Airline Bulletin is Back; Two (Re)emerging issues in the Airline Business

I have returned from Ecuador (and will try to post a few pictures within the next few days). In the coming days and weeks, I hope to shine a wee bit of light on some of the controversial issues in the airline industry. Upcoming posts may include Why Widespread Panicking is a Bad Idea, Why Most Airline Managers are Idiots, and Why Most Airline Managers are Idiots (Part II). Poor business decisions helped get the industry into this mess, but that doesn't mean ingenuity and the right decisions can get us out of it.

But to begin, I want to examine a couple of key issues that may emerge in the public debate over the next few months. The fuel issue has obviously dominated the press headlines lately, and justifiably so. However, the severity of the fuel crisis will spur ancillary difficulties for carriers, and the nation, as carriers run out of fuel savings, and begin to turn to the government for help.

Subsidies
If airlines continue to hemorrhage cash at current rates, many will run out of cash later this year or sometime next year. As a result, one of the most important issues facing the nation with regard to airlines, is not necessarily how to curb rising oil prices, but how to save the vital airline network that binds our nation together. After 9/11, the airline industry was provided with a government cash infusion to help stave off more trouble, as well as loans to specific carriers to help them survive. Once again, the government may have to intervene, and as cash reserves run lower and lower at many of the nation's top airlines, this issue will become increasingly pressing to politicians, not to mention presidential candidates. Even though corporate subsidies are increasingly unpopular, especially in the wake of the unjustifiable tax breaks that continue to be given to big oil companies, even while reaping record profits, another subsidy infusion may be necessary to the nation's airlines. However, what might be better than a cash infusion, is instead a fuel subsidy that helps limit the exposure airlines have to volatile oil market prices. This could be done by setting a ceiling on prices that carriers pay, and having the government cover the remainder, or by offering a government fuel subsidy per passenger mile. This is far from a perfect solution, as it could disadvantage carriers like Southwest who are less exposed to the volatile oil market, but it would help protect the industry as a whole from its number one enemy at the moment.

Re-regulation
Another issue stemming from high fuel costs is the possibility of some sort of re-regulation. One of the things the airline industry has struggled with since deregulation, unlike many other industries, is the constant struggle of price wars. The airline industry has seen a plethora of new entrants in the past 25 years, and most of them use low fares to draw away customers from the large, network carriers. While competition has its advantages, most notably when Southwest starts service from a new city and lowers fares, it can have very adverse effects when a new entrant enters and relentlessly offers loss-leading fares as a way to drum up new business. Skybus was a prime example of this, using it's lowest fare classes as loss-leaders to help fill planes. Some observers have suggested re-regulation as a way to prevent carriers from offering fares that are simply too low.

Robert Crandall, former CEO of American Airlines, has suggested the idea of a minimum fare threshold on routes, that would help prevent destructive fare wars. Other avenues of re-regulation have the potential to benefit carriers, such as limiting the number of carriers on very high-traffic routes, but in exchange for those carriers operating less popular routes to help appease the demands of airports and the business community. But a full re-regulation of the airline industry is less likely. As Northwest Airlines CEO Doug Steenland said at a recent Merrill Lynch conference "Anybody who looked at re-regulation seriously, I think, has concluded that the genie is out of the bottle, and I don't think it can go back in."

As airlines struggle more and more against the tide of rising oil prices, especially in the fall and winter as the busy summer travel season dies down, more and more discussion will take place about increased government involvement in the industry, either through subsidies or through re-regulation. Aviation is a crucial linkage in our nation's fabric, and the government will do what it takes to preserve it, regardless of which party is in power.