Let’s Nationalize the Airlines!
By Tim Beyers April 23, 2008 [The Motley Fool]
“I am a capitalist pig. I am a total economic libertarian, and I am ready to send the airline executives to the gulag. You know, I am ready to nationalize the whole thing.”
– P.J. O’Rourke, speaking on Real Time With Bill Maher, March 21, 2008
Uh-oh.
You know it’s bad when a confessed economic libertarian wants to shut you down. But O’Rourke has a point. Take a look at yesterday’s lowlights:
United Airlines parent UAL (Nasdaq: UAUA) said its net loss for the first quarter more than tripled to $4.45 a share from $1.32 a share in last year’s Q1. And that’s in spite of a 7.7% increase in operating revenue.
JetBlue (Nasdaq: JBLU) fared far better. First-quarter operating revenue climbed 34% to $816 million. Profits, however, remained elusive: JetBlue lost $0.04 a share in Q1.
Neither report pleased investors. Nor did the news that oil had topped $119 per barrel. UAL shares sold off more than 36%. JetBlue fell nearly 6%.
Choking on black gold
Not surprisingly, fuel prices hurt both carriers, as they did AMR (NYSE: AMR), Continental (NYSE: CAL), and Southwest (NYSE: LUV) last week. And don’t think Delta (NYSE: DAL) and Northwest (NYSE: NWA) escaped, either, because they didn’t, as today’s reports show.
But it was JetBlue that really suffered. Its fuel costs rose 61.8% to burn up nearly 38% of first-quarter revenue. UAL, meanwhile, saw fuel expenses rise 51.3%, to consume 39% of revenue.
And it could get worse. Per-barrel oil prices have risen 17.5% since March 31. United, for its part, told investors that it would cut 1,100 workers and mothball 30 of its most inefficient aircraft. UAL also plans to cut nonfuel costs by $200 million and capital expenditures by another $200 million.
JetBlue told investors it would limit capacity growth as it has in the past and charge a $20 service fee to passengers traveling with more than one checked bag. (Anyone else wonder how that’s going to work out when oil goes past $120 a barrel? Moving on.)
Buh-bye, bargains
Bigger than either story, though, was the one that got largely ignored. Except, that is, by investors. The CEOs of soon-to-be-combined Delta and Northwest, Richard Anderson and Doug Steenland, respectively, said that airlines have to raise prices 15%-20% because most cost-cutting measures have been exhausted.
(Thud.)
Don’t worry. That’s the just the major airline labor leaders. They fainted upon hearing that the management team of a major carrier might finally stop trying to take salaries and benefits away from them.
Isn’t it about time? Fares have fallen consistently since the 9/11 attacks, yet carriers continue to promise more legroom, better entertainment, and so on. JetBlue still makes this pitch today. Anderson and Steenland argue that such a model isn’t sustainable. I agree.
Take a closer look at JetBlue’s income statement.
Metrics Q1 2008 Q1 2007 Difference
Revenue $816 $608 $208
Aircraft fuel ($308) ($190) $118
Source: JetBlue press release. Numbers in millions.
More than half of the gains made on the top line were wiped out by higher fuel prices. Talk about a thumb in the eye.
Let’s put this into context. Nationally, gasoline now sells for more than $3.50 per gallon, on average. Americans have been paying dearly at the pump to get to school, commute to work, and take vacations. But at the exit row? We’re still breathlessly pining for cheap fares. Bill Shatner says we should. It is, after all, just a matter of negotiating.
Or is it?
Here’s my point. For all of the blunders airlines have made — and there have been many — the inescapable truth is that we travelers are paying less than we did six years ago. Yet per-barrel oil prices are up more than 300% over the same period.
Nationalize the airlines? I have a better idea. How about we all just agree to pay our fair share?
[Note from Airline Pilot blog editor:
Like P. J. O’Rouke I tend to favor libertarian economic values. And so I already know the answer to Beyers’ question, “Why don’t we just agree to pay our fair share?” The consumer is never going to volunteer to “pay his fair share.” But even if, in some utopian fantasy world, he would agree he need not be asked.
The airlines could compete if the industry was really deregulated. But is never has been. Do you remember when American and United were ordered to cut flights at ORD for congestion and then some of those abandoned slots were awarded by the government to the “new entrant” carriers? That is not deregulation. That is like ordering a manufacturer to cut production and then giving 10% of his factory floor to a When an airline wants to compete wingtip to wingtip with a “new entrant” or other carrier it must avoid “predatory pricing.” To do otherwise is to risk punishment by the government that “deregulated” the industry.
In a truly deregulated environment a carrier would be able to price tickets as low as it wanted, fly opposite any competitor … and see who lasts. It would not take long for Delta or United to crush the likes of AirTran or JetBlue. If those “new entrant” carriers could think of a novel way to compete, come up with something new or unique, then they could fly and thrive. Innovation, not government protection, is the hallmark of unfettered competition. (To “juggle the rules” to protect the new guy reminds me of the nightmare economic world of Ayn Rand’s Atlas Shrugged. Rand is the patron saint of libertarian thought.)
So, we either nationalize the airlines (or regulate the industry so that “franchises” are protected) or let the airlines truly compete. Let Darwinism prevail and only the strongest will survive. We cannot continue to operate on the middle ground, the “muddle ground.” That ground is quicksand and the airlines are soon to be sucked under. The current policy, where the only concern is maintaining low prices, is one that is destroying the industry.
Even if we started today, it may be too late to allow true competition to work. We may have to re-regulate, even nationalize, the non-profit organizations which are the U.S. airlines. Then we can start over.
