May 14, 2005
From the desk of Jane Galt:What About American Families?
It's a Saturday morning, and here I am, inside, blogging about bankruptcy. Am I a loser, or what? Well, I'm going to a blogger party tonight, honest, and I'm having dinner with Jessica (and won't she be surprised if I don't have time to clean the house because I'm too busy blogging about bankruptcy?) But first, once more into the breach.
In my defense, when I finished writing those articles about bankruptcy, I sighed, and thought, "I have spent a great deal of time learning about this subject, and all of that knowlege is a total waste, since I will never again be called to write about it"* Luckily for me, angry opponents of bankruptcy reform are still seething, giving me an opportunity to deploy my hard-won knowlege. So a big thank you to Battlepanda, who has created an opening with this throwaway line:
I'm also interested in Jane's favorable take of chapter 11 bankruptcy for firms on the grounds that it makes the American economy more resilient. Is she willing to extend the same curtesy to American families?
Now, this is just a little bit odd, because as I made clear in the earlier comments to which Ms Panda is responding, I didn't like the bankruptcy reform bill, despite Todd Zywicki's heroic attempts to persuade me otherwise. I thought a number of provisions were badly structured, and at least one struck me as gratuitously intended to make bankruptcy harder to file: it forced families whose incomes were low enough to file Chapter 7 (which simply discharges all non-secured debts) to nonetheless fill out detailed budgets as if they were going to have to file Chapter 13 (which puts the bankrupts on a partial repayment plan).
But the law ultimately is just not going to have that big an effect. The overwhelming majority of people will still be able to file Chapter 7; they'll just have to go to credit counseling first, and provide tax returns and a driver's license. Their attorney's fees may be a few hundred dollars higher (though since they seem to generally be paying those fees out of assets they're hiding from their creditors, it's hard to tell which way the moral censure should go). And a few of the richer people are going to have to make a payment plan instead of having their debts discharged.
Which brings us, in a roundabout way, to Battlepanda's question: am I willing to extend the same benefits as companies get to American families? Why yes I am! And luckily, American families already get them, so I don't even have to get off my butt and do something about this. Chapter 13--the terrible fate which reform opponents were bewailing--is basically Chapter 11 for humans. The court works out a payment plan, after which the person or the company emerges with its debts discharged.
Bankruptcy is vastly friendlier to consumers than companies in this country, starting with the fact that people who file Chapter 7 (debt liquidation) don't get shot at the end by the bankruptcy judge. When a company files for either liquidation or Chapter 11, a receiver is appointed to watch management like a hawk, auditors pore over the books, and various officials walk around telling management what they may or may not do. Human bankruptcy cases, on the other hand, are generally decided in minutes or hours, by a judge who by and large just takes your word for what you own (with the exception of financial assets, which show up on searches). Companies don't get special exempt asset classes, like houses, furniture, and electronic appliances, that can't be sold to satisfy creditors. And it's a lot easier for a human to start over than a corporation.
A final note: no one seems to have noticed, what with writing all those articles on how we were all about to be thrown out on the street by rapacious credit card companies, but the bankruptcy reform bill actually made Chapter 11 much harder on companies. For one thing, it gutted the ability of management to set up KERPs -- Key Employee Retention Programmes, which pay bonuses to managers who stay on. I'm ambivalent about this; generally the employees who leave during bankruptcy are the ones the company most needs to stay, but these plans can also turn into big management slush funds. But there's no question this is distinctly corporation unfriendly, as are several other major provisions of the bill.
There is an interesting question about bankruptcy, which Battlepanda should have asked, and almost did ask, but ultimately didn't, so I will: should bankruptcy courts take cognizance of the effect that a company's bankruptcy will have on other companies in its industry? In United's case, I don't think that this will make much difference, since the airplanes and the landing slots, which are causing the ruinous overcapacity in the industry, won't go away. But it is an interesting question that I haven't seen addressed as a legal matter. My first instinct is no, they shouldn't, because judges aren't very good economic analysts (nor should they be). Such a provision seems more likely to make us economically worse off, by making bankruptcy protection somewhat arbitrary, and thus increasing corporate risk. But I'd love to see someone comment the other way. I'm sure that I'm not the first person to wonder about this.
Posted by Jane Galt at May 14, 2005 7:37 AM | TrackBack | Technorati inbound links"Should bankruptcy courts take cognizance of the effect that a company's bankruptcy will have on other companies in its industry?"
Theoretically, we like our corporate law to be efficient, and there are arguments to be made that a bankruptcy court should try to maximize more people's utility than it does at present. This is not a simple topic, and I'm sure many top corporate law professors have written articles attempting to answer this question.
You should think about constituency statutes, which are state anti-takeover laws that say directors may consider the interests of employees, suppliers, customers, and communities when responding to hostile takeover attempts. Let's conspicuously ignore the question of fiduciary duty and say that, theoretically, this just allows directors to try to maximize utility for more people. Great. In practice, however, any director who says he opposes a takeover attempt because it will hurt employees, other firms, and the community is, without exception, completely full of it and is merely covering his ass (arse, Jane?). Allowing firms to make these arguments and bankruptcy judges to consider them would simply be a similar redistribution of power from investors to directors.
Just as you run into problems when you let managers consider more than their fiduciary duty to shareholders, you run into problems when you let bankruptcy courts do more than consider how best to rearrange the contractual relations between firms and investors.
Megan, I'm not as sure as you seem to be that the sources of airlines's like UAL's and American's problems are airplanes and landing slots. Quite to the contrary I think the evidence suggests that the hub and spoke business model doesn't work in a de-regulated environment.
UAL's problems didn't start this year or in September of 2001 or in 1990 but go all the way back to the Reagan era or before. The combination of a flawed business model, de-regulation, and a CEO during the early 1980's who didn't much care about the airline business (he was a hotel man) may have dealt UAL a death blow. Dinosaurs just take a long time to die.
I would argue that it's not the hub-and-spoke model which is untenable in a deregulated environment; it's the labour model. The pensions were set up when everyone could expect the government to protect a cozy little oligopoly, and the labour model that essentially allowed each of many unions to hold the company hostage. Those aren't sustainable without the government protecting you from competition. A flight attendant makes about seven or eight times what she could expect in the private sector for doing essentially the same job.
I think that the short answer is that bankruptcies don't affect an industry, at least not to a significant extent. They are just a way of cleaning up the books, and whether companies go in for reorganization or liquidation (and their assets go in for reallocation or destruction) is determined by industry-specific economic factors that are unaffected the details of a bankruptcy or two.
Having answered the original question, I beg everyone's indulgence for another airline-related comment. I don't want to wind up being looked on as some sort of a professional apologist for the industry, but really this is a business that is just becoming a target for every cranky person who once saw a plane and thinks they can run an airline (I don't mean you, Megan). People who pontificate about the "hub and spoke" system being obsolete clearly haven't thought about the operational implications of doing away with it, in terms of either pricing or availability of the air travel product.
And Megan, I realize that you are only using them as an example, but how much do you think flight attendants make? Also, even if you are focusing exclusively on their "waitressing" responsiblities (and ignoring their passenger management and safety functions), you are missing the fact that "private sector" (a strange term, since flight attendants are private sector employees) waitresses make tips. A good one can pull down $200/day. That's more than most flight attendants, and they get to work on the ground, live at home, and breathe normal air.
In fact, I don't know of a single class of employee in the airline business that makes an outrageous amount of money for the job that they do. Customer service makes $17 per hour (that's for people with a lot of seniority). Baggage and maintenance people make a bit more, but they are responsible for managing a lot of factors that keep the planes from crashing. And pilots? Yes, a 747 captain used to make $200K per year, but the working career is relatively short, the physical and social stress of the job is high, and pilots of smaller planes make a lot less in any case.
The point is that there is no reorganization of the airline business, either through Chapter 11 or otherwise, that will make the industry viable in the long term that doesn't include a reduction in fuel prices, and with a reduction in fuel prices a massive reorganization is mostly unnecessary. Megan quite rightly makes the point that the planes, gates, and landing slots aren't going to go away, and you simply can't cut the compensation of its employees to make up for high fuel prices. Unless, of course, you want a bunch of $8.00/hr employees checking you in, doing the weight-and-balance and safety checks, maintaining the plane, and a $40K per year pilot responsible for following precise air control instructions and keeping you in the air. Heck, I don't trust most people to drive their cars responsibly; I certainly don't want the hoi polloi piloting my aircraft.
My last thought on this subject is that pensions, one way or another, are not in and of themselves unsustainable. They are not based on a the same kind of worker-to-retiree ratio that, say, Social Security is. A pension is just one optional part of a compensation package. Total compensation in a given industry is set by the market. If a company chooses to offer a competitive package, part of which is a pension, then the other parts of a package will be reduced accordingly.
I'm more interested in Megan's statement that "judges aren't very good economic analysts (nor should they be)." I think that a lot of lawyers and especially law schools would disagree with this. More and more law schools have "law and economics" classes and faculty, and UVA used to (probably still does) host a judge-training session every year to teach judges how their decisions had economic consequences.
So, even though most judges aren't real good with econimics, why shouldn't they be?
2 points:
HT: Jane compared with private sector as airlines are a very weird industry that is quasi-parastatal, given the original regulation, partial deregulation, and pervasive unionisation. Airlines are not a pure private industry, as they have the legacy unionisation effects of being a government imposed oligopoly.
To run a plane (or an airline) you need a few people with skills and a bunch to just do some lifting/customer service. The rampant trotskyism that comes with unionisation results in massive featherbedding, rock bottom productivity, and no flexibility. Pilots can do a lot more than they do (see what they do at their entry level jobs), as can stewardesses (again, look at entry level/non-unionised airlines, yes I'm paleolithic in my language usage). Fedex uses mostly low skill low wage people and has no problems. Add a few more staff to handle the freight (i..e human cattle) and a few less in terms of sorting and loading, and you're golden.
Rex: we don't want lawyers and judges doing economics as it involves "doing sums" (rather much more than sums, but anwyays) and most people going into law can't do math. Top flight law schools need 3.6+ (or something like it), along with recs, kickass LSAT, etc. People that can do math take real courses, at schools that curve and don't have everyone getting honours (MIT, Stanford, CMU != marking schemes at Harvard) and so most of them can't get into law school, even if they would have had 4.0s if they'd been graded using the harvard liberal rts scheme.
To do good econometrics analysis (even law and economics stuff) people need a solid background in higher maths (look at Econ grad students, they mostly took math or something like it as undergrads). Bankruptcy lawyers and judges are not going to substantially have decent math backgrounds or have considered taking a law and economics course. Letting them get into these kinds of analysis (which is hairy even with people who have good math backgrounds) is just an insanely bad idea. You're most likely to end up with some public interest lawyer who took critical legal theory at brown and then law at U Mass rearranging the steel industry during a bankruptcy proceeding for some tiny scrapyard. Bad, Bad, Bad!
Hey: you either don't fly a lot, or perhaps you stayed at a Holiday Inn Express last night. There are huge differences between moving freight and moving people. And between short haul and long haul service. Including, among other things, Federally-mandated work and safety rules that have nothing to do with unionization, oligopoly, or featherbedding, and a lot to do with safety and the maintenance of an interlocking transportation system as opposed to a fragmented mess of cherry-picked routes.
It would be poetic justice if the people who advocate radical restucturing in the airline business (which most seem to define as radically slashing someone else's paycheck) got the airline service they are calling for so confidently. Nothing but short haul flights on flying cattlecars (your metaphor, not mine), no in-flight service, and many cities being left entirely off the grid. And the occasional plane dropping out of the sky because of maintenance, loading, or pilot errors due to either exhaustion or simple ignorance.
However, I still have to fly in the same skies (and I fly a lot; over 1.5 million air miles in my career to date), so all in all I'd rather not see justice served in that fashion.
The airline industry has, as a whole, been in bad straits with low fuel prices, as well as high, for decades. United, among other, managed itself into bankruptcy with cheap jet fuel as well as expensive jet fuel. Southwest, despite being highly unionized, and with current fuel prices, is still eeeking out a profit. It's employees are far more productive. It is a better-run airline. Period. It should not be continually, year in and year out, competing against entities, due to their management and unions, which cannot pay their creditors. United, American, Northwest, Delta, and U.S. Air, in their current forms, are not going to survive, and it would be ultimately better to have this process not play out for 20 more years.
Those who have stated that UAL was destined to fail "for decades" simply do not have the facts on their side. If you look at the annual reports, UAL was consistently profitable from the end of the 1991-92 recession all the way through 2000. It's profitability has a high degree of correlation with both overall economic activity and with fuel prices as well. Only the "perfect storm" of factors in place after 9/11 has created the current crisis, as anyone willing to look at the numbers can see.
Just for the record, here are the net profitability numbers:
FY1992: -$538MM
FY1993: $263MM
FY1994: $51MM
FY1995: $349MM
FY1996: $533MM
FY1997: $949MM
FY1998: $821MM
FY1999: $1235MM
FY2000: $50MM
FY2001: -$2137MM
When I look at those numbers I see a cyclical business, but not a failing one, until 9/11.
HT, only $311 million of the $2.1 billion loss in 2001 came in the fourth quarter. United was hemmoraghing cash before 9/11, in good part due to such brilliant management/union agreements to give pilots a 44% pay increase, starting in the fall of 2000. When a company doesn't manage it's labor force well, particularly it's skilled labor force, then there is much less margin for error when other factors sour. These assets should be under better management; a management which can forge a more productive arrangement with the needed skilled labor.
HT said: Nothing but short haul flights on flying cattlecars (your metaphor, not mine), no in-flight service, and many cities being left entirely off the grid. And the occasional plane dropping out of the sky because of maintenance, loading, or pilot errors due to either exhaustion or simple ignorance.
That's happening now. Last few flights I took had one stewardess, and two pilots who looked like they flunked out of truck driving school. It was scary. In flight service consisted of a cookie, half can of pop and a lemon soaked napkin. And that was a very unprofitable airline. At least Southwest admits they're cheap, and they are the only ones making money.
And isn't maintenance also federally mandated? No reason to believe that'll change.
So spare the poor service, planes falling from the sky rhetoric for the evening scare-fest local newscasts and the picket lines, because most of us have no sympathy. The arrogance of this industry...
Forgot to add:
As if the american public owes you a paycheck?
hey - I'm not sure what you were intending to say regarding schools with easy grading policies, but Stanford is notorious for it being impossibe to fail there. They've formally abolished the ability to drop the class after the final, but it's still an acheivement of sorts to fail out of Stanford.
Anthony
BSCE UCB '91
The canard that safety is suffering at low-cost airlines is so pathetic that it is barely worth responding to.
I thought that the price of air travel has fallen dramaticallly since the 1980's when deregulation was pushed through? Many people who would in the past only flew for business or on rare occassions (such as a major family event) now fly quite often...hoping on cheap tickets for quickie vacations to Florida, Jamacia and so on.
The pararell to me would appear to be telecommunications. For decades phone calls were dependable but expensive and phone companies were profitable but unexciting. The boom in telecommunications, though, has lowered the price for the consumer dramatically but has also left a lot of formerally stable companies in the dust.
Everyone has started referring to Jane as "Megan" for some reason. This is confusing to non-regular readers and undoes the premise of her pseudonym. People should go back to "Jane" or she should change her handle to Megan.
Loser with a capital L. (just teasing)
Instead I participated in proper weekend pursuits - working on the lawn mower, helping with the flower beds, spending too much at Lowes.
Everyone has started referring to Jane as "Megan" for some reason. This is confusing to non-regular readers and undoes the premise of her pseudonym. People should go back to "Jane" or she should change her handle to Megan.
They arrogantly believe that knowing Jane's real name makes their opinion more valid.
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