Asymmetrical Information

Did someone break into your blog account somehow? This doesn't sound like "libertarian Jane" to me! (Just giving you a hard time, as I hope you can tell) I have been hearing about these companies (not all airlines, also Worldcom, at least) giving execs special "private" retirement accounts while trying to stiff the workers and middle management out of their pensions, and i just don't understand how they can get away with what seems like pretty straightforward larceny. Aren't there rules about that? Oh well, just another day in paradise...

How much money, in relation to overall company revenues, did the 45 executives receive, anyway? One of my problems with controversies over executive salaries is that usually the numbers, while huge from an individual's perspective, are really rather trivial from a company-wide perspective. HAd the top 45 executives volunteered to work for free, would it have changed American's finances enough to avert bankruptcy?

(I don't have an on-line WSJ subscription, so I can't tell myself)

If the top 45 execs worked for free, the savings on their salaries surely wouldn't have saved the company. But if execs project an image of excessive greed, that's bad for employee morale--and employee morale is one of the things the definitely *does* help keep companies out of bankruptcy.

Jane:
"Shareholders and employees" (not to mention executives) are not the only ones who might be affected by American Airlines' possible bankruptcy: how about its customers? As a long-time (for various reasons) AA preferred-flyer, I can't help but see turbulence ahead for the airline of my choice. This just may be intuitive, rather than rational; but I fail to see how operations in Chapter 11 might serve to improve the already-mediocre quality of service at AA. Or prove a benefit to me when I fly them.
Oh well. only time will tell - and air travel, these days, certainly does give you enough time for contemplations!
But I will echo Paul's comment above: your comments re the AA executive asset-grab do seem to be coming from the "port-side" wing of Clipper Jane Galt.
Not that this is complaint, mind: it is refreshing, for once, to see an analysis of a serious economic issue which leaves ideological biases to one side. Despite much commentary to the contrary, self-serving avarice is NOT the best moving principle for the operation of a major corporation such as American Airlines, be from the union or management/shareholder side(s).
Thanks for the reminder.

The prospect of any of these horribly managed firms receiving even a dime of taxpayer support is offensive beyond words. These companies need a good dose of chapter 7. Let the assets be liquidated. It is not as if the planes will be shredded for scrap, they will simply end up under the control of people with a superior business plan, and superior management ability.

i see it very goood

I've little sympathy for most of the airline business, greedy incompetent management, greedy unions, etc. I just don't want to see more of my tax money go to subsidize failed business plans. Send 'em all to bankruptcy, let someone more competent find a use for the assets.

Paul complains about the special pensions reserved for executives. Don't blame AA (or the majority of other companies having such pensions), blame the tax law. Congress, in its wisdom, chose to treat the "highly compensated" differently than rank and file employees. Under these rules, a company cannot set aside in a "qualified plan" as much for an executive's pension as it can for a file clerk's pension (measured as a percentage of salary). Most companies create "supplemental retirement plans" for their executives to allow the executives to receive the same pension (as a percentage of salary) as they would had they been a file clerk.

The "cost" of these supplemental retirement plans is that the company does NOT get a current income tax deduction as the plans are funded AND the assets are subject to the company's creditors. It is common practice to remove the assets from the reach of creditors when bankruptcy appears likely. (This causes the a huge tax bill for the executives.) If this were not the common practice, the creation of a supplemental retirement plan would be little more than a promise -- a promise that would do little to attract and retain talent to the company.

Sorry, but just because the unions want to complain about business decisions made more than a year ago (and which were reasonable) doesn't mean it's the executives' "fault" for the airline's potential bankruptcy. Blame federal law that gives these unions distorted amounts of power, such that they can extract huge concessions from the airlines by threatening strikes. Since a major strike can bankrupt an airline in about a week, the unions have huge leverage. Moreover, because of that disparity of power, unions give back when times for the airlines are tough -- the exception being when airlines are literally on the brink of bankruptcy. As a consequence, when times are good, payroll costs go through the roof. When times go bad, payrolls remain relatively steady. In an industry where even successful carriers carry huge debt loads, union practices and federal laws that effectively insulate employees from the consequences of market conditions are what are "causing" this bankruptcy.

"And even if it were totally legit, not telling the unions gave a loaded weapon to anyone agitating against the concessions."

(cackle) Really? "If it were totally legit," then what could that "weapon" possibly be "loaded" with?

Premises are funny things. What's not so funny is how damned few can find their way to them.

It is common for companies in dire financial straits to use substantial incentives to get key personnel to stay. After all, you can be sure all of the key people are getting calls from headhunters as AA goes into a tailspin. This is such a standard (and logical) practice in all industries that it should strike no one as remarkable. What's remarkable is that this came as a surprise to the unions. You'd think the union leadership, which has to negotiate with management, wouldn't be quite so clueless about standard business practices.

It's hard to see why major airline executives would be in hot demand right now. The situation since 9/11 has been out of their control, but the major airlines were in deep trouble even before then, and mostly due to mediocre-to-poor management decisions. UAL's top management seem to be particularly clueless.

I would hope that these geniuses' next job interview would go something like this:

Q: And what was your last position?

A: I rode a major airline into the ground.

Q: And we should employ you because...?

As a former employee of one of the major airlines (not laid-off, by the way), I think there is a lot of truth in the criticisms of the major carriers, but also a lot of ignorance. If I had a dime for every time I heard someone declare, "Well Southwest seems to be doing fine, so obviously the other carriers are just poorly managed." It's just not that simple. The airline industry is a high stakes poker game where the profits can be handsome, but the overhead can easily kill you. The costs associated with just getting a plane in the air (aircraft, crew, gate access, fuel, maintenance, regulatory stuff, etc.) is simply enormous. Once you get enough people on the plane to cover these costs, the revenue for each additional seat filled is huge, but if you fail to fill the plane to the break even point, the losses are equally huge.

Southwest has been able to succeed in large part because it exists under the umbrella provided by the major carriers. One example of this is the issue of gate access. Obtaining gates at the major airports is hugely expensive for the major carriers, but this causes lack of demand (and therefore much lower prices) for access to gates at the second-tier airports where Southwest tends to fly. If the majors were to suddenly announce that they were going to dump the major airports and move to the small ones, the law of supply and demand would dictate that the cost of gates at the smaller airports would rise and Southwest's costs would immediately go up.

Another example is flight crew pay. Southwest routinely acts as a stepping stone for pilots and flight attendants who leave to get higher pay with a major carrier. The unions have largely ignored Southwest, but this would change if the major carriers started cutting salaries to compete with them.

Another thing to consider with guys like Southwest is safety. I am not disparaging their safety record, because it happens to be very good, but this frankly shocks me. Aircraft have huge maintenance requirements, requiring a lot of capital outlay. Southwest has chosen to reduce this cost by sending their aircraft to a contract outfit in Tijuana for all their major maintenance. Now no offense to either contract maintenance organizations or the Mexicans, but I personally don't trust this arrangement. In my experience, airline employees take great pride in their association with their company, and I simply don't think a maintenance contractor will necessarily take their job quite as seriously, at least in general. Nor do I think farming out such crucial work to cheap, below-the-border laborers is very smart, either.

So basically, I see Southwest as an aberration which has only been able to succeed because of, not in spite of, the major airlines. If the majors die, I think it will be bad news for Southwest, as well.

So here's my bottom line -- I see the main problems with the major carriers not as failures of management or bad business models, but rather the result of being in a tough, unforgiving business where the torture of high overhead meets head on with massive (and necessary) government regulation and extreme market fluctuations.

I hope AA and UA and other bloated airlines have to declare bankruptcy. It has taken far too long for deregulation and competition to catch up with them. Their cost structures are ridiculous.

Let's face it, flight attendants are glorified waiters and waitresses. (And "glorified" is a precise description, since the glamor of flying belies the mostly menial and tedious tasks they perform.) There are plenty of people who'd be happy to get jobs as flight attendents, at far lower wages than are now paid, if it weren't for union protectionism.

Similarly, there are lots of aspiring pilots who'd love to fly commercial jets for a lot less money than prevailing salary levels, but there are few available job openings. Here again unions have boosted wages way above the true market-clearing level. The same can probably be said about flight mechanics.

The recent union give-backs are not enough to solve this problem. At most they would allow the airlines to barely hang on for another year or three until the next financial crisis. The arrogant stupidity of airline executives giving themselves fat bonuses and pension benefits at the same time they're demanding union concessions just proves that those executives are incapable of effectively managing their companies. Far better to liquidate the most uncompetitive airlines through bankruptcy, and allow their assets (such as planes and terminal slots) to be put to more efficient use by the superior management at companies like SouthWest and JetBlue.

(cackle) Really? "If it were totally legit," then what could that "weapon" possibly be "loaded" with?

Public opinion, of course, along with how the action will seem, even if legit, and how it will anger people. Also the violation of the sense of fair play for not telling them. Just because one has a legal right or good reason to do something doesn't mean that it can be done without consequences. Sometimes the appearance of foul play is as damaging as the real thing.

What we have with many of these companies (from airlines to Enron) is corporate executives looting the company, cheating stockholders and employees and customers. (Which of these groups most gains your sympathy may depend upon where you are in the political spectrum, but the executive looting is clear.) They gather unto themselves outrageous compensation on the grounds this is just reward for the company's success which is entirely due to their sterling efforts -- and then they continue to suck the lifeblood from the company as their incompetence drives the company down. There are some excellent corporate executives out there who have earned their money, but there are far more con-men and leeches. (I consider myself to be a small "l" libertaria -- although I did vote Libertarian in the past two presidential elections -- but I can still recognize a con job when I see one.)

In the case of the airlines, there are a number of problems outside of airline control -- the economy, fear of terrorists, and the asinine sideshow posing as airport security, etc. -- but these troubled airlines are ones that treated the flying public with contempt, cramming passengers in like cattle, lying about arrival times, etc. They are now reaping the crop they deliberately sowed, but they are securing their personal loot and dumping the mess they made on their employees and stockholders and the public. Please note that some airlines (such as Southwest) are still functioning and profitable despite the current environment.

Billy Beck, (cackle) Really? "If it were totally legit," then what could that "weapon" possibly be "loaded" with?

Bad PR, perhaps? Plenty of totally legal things sound bad.

Daniel Wiener:

The teeny problem with your argument is that Southwest Airlines' pilots and flight attendants are also unionized, so unionization itself obviously does not prevent commercial success.

You've got some nerve using the last name Galt. Yes, today's airline execs are no Ayn Rand heroes by any stretch, but you give moral sanction to the unions by your ommissions.

Unions exist to get their workers more money without them having to do anything to increase their output. If shareholders (or their reps, the board of directors) don't like what the execs are doing, they should get new execs. Companies are forced by law to collectively bargain with unions, but it's by choice with their execs.

Plus, these execs know that bankruptcy is now just the latest approach to collective bargaining. They keep flying, but use bankruptcy judges to try to get the unions to be realistic about needed pay cuts. But it doesn't work for the execs. if they don't have a way to keep their salary safe for using the bankruptcy negotiation idea to save the company money in the first place.

Since some time in the 1970's the airline industry has had one goal - to de-unionize. Individual airlines are expendable in pursuit of the industry goal. There isn't much support among the populace for unionization these days, so I suspect the proverbial "they" will win this war. Within a decade or two the industry will be commoditized. An airline will consist of a website and not much more. Most of the employees will be outsourced, and the airplanes will all be leased as well. When you buy a ticket from airline X you will get a seat on someone's airplane, maintained by some maintaining company, staffed by some other crew-leasing company.

We would have had Malaysians manning the operation years ago if we could have figured out how to do it from Malaysia.

Reuters is reporting they just dropped the exec compensation plan.

http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=1&cid=580&u=/nm/20030418/bs_nm/airlines_american_dc

I guess it has to be a poor show for the executives to be taking a full slice while the rank and file take cuts. Not clear what "legit" means in this context: legal? Not so much as written into law, but slipped into a contract, and that's not at all legitimate, honoring one contract while changing another.
I stopped flying AA about 4 years ago, when management turned all the AA employees into workers. The people in the cabin just weren't as good, baggage, check-in. I don't get to see the maintenence and the pilots, but I can extrapolate: nobody except the executives escape and the quality just comes down.
It used to be the AA was an airline, a business that flew planes, and they did that really really well and I liked that.
When they became a business, squeezing the professional into worker status, my experience of flying with changed, and I left.
No reason to keep my AA visa card anymore either.

Susan, So you are saying the price of gates will go up when major airlines go out of business, resulting in lower demand??

And if the majors leave the larger airports and suddenly start flying to smaller airports raising gate fees thre, couldn't Southwest just fly to the larger airports???

As to the topic du jour, for once, I find myself in complete agreement with Will Allen (and its always nice to know that such times can occur). The whole structure, especially UAL, needs to be burned in Chapter 7.

And as for AMR it is not just the idiocy of the executives, but the fact that the flight attendants initially rejected concessions when the other unions had already made concessions! Had they voted no, and AMR gone immediately into bankruptcy that would have been one of the most monumental example of labor brain-cramp in history!

F Amr and F the unions too. This is about leadership, AMR has none, let them fossilize like the rest of the dinosaurs

I agree with the Chapter 7 route. I think it's time to give someone else a try at running a decent, profitable airline.

If you live near one of the American executives, and you happen to see an angry mob on the way to their house -- don't just wave at them. Take some time out to draw them a map.

Draw them a map eh? You mean on a 2x4? :)

Susan's points are all good. Yet they miss the point about the executive compensation scandal. Senior management and boards exist in an incestuous relationship that the stockholders are powerless to control.

It is hard for normal folk to be motivated by overpaid executives and board members as they run their companies into the ground. Employees get screwed, stockholders get screwed and the executives and board members do rather well for themselves.

Oh ye of little wit.

Several people now have made comments along the lines of 'as the executives ride the company into the ground' etc. Now maybe you don't realize this (or maybe you do), but that phrasing places the blame for the downfall itself... without one damn bit of supporting evidence provided.

Ver-ry convienent - That is, if your goal is to smear someone rather than examine the situation. Or are you claiming that the '2 seats for one fat person' policy (or insert your own scapegoat) singlehandedly toppled the profit margins?

Has it ever occured to your cowlike minds that you just justified their large salaries? If 1% of the personnel can make the company sink or swim, then maybe they SHOULD be paid more than the other 99%.

Stop chewing your cud at me that way: I'll explain it in terms you can fathom: You can EITHER blast them for having salaries out of proportion of their worth - OR you can claim they 'rode the comany into the ground, BUT NOT BOTH. Either the execs are important, or they aren't.

Oh, and I love the way some of you are calling for the company to die off. Ever occur to you that maybe what replaces it may be less to your liking? Of course, after you throw the expensive toy against the wall in a tantrum because it won't work right, its awfully hard to put it back together.

Now I agree that in principle companies shouldn't be able to count on being bailed out, but has it occured to any one of you sniveling fools, lamenting that PUBLIC MONEY should go to these shysters, that every form of transportation in this country is subsidized by government?

The buses, railways, canals and highway system (federal, state and local) may not need to overtly go hat in hand to the government occasionally, but that's because it's never been far enough away from the public tit for you to notice it bawling for more. I suppose in your mind that somehow makes it more noble.

Fine, let the company sink or swim on its own. But do them and their families a wee bit of favor and stop funding their competitors quite so completely, eh?

And most importantly, stop thinking you invented wisdom yesterday. If the answers were simple, they'd have been solved last year.

Waxx:

Is your Tourette's syndrome attack over? Good.

Now, you've got a logical fallacy there. The buck stops with the execs - true. But in a meritocracy, should they be rewarded for bad performance? Should they get golden parachutes when the rest of the company is taking cuts? I think not. If they were responsible for quintupling the stock price, that's a different story.

As for the "toy slammed against the wall thing"...bankruptcy is part of capitalism, and as a consumer I really don't care if American goes bankrupt. Jet Blue, Southwest, and the rest of the discounters seem to be doing quite well. (Susan Eaton's criticism notwithstanding, until and unless there are high profile safety issues with the discounters, I'll keep flying discount.)

So it seems that the problems are due to bad management (or something structural). I don't think that the government should subsidize bad management. I could be persuaded that airlines are important enough to our economy to keep afloat with a bailout if *all* the airlines were losing money, but - again - those pesky discount airlines seem to be raking in the cash hand over fist.

In 20 years, I will look back at this AA thing as a definining moment in the formation of any future views I have about management vs. labor, and I imagine the views will be either that they all suck or that unions are a tad more than a necessary evil. Let me explain...

I have lately become very close friends with a family where one of the faamily members is a mechanic for AA, 60 years old, and about 2 years from retiring. He was put through the ringer with the PanAm bankruptcy -- imagine delivering pizza to help support your family while you wait for the next mechanics opening at a new airline. I would have felt totally humiliated. These friends are quite liberal in their economic views, which contrasts with my libertarian leanings.

Growing up though, my Dad was a manager with the phone company. I remember a few bitter strikes where they would line up and call the managers scabs and demogogue the management. I knew that the guys who installed wires didn't have a flipping clue about how financials, investment, inventory, etc. worked. Left to the union's devices, there would be no phone company to supply them jobs. I also experienced a few nasty teacher strikes, where kids who went to school were later punished in silly, trivial ways. A teacher who I considered a friend played games with one of my grades (for teacher aid of all things) because she found out that my parents subbed during the strike. So I've seen that side and for my entire conscious life have thought that unions had outlived their usefulness.

So, let me tell you what this AA thing leaves me thinking now. The 46 managers affected by the fully funded pension are creeps, plain and simple. I do not know how any of them look at themselves in the mirror each day. These people all have salaries well above $150K, are generally in their 40s and 50s, and could cash in with lateral career moves or startup positions in a moment if AA tanks. Oh yeah, isn't that the entire premise behind the retention bonuses? Funny how that tries to justify itself, almost makes you think they know they are worthless and wouldn't be able to land anything near the cushy jobs they have!! By contrast, they are asking long time employees to take significant cuts (about the amount of a house payment in the case of my friend) and worry about whether their pensions will be fully funded.

AA shareholders should be irate. How incredibly STUPID does the management team have to be to (a) do this, (b) get caught, and (c) get caught now? They go to the unions and ask them to care about the company -- probably more than it's in the union members' or union's interest to do so -- to help save AA fdrom bankruptcy. Yet this action tells those same employees that the company doesn't give a damn about them. The result may very well be that the employees no longer care and the company goes under with no realistic chance to recover. Shareholders should be irate and this management team should be smacked.

I guess the big picture worst part about this is that it just confirms what liberals suspect about relatively unregulated markets -- that the privileged few use them for personal advantage. Even when the invisible hand reacts and swats this down, it will be generally viewed as a serious failure of the market. Sad indeed.

Little picture, I hope my friend doesn't lose the pension the company promised him because there is no trust in the management to fix things because they give nobody involved any reason to trust them. That would suck.

I'm actually in sympathy on the pensions. If there were, as AA claims, a number of key people in their fifties who risked losing their pension unless they cash out immediately, it may well have been necessary to protect the pension to keep them (as Dave points out, at huge tax consequence to said executives).

The retention bonuses are a load of crap. There are no other airlines hiring executives right now; these guys didn't have any jobs waiting that made retention bonuses necessary. For those accusing me of lacking sufficient capitalist creds: this was management looting from the shareholders with the help of a captive board.

Waxx:

Calling people names is so persuasive.

I didn't list the idiocies perpertrated by various major airlines' management teams over the last decade because I was making a short comment, and made the assumption that they were generally known anyway.

To anybody who matters, anyway...

Jane, you've made the same assumption that many others have made here - that the airline executives in question actually have jobs that are unique to the airlines. I think you'd find the execs populated with people whose work domains are in areas such as procurement, IT, communications, real estate, contract negotiation, finance, etc. These skills are not industry specific, highly portable and probably in high demand. What is their incentive for sticking with AA ? If there is none, then incentives must be created if AA is to have any hope of survivng. AA's business model may be on the verge of failing, but the laws of economics have not been repealed. Simple supply and demand explains a lot.

"Capitalism without bankruptcy is like Christianity without hell." - Frank Borman, One-Time President of Eastern Airlines
The continuing overcapacity in the airline business will not be solved until one or perhaps two of the so-called "majors" evaporate from the marketplace. The polkas and foxtrots going on right now with American and the others are to determine who won't have a chair when the music stops.

Just got back from putting daughter on a Northwest flight from Detroit to Vegas.
She had flown in with her stuff as carry-on. Going out, the gate clown told her she had to check the larger piece.
So back to a new line. There were three gates, one open, staffed by a moron. The line was quite long, full of anxious people. We watched for twenty-five minutes as the clown checked seven (7) bags. The line was for those who already had internet tickets and needed only to check baggage.
Seems to me that there are only so many things that can happen to a bag at that gate, most of which should have been covered in training. But each bag seemed to provide a fresh problem, to be solved from scratch (including the reinvention of several wheels) by a lady who had no indication that hurry was a good idea in that situation.
Fortunately, a subversive working another part of the departure system got several of us out of line and got dtr through.
My guess is the guy with the best job at an airline is their Baghdad Bob character who is constantly acting surprised when people complain.
The distance one would find driving more congenial than flying is increasing. Surprise, guys. I'm driving.
Puzzled?
Morons.

A lot of blame is on Congress here. Airlines are far over-regulated.

One example: the Essential Air Service Program, which forces airlines to run unprofitable routes.

Having spent forty years in the airline industry, I have to tell you that there is plenty of blame to go around. I began as a mechanic and rose into mid-level management so believe me when I tell you the whole industry is overpaid and underworked. There has always been too much money floating around and too little accountability. Now, the industry will pay for its excesses and I don't want top see taxpayer money bail out the airlines. What is needed is more functional airlines like Southwest and Jet Blue to name two.

They killed the retention bonuses but kept the retirement plan.

It was poor PR and a mix of good policy with self-dealing.

They will no doubt lose executives without the retention plan. But then they could stand to lose a few executives. Problem is they'll probably lose the GOOD ONES (i.e. those who have value on the market and get can other jobs). They ones who could help pull them out of their tailspin.

American got $1.8b in labor concessions. They lost $3.5b last year. They say they've already made $2b in cuts, but many of those cuts were in place while they were losing their $3.5b.. so labor concessions alone won't close the gap.

They need a revival in the economy and a revival in airline bookings. And even with that, they need to revisit their business model.

American needs to be a very different airline, which means they need some real visionary leadership -- something they're unlikely to get, either in bankruptcy or outside of it.

The most likely scenario is just a continued destruction of shareholder value.. just like most of the rest of the industry.

This is an industry that's adicted to government handouts and bailouts. They need more bankruptcies to weed out this destructive mindset. Washington needs to let that happen.

I'm a 26+ year airline employee and am now in my third airline...

I note that Scott posted the following: "How much money, in relation to overall company revenues, did the 45 executives receive, anyway?"

The thing to remember that though Scott is correct regarding the amount paid to airline executives compared to the overall amounts of money needed to run an airline is small, the costs of their incompetent decisions cost more than the total costs of employees wages and benefits and fuel combined...

Okay so I am not as smart and as knowledgeable as Ryan Waxx, but if someone could please explain why the following theorem by Ryan Waxx should hold, I would be humbly grateful

Waxx Theorem 1.1

"You can EITHER blast them for having salaries out of proportion of their worth - OR you can claim they 'rode the comany into the ground, BUT NOT BOTH. "

So executives who get outlandish salaries, above and beyond their contribution to the company, from a captive board can by the above theorem be supremely confident that the company will never go bankrupt? Or that if it goes bankrupt it won't be their fault??

Diablogger, the Essential Air program is not a drain on airlines; it is a drain on TAXPAYERS. The whole system is heavily subsidized, paying the airlines rates of up to $650/passenger for short flights to the nearest regional airport. The only losers are small airlines that attempt to compete against the subsidized major airlines.

Achilles -- no, that's not what I am saying. I am saying that right now, the price differential between gates at major and minor airports is HUGE. If the major carriers start flying to the minor airports (e.g., Love Field), the price differential between gates at the major and minor airports would greatly decrease or disappear altogether. Result: lower gate fees for the majors, but big increases for Southwest.

Of course, it can't really work that way anyway. You can't be expected to fly into LaGuardia, and then take a cab to pick up your connecting flight out of Newark just because that's where the airline got a better rate on a gate. So again, you're dealing with a very difficult industry.

Robert -- you are right that I didn't touch the issue of exec comp, and yes, they are swine. My comments were just directed toward the whole "poor business model" argument. As for the execs, it's really high time that many of them learned the difference between what one CAN do and what one SHOULD do. Andrew Carnegie once said that the owner of a company should never make more than 11 times what his lowest-paid employee makes. Sounds like pretty good advice to me.

Fortune had an article on exec pay excesses recently:
http://www.fortune.com/fortune/ceo/articles/0,15114,443051-1,00.html

IMHO, the airlines' true problems lie not with union or management, but in their collective delusion that they are still selling a rare luxury good and are thus able to get away with poor customer service and completely inscrutable pricing schemes. Companies which realize they're selling a commodity transportation service and attempt to differentiate themselves with the quality of that service will succeed. Companies which insist on playing games will fail. Unfortunately, most of the companies involved are still playing games, and the failures will continue.

>I am saying that right now, the price differential between gates at major and minor airports is HUGE. If the major carriers start flying to the minor airports (e.g., Love Field), the price differential between gates at the major and minor airports would greatly decrease or disappear altogether. Result: lower gate fees for the majors, but big increases for Southwest.>

Ah, I see your point now, Susan, thanks. I am not sure that the majors as currently constituted will start flying to smaller airports but who knows. I don't see business travelers agreeing to fly into BWI or Providence instead of National or Boston for a hundred dollar airfare difference unless the value of their time changes dramatically. But anything is possible.

I think Delta is starting its own little Southwest competitor named Song, let's see how that fares. My prediction, Song will poach two passengers from Delta itself for every 1 it poaches from Southwest.

I know this is throwing bloody meat into shark-infested waters, but...

Considering how much public money is spent on subsidizing air travel -- and all other forms of transportation -- why not reconstitute the entire industry as a web of non-profit carriers? There could still be plenty of competition -- better performing companies would qualify for a larger slice of the pie -- but you'd remove the fiction that any of this business is remotely self-sustaining, and you'd also remove the obscene appearance of people making $10 million a year to lose $1 billion a year.

Of course, "libertarians" who think the "profit motive" is the only thing that ever motivates anyone to do anything would go apeshit at such an idea.

Why quotes around "libertarians," JesseFox? Anyway, what you've just described was the Soviet method of creating an airline "industry," (quotes intentional, for obvious reasons) wherein the old Soviet mantra functioned to perfection: "They pretend to pay us, and we pretend to work."

For your next magic trick, you can explain how "loss motive" motivates anybody to do anything.

Richie's comment is the best summary. Due to 9/11, a general decline in airline travel, and the rise of bargain carriers such as Southwest, the majors are playing musical chairs.

If the execs are so smart, why is American near bankruptcy?

I'm no economic theorist but i do resent this constant bailing out of airlines. let them fail. Either we're free market capitalist or we aren't. I mean I have to deal with the price of failure and I don't make a lot of money when I fail. It's time to stop this failing upward. How? Just let the market forces work. I know people will lose their jobs but most likely they'll lose them eventually anyway. So why prolong the pain and suffering. Rip that bandage off and let the healing begin.I think we'll all be better off in the long run. 9/11 no longer flies as an excuse, what ever happened to personal responsibility anyway? Okay, I'm done ranting.

I quote Brad H:
" imagine delivering pizza to help support your family while you wait for the next mechanics opening at a new airline. I would have felt totally humiliated."
As well you should! I'm 48, earned my FAA A&P certificate in 1976, in the midst of the "Oil Crisis." My Father, at 77 yrs old still has a current FAA IA ( Inspectors Authorization), and suppliments his retirement by working at the local FBO. I have never been forced to deliver pizzas, I am a mechanic! I can fix turbines, turbo-shafts and reciprocating engines. There IS work, good paying work. But it doesn't have all the union perks. I only get to ride for free on maintenance checkout flights.
Now if for some reason all the aircraft in the world were suddenly grounded forever, I could work on ANY engine, locomotive,Tractor-trailer, or even show Mr Goodwrench a thing or two. IF all I was able to do was deliver pizzas, then I should have my ticket revoked!
OH, Wait, that's right, most of the airlines "mechanics" are not certified by the FAA. as long as the Union vouches for them, they don't need a cert. Just one person per shift to sign off the work of the others.

Every plane I touch, I have to sign the logbook, and I vouch for no work but my own.

So ask Your buddy if he is a mechanic, or a union parts swapper. There is a BIG difference!

The Unions ARE the problem, Bankrupcy is the solution!

I must vehemently disagree w/ you regarding the airlines. Although it goes without saying that the execs are/were over-payed, that just goes to show how difficult it has been to attract talent to the industry. Anyone with a basic econ degree knows that the hub model is doomed to fail and that any exec who takes such a job is just bleeding the turnip. Southwest and Jetblue are ripping their arses for a reaons= point to point! I wish all the union folk well, but I fear their too daft to recognize that the problem is well beyond their wages. Cheers

Ah, what pearls of wisdom from the mouths of babes (aka projectile-vomit).

Victor: I'm no economic theorist but i do resent this constant bailing out of airlines. let them fail. Either we're free market capitalist or we aren't.

Well, thank GOD you aren't an economic theorist or you'd be unemployed. So capitalism is an on-off switch? Then explain why general-revenue tax money (as opposed to tolls or gas-taxes) goes to build and maintain roads. While you are at it, explain why city bus and train fares rarely pay 100% of the system's costs.

The airlines are a hell of a lot more free-market than the OTHER ways of moving people and goods, which you are noticably silent about. Also, those of our carriers who go overseas have to compete with foreign airlines that are completely state-owned.

Our airlines are pretty good, but could be better. Its morons like YOU we could do with a lot less of, who would throw the baby out with the bathwater out of sheer ignorance.

A recession that happens to hit the airline industry particularly hard, and the airlines with the most overhead get hurt worst, and a union prevents reform signifigant enough to save the company, while whining that the execs make more than the floor-sweepers.

...so who's suprised, besides idiots who can't project their minds beyond "airline bad! execs bad! capitalism good! um, what capitalism anyway?"

It never ceases to amaze me how easily someone can ruin a good point with name-calling. Waxx, I don't know you and I don't know your qualifications to pontificate on economics. I know me and I know that I can barely balance my checkbook. I will concede that you are more knowledgable in economic theory. I'm just a soldier and have no reason to be smart in that field.
All that being said, as a soldier I do know about leadership. I know that good leadership is valuable and bad leadership is lethal. And great leadership is a rare quality. What I've seen from researching the recent economic troubles is a belief that companies have NO IDEA how to tell good leadership from great or bad. They throw money around hoping to "catch lightning in a bottle". The cost of this shotgun approach to hiring isn't limited to just the cost of the executives. Those executives are people and they make choices. It looks like the airlines have spent a lot of money to hire people who make bad decisions. And those bad decisions wind up costing the company gobs and gobs of money.
Sure, economic theory might require that they not go bankrupt and be given every chance to recover and sustain themselves until the next tide comes in andd raises all ships. But shouldn't Darwin come into play at some point and cull the weak and sick from the herd?

You're all wrong (but, let me explain) -- The problem is not just PR, and it's not that the airline execs are incompetent. The real problem is that executive pay has gotten out of whack with respect to the value they add. Boards of Directors (and their respective compensation committees) have ratcheted up executive compensation to better than two orders of magnitude beyond the pay for comparable skill levels of production folks (the guys and gals who actually contribute to the value of the enterprise).

Directors need to be held accountable.

Here's the joke: Most of the decisions made by senior management types are on the order of choosing the colors of their carpets. What passes for "guidance" and "vision" is merely picking winners from the detailed proposals prepared by middle management.

Senior Management is overhead! Production people add value! If senior management were paid by the hour (for actually making critical decisions), say at $500 per, they'd make one one-hundredth of their current compensation levels (and there'd be nothing for the unions to get upset about).

Directors need to be held accountable!

Lemme see, Norman...500 bucks an hour equates to just over a million a year. How many execs do you know that make over a hundred million a year?

Still, I have to agree with your value-added sentiment. It's hard to see the logic in corporate officers pulling in an 8-digit compensation package and still getting ten percent salary raises every year. Especially when few below them even get ten percent for a stretch of exceptional service.

For Dave,

My point about paying them by the hour for the hours they spend actually thinking about critical questions is that they actually spend precious little time on these endeavors -- much like lawyers who are brought in to for an opinion on a specific matter.

Most of the questions they consider are on the order of choosing the colors of their carpets.

Hi!

James:

THe hub model is doomed to fail?

THen why do FedEx, UPS, Airborne and DHL run a hub and spoke system, and make a ton of money at it.

They've learned that a single hub system is the most efficient.

Obviously, PAX aren't packages, so the PAX airlines have had to make adjustments to a single-hub, single connection concept the package airlines use.

Point to Point works great for LGA-LAX, or ORD-ORL, for example, but if you live in Fargo, ND, and want to fly to Tupelo, MS, the only reasonably inexpensive way to fly is through a hub, as so few PAX want to fly the specific route above, but a number want to flyl out of Fargo, and into Tupelo. If they're all brought together at the hub, the airline can afford to fly 1 or more flights, especially if they use an RJ.

Cliff
GRB

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