Airlines Are Clamoring for Help in Response to Global Travel
In 2014, through mergers that reduced competition and increased billions of dollars in new baggage fee revenue, American Airlines began to reach an amazing level of financial success. The company had a profit of $ 7.6 billion in 2015, compared with about $ 500 million in 2007 and less than $ 250 million in 2006. Over t...
In 2014, through mergers that reduced competition and increased billions of dollars in new baggage fee revenue, American Airlines began to reach an amazing level of financial success. The company had a profit of $ 7.6 billion in 2015, compared with about $ 500 million in 2007 and less than $ 250 million in 2006. Over the next decade, it will continue to make billions of dollars in profits annually. "I don't think we will ever lose money again," Doug Parker, the company's CEO, said in 2017.
Americans can do a lot with this money. It knows that airlines cycle regularly between boom and bust, and it could have cash reserves for future crises. It may attempt to decisively resolve ongoing contract disputes with pilots, flight attendants and mechanics. It may have invested heavily in improving the quality of its services in an attempt to restore its long-term worst carrier reputation.
Instead, Americans spend most of their cash on stock repurchases. From 2014 to 2020, in order to increase earnings per share, American Airlines spent more than $ 15 billion to buy back its own stock. Despite the risks of rain, it managed to reduce its cash reserves. At the same time, it spent a lot of money on repurchases, and American Airlines began to borrow heavily to finance the purchase of new aircraft and retrofit old aircraft to accommodate more seats. Back in 2017, analysts warned that if the economy worsened, there would be a risk of default, but Americans have been borrowing. It has now accumulated nearly $ 30 billion in debt, almost five times the company's current market value.
American has never improved how it treats its customers over the years. The change fee for domestic flights is up to $ 200, and the change fee for international flights is up to $ 750. Its widely despised baggage fees increased to $ 30 and $ 40 for the first and second pieces of luggage, respectively. These higher costs have generated billions of dollars in revenue but have not helped airlines improve on-time arrival times, reduce tarmac delays or prevent involuntary collisions. Instead, American ’s main “innovation” was to remove the screen from the aircraft, reduce the size of bathrooms and seats, and introduce a “basic economy” cabin that initially included regulations that barred luggage.
After the corona virus outbreak, the aviation industry suffered severe damage, and American Airlines has not yet demanded bailout, at least not so much. However, after a recent meeting with airline leaders, Larry Kudlow, chairman of the National Economic Council, said that “in some sectors of the economy, the airline of choice” may need help. Treasury Secretary Steven Mnuchin said on Wednesday that airlines, including American Airlines, would "top the list" in federal loan relief.
As the government thinks about what our public should do for airlines, we should ask: What have they done for us?
The American economy needs aviation to operate. In this sense, the industry is not a "normal" industry, but a device that was once called a public carrier or utility: the critical infrastructure on which other economies depend. Major airlines know that unlike local restaurants, they are never allowed to fail completely. In effect, the public subsidizes the industry by providing de facto insurance against difficult times in the form of bail-outs or merger approvals. Now we come again.
We must not allow the United States and other airlines to use federal assistance (with or without a bailout) to survive the coronavirus crisis and continue business as usual. Before providing any loan deductions, tax deductions or cash transfers, we must ask airlines to change the way they treat customers and employees and make fundamental changes to the industry's ownership structure.
Starting with passengers, the maximum change fee is $ 50, while baggage fees are linked to a percentage of the cost. Not only are change fees annoying, they also weigh on the overall economy, reduce the flexibility of the transportation system, and hinder efforts to effectively change travel plans. We should also end the airline's pursuit of smaller and smaller seats that are not only uncomfortable and even harmful to the body, but also exacerbate anger in flight and make the stewardess's job almost unbearable. Finally, we allow too much co-ownership, allowing major shareholders to hold shares in each major airline, thereby incentivizing collusion rather than competition.
Airlines will argue that their ownership structure, narrow seats, high fees and other forms of customer suffering are necessary to keep prices down. But after the merger of the last decade, no one should take this argument seriously. As any economist will tell you, there is limited pressure to lower prices in markets with less competition and joint ownership. Instead, as we have seen, large airlines charge fees that they can escape and use profits for stock repurchases and other self-service businesses.
The question of what the public should expect from the airline's bailout raises the question of going beyond flight operations. The next few weeks will leave many economic victims, including almost everyone who provides services in person. Many small retailers, restaurants and other businesses, such as food service providers or fitness coaches, face grim prospects. However, it is the major players in the economy that are most likely to request (and receive) government assistance, such as banks and airlines.
During the last economic crisis, we largely helped individuals suffer when helping big men, leaving deep dissatisfaction. This time we should start at the bottom instead of the top.
News References: https://www.nytimes.com/2020/03/16/opinion/airlines-bailout.html