Monday , February 24 2020

Airline industry made inequality worse

With power and wealth concentration on the minds of politicians and voters in an election year, one overlooked culprit is the airline industry. Thanks in part to deregulation and consolidation of the industry during the past several decades, airlines have focused their operations in big hub airports and major coastal markets as a way of reducing excess capacity and improving their profitability. And for a long time, airlines needed the government’s help in staying afloat.
But today, the airline industry is the most profitable it’s ever been. Increasing flight connections to second-tier cities would help reduce geographic inequality by creating better links with the thriving superstar cities. If airlines won’t do it on their own, perhaps government should intervene.
It’s understandable why regulators let the airline industry restructure so extensively. Historically, airlines have been a sinkhole for money. Warren Buffett’s famous joke about the industry is that investors could have saved billions of dollars if someone had shot down the Wright brothers’ plane. The industry struggled in the 1970s and 1980s amid high fuel costs, and the 2000s were simply disastrous between the downturn in travel after the 9/11 terrorist attacks at the start of the decade and the Great Recession at end of it. US airlines had losses of more than $50 billion during the decade.
With the industry on the brink of collapse, regulators allowed it to consolidate from 10 major carriers to four. Delta and Northwest Airlines both declared bankruptcy and merged, joining other carriers that were operating in bankruptcy. Along the way airlines rewrote labour contracts, eliminated some unprofitable routes and slashed debt. The reduction in competition and cost-cutting just as the economy rebounded from the Great Recession allowed airlines to finally earn their keep and reward investors.
It’s a good thing that airlines, like any important industry, are now profitable rather than on life support. But maybe the pendulum has swung too far the other way, particularly for an industry that will always have a strong regulatory and public-welfare component. Delta said that it generated $4.2 billion of free cash flow in 2019, returning $3 billion of it to investors in the form of buybacks and dividends.
Now that the financial fortunes of the airline industry have improved, it may be time for the government to negotiate with carriers about re-establishing or increasing service to communities whose fortunes have suffer because of route elimination. This isn’t to say that hubs in Memphis or Northern Kentucky must be re-established. The issues of 2020 won’t be fixed by returning to how things were in 2000. But when the airline industry was deregulated in 1978, one of the goals was to avoid the sort of industry concentration that could result in higher fare prices and loss of service. As it turns out we got what deregulation was supposed to avert.
Airlines and their investors should cheer their good times but also realise it’s time that they pay back the country that bailed them out in their moment of need.


Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Inside

About Admin

Check Also

Masa and his bankers grab a shared ride

Mitsubishi UFJ Financial Group Inc. (MUFG) is investing more than $700 million in Southeast Asian ...

Leave a Reply

Your email address will not be published. Required fields are marked *