The busines news is full of chatter about a proposed merger between Northwest and Delta, two of the big six U.S. airlines. Airline lobbyists and mainstream business pundits are applauding the merger, and the subsequent round of mergers among the remaining four major airlines, as the cure for what ails the U.S. airline industry.
What is ailing the big American carriers is bad management. I see no reason why a merger from two sick companies so recently in bankruptcy, and not really in direct competition with each other, should produce anything but one great big sick company. The problems with U.S. airlines stem from a culture of management that makes the major carriers among the worst run companies in America, only able to survive due to bailouts and public infrastructure subsidies (i.e. public sponsorship of airports). Foreign airlines generally do much better, and provide better service to boot. Low cost U.S. airlines manage to provide cheap intercity flights and still make money. Why is it that the big six can do neither? Bad management.
The example most directly relevant to the case at hand is US Airways, a company run with such genius that their 1996 solution to their loss-making record was to rebrand the company from US Air to US Airways, and spend millions of dollars repainting every plane in the fleet. They introduced Metro-Jet, a low cost subsidiary meant to compete directly with Southwest Airlines, and gave it the oldest, clunkiest, most fuel-inefficent planes in the fleet. Within just a few years, United tried to buy US Air (sorry, US Airways), but the deal fell apart with both sides losing a bundle. Metrojet hemorraged cash, so US Airways blamed 9/11 and closed the company in 2001. Finally, the airline went bankrupt in 2002, after years of struggling along, despite the big 9/11 airline industry bailout granted by Congress. Along the way, US Airways employed the same tried and disproven method of arresting loss-making that every troubled airline in America has used at one time or another when, all to no success: buy a bunch of new shiny planes, expand routes, mass lay-offs, slash employee benefits, slash customer service, and all the incompetent executives get lucrative retention packages. Later, U.S. Airways merged with America West, but still doesn’t know quite what to do with it.
Given that every troubled airline resorts to more or less the same bag of tricks to right its sinking ship, and sinks anyway, one wonders why the same voodoo gets used over and over again. The answer is simple: mergers are good for stock options, and there is that tasty executive retention package at the end!
It is not that mergers are a bad thing in and of themselves, even in the airline industry. There are examples in Europe: Air France and KLM merged rather successfully. Lufthansa bought Swiss Air and is doing well with it. However, those European airlines are well-run. Given that the leadership of the U.S. big six has routinely proven themselves to be little better than a bunch of greedy boobies, any suggestion they make should be taken with a grain of salt. Actually, make that a cannister of salt.
The Market Solution: Let Them Fail
If the mergers are legal, they should be allowed to take place, but we should look elsewhere for a solution to the woes of the airlines. My suggestion is to apply the magic of the free market. By that, I mean Adam Smith’s free market, not the crony capitalist “pro-business” claptrap carted out by well-bribed members of Congress from both parties. The government should get out of the business of helping the airlines, and let a few of them fail. The big six face competition from foreign airlines abroad, and low-cost airlines at home, but by and large their woes are not due to competition. They are due to the incompetence of airline management, so let them run their companies into the ground and be done with it. The companies that are meant to surivive in our little world of market Darwinianism will see shareholder or Board revolts, innovative new management willing to try new, practical solutions to their problems, and will be well-placed to pick up the market share of the failures.
If a foreign airline like Air France-KLM wants to buy, say, a collapsed Continental, let them. They certainly can’t do a worse job running that awful airline than the current crop of executives. My guess is that not only would service improve, but the employee benefits would too, disproving certain greedy and utterly disproven standard measures of the executive ghouls who dominate the airline sector in this country.
Very often in this country, the people who talk free market actually mean pro-existing business. Note that isn’t pro-business, but pro-exising businThat is a mix of policies which transfer wealth from taxpayers to the corporations in question, suppress market entry on the part of innovative upstarts, and help the company weasel their way out of inconvenient contractual obligations to their workers on things like pensions. Whenever I read or hear about what passes for “free market economics” on the part of Republicans and pro-business Democrats, I wonder if they ever read even the Cliff Notes version of Adam Smith. The free market is about free competition, so if you want to see the magic of the free markets fly the friendly skies, let those companies compete freely. Let them rise and fail on their own merits. In particular, just let them fail.