Help for Airlines?

Help for Airlines?

A couple of weeks ago, in a departure lounge at LaGuardia Airport in New York, the crisis plaguing the AIRLINE INDUSTRY played itself out in microcosm. Not that there's anything remarkable in that - the industry's economic disaster film is playing on continuous loop daily, in airports around the world. Still, it was something to see.

The weather was good in New York, but heavy thunderstorms were drifting across New Hampshire and Massachusetts, delaying a handful of flights. That relatively minor disruption was enough to put one of the world's busiest airports into gridlock. Thousands of passengers waited for flights to arrive so theirs could leave. Runway traffic piled up. Delays inevitably gave way to cancellations. Soon, anyone waiting for a flight to the northeast U.S. or Canada was waiting in vain.

Two weeks earlier, my US Airways flight to Las Vegas was cancelled because the plane's parking brake would not release. At least that night the airline paid for my hotel room. But in New York the glitch wasn't mechanical and so accommodations were my problem. In the end, I just gave up. I rented a car and drove nine hours home, only slightly more irritated that the typical airline passenger, who now ranks the industry at historic lows in customer satisfaction surveys - on par with the U.S. Internal Revenue Service.

Who's responsible, and who must fix it?

To hear airline executives tell it, their problem is oil, and the nasty speculators who are driving the price higher. Aside from a few discounters with smart hedging strategies, like WestJet, it is virtually impossible for airlines to turn a profit with oil selling for well over US$100 a barrel. The industry's overall losses are expected to top US$2 billion this year, and 2009 could be even worse.

But that is only half the problem. Oil prices are strangling airlines because the industry has exploded in size, and managed to lose all pricing power and efficiency along the way. Since 1978, the year the U.S. airline industry was deregulated, the number of people flying each year has roughly tripled - from a little over 700 million individual flights to 2.1 billion as of 2006. Over the same period, industry-wide labour costs have risen from $1.77 per mile flown to $4.08. And fuel costs ... well, you know what has happened to them. Over the same period, the average ticket price has risen at roughly half the rate of inflation. Put another way: the inflation-adjusted price of flying has fallen by half in 30 years.

All of that - surging demand, inflating costs, stagnant pricing - is the result of an industry that has become a blood sport in which nobody ever really wins. But rather than letting the market take its course, killing off the weakest players, companies have used the courts, regulators and foolish investors to maintain the hopeless status quo.

The flood of new airlines and routes in the wake of deregulation yielded an unending price war that has begat zombie airlines, barely alive, slashing staff and service to the point that those who remain are deeply demoralized. Desperate for any revenue, they now charge for checked bags, seat selection, even a pillow. On US Airways, it'll cost you two bucks for a Coke, seven for a beer. But you have to sell a lot of drinks to make up the US$803 million it lost in the first half of this year.

The problem is too many people flying, all of them paying too little for their tickets, and it can't be fixed with nickels and dimes.

The era of cheap air travel has overloaded airports to the point that a simple rainstorm in the northeast can bring a hub like LaGuardia to a virtual standstill in a few hours. It does no good for an airline to try to differentiate itself with better service because the most important service of all - running on time - is at the mercy of airports that are bursting under the strain of excessive traffic.

This grim reality has led to some bizarre ideas from the most surprising sources. A month ago, former American Airlines CEO Bob Crandall said airline deregulation has been a failure - carriers are dying, customers are angry, the economy is threatened - and Congress should re-regulate. Last week, his idea was seconded by prominent investment banker Hector Cuellar, who thinks Congress should set minimum prices, loosen labour laws to make it easier to fire workers, and tighten bankruptcy rules to prevent failing carriers from undercutting the stronger ones. Everyone, he says, would be better off if airlines were treated like utilities. (Because, you know, regulated utilities are famous for their efficiency and customer service.)

When investment bankers start demanding more government intervention, you know something strange is happening. Both Cuellar and Crandall are begging government to save a misguided industry from itself. For 30 years they have trained their customers to buy solely on the basis of price - viciously undercutting with no regard for profitability. Now, soaring oil prices have finally made that toxic game into a terminal one, and they want a legislated lifeline that would screw consumers so the airlines can get fat together.

The more sensible solution is the one that the executives can't bear to face: a bunch of them need to (finally, mercifully) go out of business. Airlines need to merge (like Northwest and Delta are currently), they need to slash routes, raise prices, and the weakest must finally be allowed to die for good. Yes, that means fewer spontaneous trips to New York, and a lot fewer people employed in the airline business. So be it.

When my flight was finally cancelled and it was clear that I would not make it home that night, the gate agent gave me a sympathetic shrug. She was prepared for anything from obscene rage to childish weeping. She'd seen it all before, and there was a line of people behind me already demonstrating the full range of negative human emotion. "Sorry," she said. "It's okay," I answered. It wasn't her fault, and besides, within 24 hours I'd be home, but she'd still be there, toiling in an industry circling the bowl. And the solution is likely to hurt her more than it hurts me.

Maclean's September 1, 2008