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Jewish World Review April 21, 2003 / 19 Sivan, 5763

George Will

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Consumer Reports

Airlines' perfect storm | Even a short war can be a big boulder hurled into the pond of society, causing large waves. Today's wars against Iraq and terrorism are components of a perfect storm of converging calamities for America's airline industry.

As a result, a conservative Republican administration is being forced into doing something conservatives distrust - administering "industrial policy." By its actions and even more by its inactions, the administration will preside over a radical transformation of the industry.

As of Sept. 10, 2001, the 11 largest carriers already were well on their way to losing $7.7 billion for the year. Then came terrorism, the increased unpleasantness of the airport experience and the (largely irrational) fear of airborne terrorism. Losses in 2002 were $10 billion. And now comes an additional reason for fear of flying - severe acute respiratory syndrome.

The industry's fundamental problem is oversupply - too many flights and too many seats relative to the number of passengers prepared to pay what the major carriers need to charge in order to cover costs. That crisis began with the bursting of the tech bubble that grounded many previously high-flying business travelers who bought what the airlines most like to sell - high-priced first-class tickets purchased at the last minute. Those free-spending fliers never may be back, now that low-priced carriers such as Southwest and JetBlue and Internet ticket shopping have made high-priced flying anathema to companies' comptrollers.

Airlines are capital intensive (fliers landing in Tucson can see some of the 1,700 commercial aircraft now mothballed but still being amortized) and highly leveraged (the debt of the 11 largest carriers is equal to 90 percent of their value). Airlines also are labor intensive (labor normally is about 40 percent of an airline's spending), and because they are capital intensive and leveraged, they can't survive strikes. So, bankruptcy has become a procedure for undoing the results of the asymmetry of power favoring unions.

Under bankruptcy or the threat of it, the airlines have been shedding jobs, cutting pay, changing work rules and wringing concessions from vendors, leasers and suppliers. The largest airline, American, has avoided bankruptcy - so far - by negotiating labor concessions valued at $1.8 billion a year and cutting almost 100 aircraft (to 807) and 700 departures a day (to 2,600). The pain in that is severe. But what the industry might need to shed is an airline or two, perhaps starting with the second largest, United, which has about 16 percent of the domestic market.

Some good is being blown by all this ill wind. Consumers are benefiting from ticket prices at 1987 levels. The furloughing of younger pilots means there sometimes are two especially experienced pilots in the cockpit. The mothballed planes generally are the older ones, making for newer, safer fleets in the air.

The good that government can do is to facilitate what market forces demand. That should include the shrinkage of capacity, perhaps cooperative arrangements and mergers, and binding arbitration of labor contracts. That is more than benign neglect, but it stops far short of trying to shore up an unsustainable status quo.

In medicine, an iatrogenic ailment is one "induced inadvertently by a physician or his treatment." There was a danger that "iatrogenic government" (Pat Moynihan's phrase) would result when, immediately after Sept. 11, Washington created the Air Transportation Stabilization Board, with $10 billion to lend the airlines. Fortunately, it still has $8.5 billion of it.

Fortunately, because that sum would have been wasted in any attempt to purchase what neither the industry nor the nation can afford - stabilization of untenable arrangements.

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