December 14th, 2004 at 11:18 pm
“Airlines end 2004 $5bn in red.” “United Airlines imposes wage cuts.” “US Airways agrees (to) cash lifeline“.
The reason? “While yields - the amount of money made per seat on flights flown - had declined, the IATA blamed the projected loss squarely on rising fuel costs.”
Responding to lower market prices for seats and higher fuel costs, in addition to wage cuts and credit lines, airlines additionally are selling planes and leasing them, using regional jets, and selling airport gates. An interesting quote from J. George Mikelsons, founder and CEO of ATA, a Delta Airlines regional jet operator:
“What has happened to this industry is unprecedented: nobody thought it would be this bad for this long,” Mikelsons said. If he loses control of the airline, he said, “I will feel like I sold my child into slavery.”
It didn’t have to be this way.
You may recall in 2002 that Congress and President Bush (read: you and I) funded an airline bailout to the tune of 15 billion dollars, because of the anticipated damage to the airline industry by 19 male Middle Easterners in their 20s and 30s. There’s no question that the attacks caused demand to drop in the airline industry. Instead of allowing market forces to make the airlines leaner and meaner in the face of decreased demand, Congress subsidized the supply.
Instead of the airline industry taking its hit right after the terrorist attacks, when oil stocks where hanging out around $20 per barrel, the airlines are taking their hit now, when oil prices are over double. Nobody would have dared start new value airlines after September 11, 2001, but 2004 saw the advent of Southwest-style airlines Airtran, JetBlue, and Independence Air. These value airlines have forced serious price cuts from the big vendors: today I purchased a normally $600 ticket for $350, and I didn’t have to fly through evil Memphis to do it.
A government bailout or propping of the market, no matter how wonderful it may seem at the time, evaluates to a lose-lose situation in the long term. When prices stay up, suppliers have no incentive to retool when demand drops, and money that could be used in more profitable ventures is wasted. Let’s keep this in mind whenever our government officials want to “help” an industry by subsidizing it.
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