Re: Airline Biz Crisis: Not Difficult To Predict
- From: James Robinson <wascana@xxxxxxx>
- Date: Sat, 08 Oct 2005 23:26:08 -0500
"Reef Fish" <Large_Nassau_Grouper@xxxxxxxxx> wrote:
>
> Again, to re-iterate, Robert Cohen started this thread saying
> Eastern's surmise was easy to predict because it was overpaying the
> pilots and a few other extravagent spendings.
>
> I disagreed, in general principle, on the Free Market principle that
> no salary is too high, and cited examples in sports where the teams
> didn't go bankrupt because they pay some players millions of dollars a
> year -- which *I* think is ridiculous, but that's what the market will
> bear.
Not entirely. Many of the weaker teams cannot afford the higher salaries
of the star players. Even with a redistribution of broadcast income,
they may not be able to survive. A recent example was the sale of the
Montreal Expos, which could not generate sufficient income to pay the
salaries of really good players. They would lose any standouts to
higher paying teams, leaving them with second string players.
> Again, in GENERAL principle, any business that fails ultimately can be
> blamed on the owner of the business (or its management).
Perhaps in a general sense, but there are examples which defy the rule:
The management of transatlantic steamship companies could do very little
to counter the introduction of the jet airliner. The rules of the game
changed overnight, and they lost the majority of their passengers just
that fast. No reduction in fares would have been sufficient to retain
the business.
> James blames it all on deregulation.
That's a bit too black and white, though I certainly feel that
deregulation was the root of their problems. They fell sooner than
other airlines because of bad timing and bad luck, which has some
management overtones. While a different management strategy might have
helped somewhat, it would have only delayed the inevitable. A company
like Eastern could not change quickly enough to react to the effect of
deregulation.
> If it were a completely deregulated industry, then it would have been
> the Free Market, and that would be the perfect business environment
> for competition and survival of the fittest. Unfortunately the
> deregulation is only PARTIAL, and the airlines are subject to all
> kinds of regulations which restricted their "free" choices!
Again, the rules can change fast enough that they still can't compete.
Airlines like Eastern were sitting fat and happy under regulation. They
had cost structures that matched the business at that time. Aircraft
fleets were shaped to their business, with associated long-term debt
repayments. Union agreements were made based on anticipated incomes.
Passenger amenities were provided based on the competition at the time.
Streamlining that historic cost structure is not something that happens
overnight, even if the management recognizes that it is necessary for
survival.
> I am somewhat sympathetic to the theory of blaming it all on the
> change of rules that is bring down the entire airline industry,
> leaving no airline unscathed.
>
> If that WERE the case, then the airlines themselves are to blame for
> the collective stupidity of not getting OUT of competition that kills
> everyone, winner and loser! There is no regulation against an airline
> selling itself (while it was still profitable) and get into other
> industries of better fair-competitions among large and small
> companies.
It was too late to get out. Once deregulation established the lower
cost, all of the airline's assets devalued to the point where the
companies were defacto in bankruptcy. All they could do is cut and run,
but that also assumes that the management of the company has the benefit
of seeing what eventually happened to the industry. Eastern, and their
shareholders, thought they could survive by expanding to gain a critical
mass that would support their high cost structure.
Therefore, their options were to declare immediate bankruptcy, or try
the alternative of growing to profitability. The tried the latter, and
the financial downturn of the Gulf war was their eventual undoing.
> To me, that's the bottom line of "the buck stops at the Management".
That's very convenient, and simple to say, but luck also enters into the
picture. Business is usually a gamble, and certainly never a sure
thing. Some people take the risk and win, others lose. If they only
ever bet on the sure things, our economy would be dead.
> Hero or goat, the glory or blame goes to the decision maker.
That's what capitalism is about. However, there are also those who
begrude the winners the glory when they make it big. Look at the oil
companies and their profits.
> That's how K-Mart, S-Mart, and other Marts all lost to the
> better-managed Wal-Mart. Walmart didn't get big (like American)
> overnight. It just grew by leaps and bounds because of better choice
> of products, better layout for that kind of market, etc. It's unfair
> competition to other retail store NOW -- that's for sure!
Nothing unfair about it. That is how all business operates. WalMart
simply is winning by a better strategy and deserve credit for their
accomplishment. Unlike the airline industry, they did not sweep over
their competitors because of a parallel to airline deregulation. Rather
than a revolution, the retail industry simply evolved.
> I am back to the Free Market principle via the same route! Every
> business has a CHOICE to compete or not, or how to compete, in an
> unregulated market seemingly dominated by one BigBoy. The computer
> and software industry seems to be doing quite well, with many
> companies going down the tubes against Big Blue or Microshaft, while
> other companies are competing successfully in the industry dominated
> (past or present) by those Big Boys. Untimately the one-time Big Boy
> of Big Blue had to re-evaluate its market to start as a Little Boy to
> compete against Bill Gate's Big Boy.
>
> That's the way free competition should be. The USA is hardly a
> perfect Free Market, but is about as good as it gets, in practice.
That's nice to say in theory, but it is rarely the case in a high
capital cost industry like transportation. Classic textbooks on
transportation economics describe how a certain amount of regulation is
necessary to keep such businesses from engaging in destructive
competition. In an effort to provide any contribution to their capital
cost, they will slash fares to barely above their marginal cost of
business, and ensure that nobody makes a decent return on their
investment. With no regulation, the transportation industry will tend to
form natural monopolies, which is equally undesireable.
.
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