You would think that in a week with this much news, I could find something to write about. Obama is elected. General Motors' October sales fell by 45 percent. GM loses $2.54 billion in the third quarter. A legacy industry seeks government help. US Airways bolstering liquidity through deals with the same regional partners that served as financing sources used in its second trip through Chapter 11. Economic warnings du jour coming from all continents. And of course, a story suggesting that Minnesota’s Jim Oberstar would be interested in becoming the new US Secretary of Transportation in the Obama administration.
There must be something of interest, right?
No, but just thinking of Oberstar and his lawmaking/regulating knee-jerk inclinations better fit for an airline industry structure closer to Jurassic Park than today’s structure designed to compete globally, I come across a piece in the Atlanta Journal Constitution citing previous academic studies that mergers may harm consumers. And I started having bad thoughts. My favorite cite in the article referred to a 1987 study done by two professors on the USAir – Piedmont merger. Now that has application to today’s world right? NOT.
Southwest had not crossed the Mississippi in 1987. Eastern, Pan Am, TWA, PEOPLExpress and Presidential were still flying. Air South and Air Atlanta would die in that year. ValuJet, AirTran, jetBlue and SkyBus were not close to being hatched to replace the capacity that would ultimately die. Mergers at that time were being done in order to build regional scope and scale in order to facilitate national competition. And create competition they did.
In 1987 the US airline industry paid an equivalent price per barrel for jet fuel of $23.50. Through September of 2008, the industry has paid an equivalent price per barrel of $136.81. In 1987, the average yield, (passenger revenue per revenue passenger mile) expressed in 1978 dollars, was 6.38 cents per mile. Today, the average inflation-adjusted yield is estimated at 4.30 cents per mile. The average compensation package for an airline worker in 1987 exceeded $42,000 per year. Today, the same package exceeds $76,000.
The fact that we still make these claims that mergers will somehow hurt consumers is old school. This market has demonstrated time and time again that competition will discipline those that exploit consumers. This market has proven that where there is a viable market and insufficient capacity is provided to that market, a new competitor will appear. How long did it take ValuJet to fly and begin replacing the Atlanta hub Eastern left vacant when it liquidated? Answer: roughly two years that included a recession.
None of that will change unless we stand in the way of the evolutionary process. The US airline industry has made progress in that the industry has rid itself of many, if not most, inefficiencies. The biggest inefficiency that remains is the infrastructure that guides the nation’s air traffic system each and every day and negatively impacts nearly every stakeholder. It is a dinosaur.
Things go extinct when they are unable to adapt to environmental change or compete within that new environment. Oberstar has had more than 30 years to ensure the adaptation of an air traffic system that might have mitigated some of the capacity cutting going on today, and it has not happened. Putting him in charge now would further damage those he professes to help – namely consumers and labor and small communities. President-elect Obama you said you would change things.
Delta and Northwest are designed to compete globally. United and Continental are sure to be stronger global competitors as their plans emerge. American is seeking anti-trust immunity that is necessary to ensure a playing field that enables it to be yet another US competitor that can carry the US flag around the world. Prohibiting this phase to fully develop would be an enormous mistake for even those stakeholders that believe they are being wronged in the evolutionary process.