merely be an empty showing of government paternalism over its petulant child, the aviation industry. If the latter proves true, it could have devastating effects for an already beleaguered industry whose existence and sustainability are critical for America's economic wellbeing.
From the News
American Airlines announced today that it was canceling 933 more flights in order to inspect and repair wiring on its MD-80 aircraft. This most recent news brings American's total canceled flights to over 2,500 since Tuesday when this internal crisis began. American is hopeful that it will be able to return to business as usual come Sunday, though that could certainly change. One positive sign is that the flight reductions themselves have started to decrease and over a third of American's MD-80 fleet has been returned to active service. American's safety difficulties appear to be rooted in the FAA's recent oversight crackdown. As readers of the blog will no doubt recall, the FAA has been under intense public and political scrutiny since it was accused of laxity in its inspections of Southwest Airlines' fleet. In addition to American, Delta, Alaska, and Midway Airlines have also been compelled to ground portions of their fleet in response to FAA safety demands. While there is no word yet on what the economic impact will be from all of these groundings, Gerald Arpey, American's CEO, stated that the groundings will cost the airline tens of millions of dollars.
On the passenger rights front, a breaking news report indicates that federal passenger rights legislation-now the only hope for airline consumer groups following the Second Circuit's decision in ATAA v. Cuomo-looks to be going forward. The current FAA reauthorization bill, which has sat lifeless on the dockets of the House and Senate for months, contains marching orders for airlines whose aircraft are left out on the tarmac for three or more hours. In addition to requiring provisions for adequate food, water, and working toilets, the proposed legislation would also allow passengers to request a return to the terminal if the plane has sat at the tarmac for at least three hours and the captain determines there is no imminent sign of departure. It now appears that the federal passenger rights act will be removed from the reauthorization bill and reattached to moving legislation. Finally, on the analysis front, the Wall Street Journal's Scott McCartney has an intriguing piece on the supposedly new airline attitude toward customers of out-of-business carriers: "It's your loss, not ours." Citing the fact that Congress allowed protections for airline customers expire in 2006, McCartney stated that consumers should no longer expect other carriers to honor their tickets. Consumers should therefore be wary about purchasing tickets on struggling carriers; unless they have a code-share relationship with one of the more stable airlines, options for rebooking will remain slim. As a further point of interest, McCartney supplied a "Carriers to Watch Closely" list which included Frontier Airlines, ExpressJet, Sun Country, and Italy's version of the "living dead," Alitalia. April 10, 2008 | Permalink
Black Wednesday for Two Airlines
Wednesday proved to be a dark day for airlines on both sides of the Atlantic. In the United States, low-cost carrier ATA Airlines filed for bankruptcy after losing a key contract for its military charter business. "Unfortunately, the cancellation of a critical agreement for our military charter business undermined ATA's plans to address the current conditions facing all scheduled service airlines, including the tremendous spike in the price of jet fuel in recent months," explained ATA CEO Doug Yakola. ATA has halted all service, informing passengers that it would not honor any standing tickets or reservations. Carrying an average of 10,000 passengers each day, ATA's cancellation of services is likely to cause some chaos as passengers scramble to make last minute adjustments. ATA's financial woes also come as a blow to the beleaguered Southwest Airlines with which ATA had a code-sharing arrangement. Southwest has committed itself to giving booking priority to any passengers scheduled to fly within 14 days through their previous arrangement with ATA. Coincidentally enough, this news comes just as Congress begins hearings to investigate the FAA and its apparently cozy relationship with Southwest. Some have argued that this relationship led to undue endangerment of passengers flying on Southwest Airlines due to lax safety inspections.
In Europe, Italy's Alitalia may have had the proverbial stake driven through its heart. After years of being the industry's Nosferatu, perpetually rising from the dead, Alitalia's hopes for a new source of financial lifeblood from Air France-KLM may be extinguished. Late last night, Air France-KLM announced that it was rescinding its offer after Alitalia's union made proposals which "would involve retaining a number of activities generating large scale losses within the Alitalia group," said Air France-KLM in a prepared statement. The deal, valued at an estimated $1.15 billion, would have given the struggling Italian airline a new lease on life after seeing its operating capital quickly diminish over the last couple of months. While some analysts believe that the deal is officially dead, Alitalia's unions are still holding out hope that a new agreement may be reached. However, even if the union problem is taken care of, Air France-KLM's bid still hangs on the outcome of Italy's upcoming elections. Should Silvio Berlusconi return to power as prime minister, he is expected to block the deal on chauvinistic grounds that Italy's flag carrier should not fall into the hands of foreigners. A recent government tax break and the selling of its Air France-KLM shares have allowed Alitalia to survive for now. In the meantime, the board of directors has called an emergency meeting to decide what its next move should be in the face of what the airline can only consider to be a disaster. April 3, 2008 | Permalink
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Brian F. Havel
Distinguished Research Professor of Law
Director, Intern'l Aviation Law Institute
DePaul Univ. College of Law
John Q. Mulligan
FedEx/United Airlines Resident Research Fellow
Intern'l Aviation Law Institute