In an era where business moves at warp speed, it turns out airlines are an anomaly. The rise of efficient, low-cost airlines and the ever-expanding benefit for consumers are just what deregulators envisioned -- it merely took a quarter-century.
"people have to realize that the paradigm has shifted."
Long Flight
How Airlines Resisted Change
For 25 Years, and Finally Lost
After Deregulation, Carriers
Failed to Cut Labor Costs;
Internet Helps Upstarts
US Airways' Turbulent Ride
By SUSAN CAREY and SCOTT MCCARTNEY
Staff Reporters of THE WALL STREET JOURNAL
October 5, 2004; Page A1
When Congress deregulated the U.S. airline industry in 1978, many fares came down, flights increased and air travel took off.
But one side of the business changed much less: airline costs. To keep their grip on the market for more than two decades without rewriting expensive labor contracts or improving efficiency, big airlines used a bag of tricks: frequent-flier plans, the "hub" system of controlling key markets and international alliances to keep business customers. The airlines often gouged business travelers, their best customers, and bedeviled vacation travelers with restrictions and fees.
Now the airlines have run out of tricks. As upstart carriers spread across the nation with across-the-board cheap fares, the traditional higher-cost carriers are struggling to transform themselves into versions of the low-cost model. The most desperate to change is US Airways Group Inc., which entered bankruptcy last month for the second time. No other airline has tried as many gambits to avoid the day of reckoning as US Airways, and no other airline is in as much danger.
In an era where business moves at warp speed, it turns out airlines are an anomaly. The rise of efficient, low-cost airlines and the ever-expanding benefit for consumers are just what deregulators envisioned -- it merely took a quarter-century.
"It's a change we predicted in 1978, and we all scratched our heads wondering why it has not gone faster," says Michael E. Levine, a former executive at several airlines who helped push deregulation as an official in the Carter administration.
Airlines, Mr. Levine says, proved "far more ingenious in defending themselves than we thought."
The mistake of the established airlines -- and those who invested in them -- was to imagine that this death-defying act could continue forever. They defeated the first crop of low-fare airlines easily in the 1980s and worried more about strikes than new competition. So labor contracts that kept expenses high and productivity low stayed in place.
Sept. 11, high oil prices and the Internet, which showed customers when they were getting a bad deal, delivered the coups de grace. US Airways warned in a recent court filing that it might have to liquidate by February without emergency labor savings. Other higher-cost airlines are also in bad shape as fuel costs rise.
UAL Corp.'s United Airlines has been under bankruptcy-court protection for nearly two years, having failed to get financing to resume operating as a normal company. Delta Air Lines says it is sliding toward a bankruptcy filing if it can't restructure its $20 billion debt and win concessions from its pilots. AMR Corp.'s American Airlines barely escaped bankruptcy last year in an out-of-court restructuring, but its cost-cutting is already falling short. American says it's spending $1.1 billion more on fuel this year than it had planned. Northwest Airlines is urgently seeking concessions from its unions.
These airlines are expected to survive. But they'll need to become more like the low-cost leaders such as Southwest Airlines and JetBlue Airways, which themselves have proven lately that their bottom lines aren't immune to high fuel prices and bruising competition. Indeed, America West Holdings Corp.'s budget carrier America West Airlines warned last night that it expects to report significant third- and fourth-quarter losses due to price pressure and fuel costs.
Under the old regulated system, the federal Civil Aeronautics Board set fares and parceled out routes. Like electric utilities, airlines could ask the board to raise prices whenever their costs went up. The board, where Mr. Levine served in the late 1970s, effectively made it impossible for newcomers to compete nationally since they couldn't get quick approval for a route network.
The Carter administration pushed deregulation as a way to lower consumer prices during the high-inflation years of the 1970s. Over the objections of most major airlines, Congress voted to allow carriers to choose their own routes and fares.
cont'd...
"people have to realize that the paradigm has shifted."
Long Flight
How Airlines Resisted Change
For 25 Years, and Finally Lost
After Deregulation, Carriers
Failed to Cut Labor Costs;
Internet Helps Upstarts
US Airways' Turbulent Ride
By SUSAN CAREY and SCOTT MCCARTNEY
Staff Reporters of THE WALL STREET JOURNAL
October 5, 2004; Page A1
When Congress deregulated the U.S. airline industry in 1978, many fares came down, flights increased and air travel took off.
But one side of the business changed much less: airline costs. To keep their grip on the market for more than two decades without rewriting expensive labor contracts or improving efficiency, big airlines used a bag of tricks: frequent-flier plans, the "hub" system of controlling key markets and international alliances to keep business customers. The airlines often gouged business travelers, their best customers, and bedeviled vacation travelers with restrictions and fees.
Now the airlines have run out of tricks. As upstart carriers spread across the nation with across-the-board cheap fares, the traditional higher-cost carriers are struggling to transform themselves into versions of the low-cost model. The most desperate to change is US Airways Group Inc., which entered bankruptcy last month for the second time. No other airline has tried as many gambits to avoid the day of reckoning as US Airways, and no other airline is in as much danger.
In an era where business moves at warp speed, it turns out airlines are an anomaly. The rise of efficient, low-cost airlines and the ever-expanding benefit for consumers are just what deregulators envisioned -- it merely took a quarter-century.
"It's a change we predicted in 1978, and we all scratched our heads wondering why it has not gone faster," says Michael E. Levine, a former executive at several airlines who helped push deregulation as an official in the Carter administration.
Airlines, Mr. Levine says, proved "far more ingenious in defending themselves than we thought."
The mistake of the established airlines -- and those who invested in them -- was to imagine that this death-defying act could continue forever. They defeated the first crop of low-fare airlines easily in the 1980s and worried more about strikes than new competition. So labor contracts that kept expenses high and productivity low stayed in place.
Sept. 11, high oil prices and the Internet, which showed customers when they were getting a bad deal, delivered the coups de grace. US Airways warned in a recent court filing that it might have to liquidate by February without emergency labor savings. Other higher-cost airlines are also in bad shape as fuel costs rise.
UAL Corp.'s United Airlines has been under bankruptcy-court protection for nearly two years, having failed to get financing to resume operating as a normal company. Delta Air Lines says it is sliding toward a bankruptcy filing if it can't restructure its $20 billion debt and win concessions from its pilots. AMR Corp.'s American Airlines barely escaped bankruptcy last year in an out-of-court restructuring, but its cost-cutting is already falling short. American says it's spending $1.1 billion more on fuel this year than it had planned. Northwest Airlines is urgently seeking concessions from its unions.
These airlines are expected to survive. But they'll need to become more like the low-cost leaders such as Southwest Airlines and JetBlue Airways, which themselves have proven lately that their bottom lines aren't immune to high fuel prices and bruising competition. Indeed, America West Holdings Corp.'s budget carrier America West Airlines warned last night that it expects to report significant third- and fourth-quarter losses due to price pressure and fuel costs.
Under the old regulated system, the federal Civil Aeronautics Board set fares and parceled out routes. Like electric utilities, airlines could ask the board to raise prices whenever their costs went up. The board, where Mr. Levine served in the late 1970s, effectively made it impossible for newcomers to compete nationally since they couldn't get quick approval for a route network.
The Carter administration pushed deregulation as a way to lower consumer prices during the high-inflation years of the 1970s. Over the objections of most major airlines, Congress voted to allow carriers to choose their own routes and fares.
cont'd...
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