councilor.org
| Source | Louis Proyect |
| Date | 01/05/07/14:52 |
| Looking back in retrospect, it is easy to see how deregulation would lead
to new monopolies. Indeed, the same big business interests that took advantage of government regulation in the first place were some of the first to benefit when the 1978 Airline Deregulation Act was passed by Congress. If pigs hang around the trough long enough, they can recognize the farmer's footsteps. Despite evoking images of the trust-busting golden age of Progressive Politics, the New Deal legislation which created the Civil Aeronautics Board catered to the needs of an infant industry and the rich white men who launched it. Juan Trippe, the founder of Pan American Airlines, was fairly typical. He graduated from Yale in 1921 where he had forged "old school ties" with Sonny Whitney and Bill Rockefeller. In 1925 Trippe got one of his fraternity brothers, who had married into the Mellons, to set up a meeting with a Congressman representing Pittsburgh's district (home base of the millionaire family) and who served on the House Post Office Committee. In an early experiment in "privatization", Trippe and others campaigned for replacing Army mail delivery with paid contractors. In the sweepstakes that followed the changeover, World War One ace Eddie Rickenbacker won the right to transport mail through a new corporation called Eastern Airlines. A Seattle timber magnate named William Boeing launched what would become United Airlines, before moving on to airline manufacturing. Although Trippe was awarded the lucrative New York-Boston route, he had his eyes on bigger prizes. For public relations purposes, he convinced the super-hero Charles Lindbergh to join Pan American as a "technical adviser," which was a coup similar to Nike signing Tiger Woods or Michael Jordan. Trippe also chose a new bride carefully. He wed Betty Stettinus who was the sister of Edward Stettinus, a steel executive who would become FDR's Secretary of State. With financial allies in the Mellon, Rockefeller and Whitney groups, a public relations coup, and government connections, everything promised to go well for the young, aspiring corporate chieftain. It was Trippe's original bright idea that planes carrying mail can just as easily transport people. Putting wicker chairs in the back of each plane, he charged $100 to fly to Havana, where booze was legal. His discovery that unfilled space on a plane was unrealized profit became the cardinal rule of airline economics, thus explaining not only deregulation of years hence but the sardine conditions in which we travel nowadays. When Roosevelt entered the White House, domestic air transport including mail and human bodies was divided up by four big corporations (United, TWA, Eastern and American), while Trippe's Pan Am owned the international routes. During the depression, upstart airlines tried to horn in on the big four's oligopoly. This led to price wars of the kind that marked the 1980s post-deregulation period. For example, when a contract for post office airmail was offered between Houston and San Antonio, Eastern Airlines was rumored to offer a bid of less than one cents a mile! Braniff made a counter-offer of $0.00001907378 per mile. Afterwards, Eastern put a final bid of zero cents on the table. This put the airline companies in a quandary. How could they do business in the face of debilitating price wars? Since the state tends to act as an executive committee of the capitalist class, the answer would be forthcoming in the form of government regulation of fares and routes. Needless to say, the interests of the rank-and-file flyer barely entered the picture. With guaranteed profits, it did not matter to the airlines whether those of modest means could afford a ticket. Juan Trippe instituted a marketing campaign with the slogan "Fly Now, Pay Later" which provided an installment loan through the Household Finance Corporation. With such a cozy government-business relationship, it is perhaps difficult to see why the need for deregulation ever arose. Essentially this came about primarily as a result of overcapacity in the 1970s--to a large extent a function of investment in the ubiquitous Jumbo Jet--the Boeing 747--interacting with the energy crisis. This would necessitate full-bore competition to wring out excess investment. In the vast literature defending the free market with its purported self-regulating supply-and-demand mechanisms, nothing can be more remote from the ideal found in those pages than the airline business. Unlike consumer goods which compete with each other on the retail shelf for customer preference, the airline industry seems to run by its own rules. Investment decisions are not carefully calibrated to consumer signals, but made by fiat in ways that might have made Stalin green with envy. A "command economy" certainly describes some of the more grandiose plans of the largest airline companies, each of which was run by hard-driving executives who relied on nobody but themselves when it came to questions of routes, fares, and most of all, the kind of airplane offered to a potential ticket-buyer. In 1982, a book titled "The Sporty Game" appeared. Written by Brookings Institute fellow John Newhouse, it ran originally as a series of articles in the New Yorker magazine. Although the word capitalism rarely appears, Newhouse's study is about as graphic a demonstration as you are going to find of the irrationality of the system. Unlike the well-ordered world of Adam Smith where an "invisible hand" prevails, the airline industry has more in common with Matthew Arnold's "Dover Beach" in which "ignorant armies clash by night." The years 1958 through 1968 were banner years for airline manufacturers and their customers. Assuming that the profits would flow forever, they decided to invest steeply in a new generation of airplanes, including the Concorde and the 747 jumbo jet. Keep in mind that such decisions are always made jointly. Boeing does not decide to build a 747 without having orders lined up in advance. Pan Am was the perfect customer for the jumbo jet, since it was more profitable than any other airline. International routes were extremely lucrative and Trippe's fiefdom enjoyed a virtual monopoly. On December 22, 1965 Boeing's chairman William Allen and Trippe signed a letter of intent which committed Pan Am to purchasing 25 of the planes. Key to the acceptance of the wide-body architecture of the 747 was the belief that the plane could serve double-duty as a freight carrier. Two standard-sized cargo containers could sit by side in the plane's midsection. This approach seemed prudent at the time, since long distance passenger travel was assumed to be dominated by supersonic jets in the future rather than conventional planes like the 747. With everybody bouncing back and forth across the Atlantic on Concordes, the 747 would be guaranteed a second life as a freighter. As we now know, neither the Concorde nor the 747 was economically viable. Once Pan Am declared for the 747, other airlines like British Airways, Japan Air Lines and TWA had to follow suit. They did not even have the freedom to see how the market would respond to the jumbo. In the airline business, the only corrective appears to be bankruptcy. Each of the airlines justified the investment on the basis of an expected 15 percent annual growth in passenger traffic. They might as well have thrown darts at a board to come up with a sensible figure. Other factors arose that made the 747 jets an even riskier investment. Thinking as always in grandiose terms, Trippe felt that eighty inches should be added to the fuselage to allow two extra rows of seats, another toilet compartment and other paraphernalia to accommodate passengers. However, the original engines designed to propel the jet proved inadequate to the task. Sometimes they shut down in mid-flight. When more powerful engines were substituted, the plane remained airborne but with considerable more consumption of jet fuel. Of course, as everybody knew in 1970, petroleum was as cheap and plentiful as water and would remain so for all eternity. Newhouse's final chapter, written just on the cusp of deregulation, is an attempt to anticipate the airline industry's likelihood of returning to the kind of profitability enjoyed in the fat years. He was glum: "Little, if anything, of significance that has occurred in the wide-body era figured in earlier plans of America’s commercial aircraft and airline industries. The bright prophecy of the 1960’s was mocked by successive reversals, a few serious shocks and generally hard going. With very few exceptions, the major companies have had a thin time since 1970, and their current prospects range from uncertain to very poor. The fortunes of these companies depend partly on their own actions and partly on forces which they cannot influence any more than the rest of us can. Curiously, they have behaved as if capricious economic trends and the uncongenial policies of foreign governments were problems for other industries, but not their own. (The same could be said of the auto industry.) The boldness of the aircraft suppliers was matched by their innocence of the world and its uncertainties. This unworldliness harmed their interests. "Any lingering hope for an outbreak of good times was dissolved by the dramatic rise in fuel prices. The oil crisis shocked the airlines and their suppliers, even though events had clearly foreshadowed it. A Boeing executive who directs the company’s forecasting remarks that 'Nobody in the airline industry saw it coming, and the airlines still dislike looking ahead. They don’t look beyond next month’s fuel supply.' As for his own company, he says: 'Boeing hadn’t the least idea that a fuel crisis was coming. We had spent hundreds of man-hours studying the economics of the SST burning fuel at ten cents a gallon and not a penny more. Boeing planned for the SST to be operated forever at ten cents per gallon.'" (p. 227) In the same year that Newhouse's book appeared, a report on "Competition and the Airlines: An Evaluation of Deregulation" was submitted by staff economists David R. Graham and Daniel P. Kaplan to their superiors at the Civil Aeronautics Board. Given its internal character, the authors make no effort to depict deregulation as progressive legislation motivated to make air travel affordable. Instead it is declining profits that occupies center stage. In fact they openly admit that air travel had become a mass consumer phenomenon without the help of Senator Kennedy's trust-busters. They state that between 1949 and 1969, air traffic grew by more than 14 percent a year. During this same period, average air fares actually fell by 2 percent while the consumer price index rose by 50 percent. In other words, air travel was cheap relative to other consumer goods. What concerned the economists was the fortunes of the airline companies rather than those of the consumers. With all the money spent on 747s and other oversized jets, empty seats became a much more serious problem given the economies of scale. The way they describe the problem is refreshingly frank: "This imbalance between fares and costs encouraged the airlines to engage in inefficient service competition, particularly by offering high quality, high convenience service. This was especially true in long-haul markets; because costs fell nest rapidly in these markets, the CAB did not substantially alter the fare structure. Consequently, the percentage of seats the airlines filled (load factor) fell through most of the 1950s and the 1960s. "By the end of the 1960s, the economy and air traffic growth faltered. In addition to the cyclical downturn, the long-term growth rate of air travel demand slowed, because the cost savings and added convenience from the switch to jet equipment .had largely been achieved. The carriers, however, had ordered many new aircraft in the mid-1960s. Excess capacity grew and the industry’s profitability declined. Consequently, the carriers asked the CAB for relief." (p. 11) This is quite a mouthful. They identify "high quality, high convenience service" as an obstacle to realizing corporate profits. Anybody who has flown on a plane lately can tell how that problem was resolved. By the end of the 1960s, when the downturn began, the solution would evidently take the form of getting rid of this kind of service and turning the airlines into what they have become today: cattle-cars with inedible food that are chronically late. Besides putting more bodies in the seats, the only other way the airlines could increase profits was through slashing wages. Graham and Kaplan try to explain how the employees, especially the pilots, had become fat and pampered. During the post-WWII years advances in technologies, most especially jet engines, had made it possible to transport ever larger numbers of passengers in shorter times. In other sectors of the labor market, such as coal and long-shore, productivity advances had made it possible to reduce the work force. But the pilots were tightly organized and resisted such cuts. Not only that, they insisted on maintaining generous work rules that were wrested from management in 1934, at the height of labor militancy during the depression. Although the pilots never occupied factories or fought the national guard, it was such battles that gave them the leverage to win an 85 hour per month limit on flights. Obviously, if jets are moving people to their destinations in half the time, the bosses sought ways to extend the number of hours pilots were in the air. If you could get them to work longer hours at lower pay, so much the better. To put the pilots in a weaker bargaining position, the first step would be increasing the number of airline companies, an automatic outcome of deregulation. Prior to deregulation, pilots could maximize their work actions by facing a relatively limited number of companies. By shutting down two airlines, you could effectively bring the industry to its knees. By the same token, if you doubled or tripled the number of airlines, and made them non-union shops, the bosses would have the leverage to drive down wages. This is exactly what happened. It is no accident that the primary business model for post-deregulation airlines came from Texas, a notorious "right to work" state. Prior to the passage of the 1978 legislation, Southwest Airlines had pioneered the kind of "no frills" approach that would be adopted by major carriers. In exchange for low-cost connections between major Texas cities, customers would forfeit hot meals and other amenities. The whole idea behind deregulation was to generalize this type of transportation for the entire country. Texas Air was another "no frills" company, but the corporate culture was nothing like the sort of "good old boy" paternalism fostered by Southwest chairman Charlie Kelleher who liked to drink Jack Daniels out of a bottle at staff meetings. Texas Air was owned by Frank Lorenzo, a Queens, NY native who grew up near the local airports. In the course of building a holding company that eventually would include Continental and Eastern, he became the labor movement's most hated figure since the days of Henry Ford. In contradistinction to Ford, Lorenzo ruled through methods more appropriate to the Reagan-Bush years than the FDR era. Rather than using open violence, he made use of complex financial machinations that always put the trade unions on the defensive. His main tactic was to take on enormous debts while financing his expansion through junk bonds arranged by Drexel-Burhnam, the investment bank Michael Milken made infamous. Lorenzo, a graduate of the Harvard Business School, was a master of the leveraged buyout. When he decided to challenge the big boys from his established base at Texas Air, he knew that he was at a disadvantage. To become a big-time player on a national scale, he would have take over on of the existing companies like United, American or TWA, which were many times his size. He decided to go after National Airlines, the tenth largest carrier. Although the term "leveraged buyout" had not be coined yet, this is exactly what Lorenzo had in mind for his take-over. Since National Airlines had virtually no debt, Texas International (the new name of Lorenzo's expanding empire) could borrow enough money against National's own assets to finance the entire acquisition, essentially buying a company for free. Once the buyout is complete, the new bosses are able to present the ocean of red ink as a 'fait accompli' to the workers. Unless they agreed to wage cuts, and longer hours, bankruptcy would be the consequence. Blackmail rather than gun thugs would be the choice of the new corporate bosses. Using the same leveraged buy-out techniques, Lorenzo eventually became the owner of Continental Airlines, which like National had not only been one of the top-ten airlines but a financially stable one as well. |
Copyright (c) 1998, Joongpil Cho