Zombies. The Un-Dead. Few economists ever mention them, but they exist and they are around us. In fact, many Minnesotans take flights to places like Detroit, Fargo and Tokyo without realizing their life is in the hands of one of the Living Dead.
In the interest of honesty I must acknowledge that not all airline industry analysts favor the Zombie metaphor to describe the big, old-business-model airlines such as Northwest, American and United. Some prefer to compare them to the crews of T-62 tanks after a neutron bomb explosion.
For those of you too young to remember foreign policy issues from the Carter administration, the neutron bomb is designed to produce as little blast as possible, minimizing damage to buildings, while giving off radiation to kill people.
Fatally irradiated soldiers would not die immediately, however, and after an initial period of nausea might feel healthy enough to man their weapons for 12 to 36 hours. U.S. military tacticians were haunted by the idea of what a Russian tank regiment, manned by soldiers aware they were doomed, might do in their few remaining hours.
So why do some airline analysts assume that the big ones are fated to die? The answer is that they have cost structures, especially in pilot salaries, that are virtually impossible to revamp without liquidating the firms. They resemble irradiated tank crews in that they can do a lot of damage to others before they actually expire.
Hundreds of airline pilots earn over a quarter million dollars per year. That doesn’t bother me in any sense of fairness or justice. In terms of my personal ethical preferences, I would rather see a 747 captain earn $300,000 than see the millions of dollars that went to Northwest director Al Checchi or its former CEO, John Dasburg.
The problem, for the airlines and ultimately for the pilots, is that there are many other well-qualified pilots who are willing to fly for a lot less than prevailing United and Northwest salaries. Some of them work for lower-cost competitors such as Southwest Airlines.
Pilot salaries were low when modern airlines entered their first growth spurt at the end of WWII. Tens of thousands of young people had learned to fly in the war and subsequently applied for airline jobs.
This excess supply lasted for a long time, but airline pilots were helped by two factors. First, the legal framework in the 1950s favored unionization. A third of the entire work force was unionized. It was easy for the Air Line Pilots Association to secure recognition in virtually every airline.
Second, airlines were then regulated by the Civil Aeronautics Board and enjoyed overt protection from competition. They could pass along higher pay for pilots in the form of CAB-approved higher ticket prices.
If the airlines are zombies, their death was decreed when Alfred Kahn, the Carter administration economist, introduced the term “deregulation” and initiated the abolition of route and fare regulation 25 years ago. That drove a spike into the ability of any airline union — pilots, attendants, or mechanics — to derive above-market wages from the regulated monopoly structure in the industry.
To the extent that unionization gave such workers power, even after the general weakening of union powers in the Reagan-Bush administrations, pilots and others could maintain high salaries as long as the firms that employed them remained solvent. The dramatic growth in air travel, which was also touched off by fare deregulation, kept some majors afloat till now. But mention of TWA, Pan Am, Eastern and Braniff reminds us how many carriers have already bit the dust.
Now time grows short for the others. United and US Airways are in bankruptcy. American, Northwest and others may not be far behind.
That brings us back to the neutron-bomb metaphor. Bankruptcy filings allow firms that are financially doomed to shed some short-term debt and remain operating for months or even years. Airlines at this stage will have every incentive to take risk and to slash prices in a predatory manner.
Any possible downside cannot be much worse than what they already face, so why not roll the dice a few more times? Slash fares to claw market share back from non-unionized upstarts that are not locked into expensive hubs. Like vengeful, doomed gunners in a neutron saturated T-62, they may fire off as many rounds as possible before death overtakes them.
Consumers may enjoy low fares in the interim, but society as a whole will be hurt the longer financially unhealthy airlines can use bankruptcy laws and political status to injure healthy competitors.
We will surely always have airlines to take people where they need to go. But the planes probably won’t be painted with names that anyone would have recognized in the 1960s.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.