Ask the pilot

Bailout nation: Will the airlines follow Detroit to the government trough?


Patrick Smith
December 19, 2008 4:02PM (UTC)

I was watching those unfortunate CEOs from Ford and Chrysler and General Motors, cowering behind their microphones, weathering sneers and, in some cases, open mockery from their congressional interrogators. Anger toward the automakers has been almost palpable. Even the staunchest advocates of a bailout have taken little pity on these entities who, by most accounts, brought ruin upon themselves.

But I was trying to imagine for a moment how much louder the howls of outrage would be if those were airline CEOs sitting there, begging for a lifeline. For a number of reasons such a scenario is very unlikely to happen, no matter how bad things get -- Gerard Arpey, chief executive of American Airlines, is on record as saying that industry should  not expect direct payments -- but I suppose it's possible. And if it came to pass, I reckon the public would be apoplectic. Am I wrong? I mean, let's face it, Americans resent the automakers, but they still  love their cars. On the other hand, nobody likes anything about airlines, even as they've come to depend on them. Ask government to prop up the airlines, those evil of evils, and taxpayers would be storming airports and flipping over planes.

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It's a little hard to understand. I'm not saying airlines haven't earned their share of grief, but the amount of hatred out there strikes me as disproportionate to their crimes.

No matter what they are paying to fly, all passengers deserve three things: dignity (see Transportation Security Administration), a modicum of service, and honest communications. Granted, they don't always get them. (I have, many times in this column, berated the nation's airlines for their failings on these fronts, so please review the archives before posting hateful messages.) Its shortcomings duly noted, however, air travel is nevertheless astonishingly safe, mostly reliable, and generally a bargain. The average ticket price in 2008 is roughly what it was in the mid-1980s. That is certainly not true of the average price of a car, or of most other consumer products. And if we're going to make comparisons with Detroit, we should note that U.S. air carriers are today 70 percent more fuel efficient than they were 30 years ago -- a full 35 percent better since 2001.

Contrary to popular belief, airlines were not "bailed out" following the terrorist attacks of 2001. This is something I hear all the time, and it simply isn't true.

Shortly after the attacks, the government gave the airlines about $5 billion. Each company's share was relative to its size, to be spent as it saw fit. In effect, this money was compensation for the government-mandated shutdown of the airways for several days and for the massive downturn in traffic, fueled by fears of terrorism, that lasted for weeks afterward. It was also intended to help recoup operating costs related to new security requirements. The Air Transportation Stabilization Board, created that fall by President Bush, offered up to $10 billion more as loans. To qualify, each carrier had to present its case to the board for review. The ATSB was quite stingy with the money, twice refusing it to United, for example, and only a fraction of the loans were ever taken up.

For an industry that drives approximately $3.4 billion in daily economic activity, this would seem a pittance compared to the $700 billion recently awarded to the banking and financial sector, and the $15 billion or more likely to be handed over to the auto industry.

In the months following Sept. 11, despite whatever assistance these limited funds provided, five major carriers went into bankruptcy and were nearly liquidated. Some smaller ones collapsed. Those majors -- United, Delta, Northwest, America West and U.S. Airways -- eventually came out of it (the latter two merged). But the taxpayers didn't save them; they saved themselves.

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And although the future is at best uncertain, hopefully they won't need saving again. For now, anyway, they've been staving off disaster.

Indeed, these are strange times that few of us could have predicted. Six months ago, with the cost of jet fuel rocketing to an all-time high, arrival of an economic meltdown and possible global recession would have spelled airline Armageddon. Oil prices alone were approaching catastrophic. Couple that with a crashing economy, and the entire industry would be teetering on the abyss.

What happened, of course, is that a barrel of oil now costs less than half of what it did last summer. America's carriers, meanwhile, had begun slashing double-digit capacity from their networks well prior to the Wall Street bust. Whether they meant to or not, they were positioning themselves nicely for the current environment. Inexpensive fuel turned out to be a hedge against a shrinking economy.

Still, the International Air Transport Association forecasts an industry loss of $5.2 billion for 2008, and there are few indications that 2009 will be better. And elsewhere around the world, the timing couldn't be worse for some of the most prestigious global carriers, who, even as demand was slackening, chose to increase capacity, particularly in their elite first- and business-class cabins. The ongoing economic storm hit just as these airlines were trimming away economy-class seats to make room for ever fancier digs up front. Just to pick one example, Emirates has shrunk the economy class cabin on many of its 777-300s by 80 seats, allowing room for expanded, and I must say extravagant, quarters in first and business.

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Is it not ironic that as the world slides toward despair, never before have airplanes been more luxurious in the forward rows, showcasing a blend of old-fashioned creature comforts (beds, bars, turndown service and even showers) and cutting-edge technology (hundred-channel entertainment systems, supersize video, and so on)? In Emirates' latest biz-class configuration, each seat features a lie-flat bed, a minibar, an electrically operated privacy barrier, an oversize work table, a laptop stowage compartment, and in-flight access to an on-board lounge. In first class, passengers relax in a fully enclosed suite. Setups are similar on Singapore Airlines, Qatar Airways, Qantas, Cathay Pacific, et al.

All very nice, but a business model that relies on high-end premium-cabin fares is perhaps not the ideal one at the moment. Those lie-flat sleeper pods and private suites will be increasingly difficult to fill. "With far fewer investors and portfolio managers jetting to and fro," writes Perry Flint, editor of Air Transport World, "the premium segment of the airline industry is going to be hit, and hit hard."

For a change, it's the U.S. airlines that have a competitive advantage. It is, if nothing else, peculiar. And perhaps only temporary. Our carriers were smart, but they have been lucky too. Petroleum prices will spike again, with or without a crumbling economy. While there is only so much airlines can do against the two-headed devil of increasing fuel costs  and rapidly declining traffic, that's a scenario they may well be facing in the months ahead. A strategy to deal with it needs to be in place -- now -- lest it be United, Delta and American in front of those microphones, withering under the indignant glares of Congress members and the merciless laughter of the public.

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Do you have questions for Salon's aviation expert? Contact Patrick Smith through his Web site and look for answers in a future column.


Patrick Smith

Patrick Smith is an airline pilot.

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