From For U.S. Airlines, a Shakeout Runs Into Heavy Turbulence:
The U.S. airline industry has a business problem that’s simple to state and difficult to solve: Twenty-seven years after deregulation, major airlines’ costs exceed revenues, and they can neither cut costs nor raise fares enough to turn a profit.In classic competitive markets, such as retailing and auto-parts manufacturing, such circumstances kill off the least efficient players, freeing survivors to raise prices enough to make money. In the airline industry, this process is proving to be excruciatingly prolonged.
Reason one: Airlines that go into bankruptcy don’t go away. They shed costly contracts and continue to fly, making it impossible for competitors to raise prices. One key to survival: Wall Street, banks, credit-card companies and aircraft makers keep lending them money, figuring they’re worth more alive than dead.
And though the government has resisted the temptation to re-regulate the industry, it periodically interferes with the Darwinian struggle. It handed the industry $5 billion after Sept. 11, offered loan guarantees to a few others, and has blocked an occasional merger and shielded U.S. airlines from foreign competition.
How bad is it?
Even before the recent run-up in jet fuel prices, the U.S. airline industry lost $32.3 billion between 2001 and 2004, wiping out the more than $18.2 billion it earned between 1938 and 2000.Last week, both Northwest and Delta Air Lines sought Chapter 11 bankruptcy protection on the same day. Four of six legacy carriers are now attempting to reorganize under court supervision. Since 1978, there have been more than 100 airline bankruptcies, including UAL Corp.’s United Airlines in 2002, the biggest ever.
All this hurts airline workers and retirees, and businesses that sell to them, invest in them and lend to them. About 135,000 workers have lost their jobs since 2000, the Air Transport Association says. Some airlines have abandoned pension promises made to their workers, sticking billions of dollars in obligations with the government’s pension-insurance agency.