Is It Time to Re-regulate the Airlines?

I wrote this while stuck in the Tucson airport last week. Today, the New York Times advanced a similar question.

Before you flame me with “regulation never works” rants, here me out.

The airline business is a mess. Everyone who flies or invests in it knows it. Customers are aggravated, employee morale is in the toilet, and carriers are into and out of bankruptcy as often four year olds running in and out of the back door on a hot summer day.

With high fuel prices, expensive labor agreements, and customers demanding low, low prices, it is incredibly difficult to make money as an airline. Carriers are charging for extra bags, reservation changes, seat changes, and anything else they can think of to generate revenue without raising prices. They are cutting costs wherever they can. In the process they are irritating everyone up and down the value chain.

And still they can’t generate a consistently acceptable rate of return for investors. The business is trapped in an alternate reality – or surreality, really.

What is needed is a chance for the industry to regain its footing. A period of stability when they can reexamine, and perhaps reinvent, their business models. A chance to inject some rationalism into the system. A viable, robust airline industry is in the interest of management, labor, investors, and customers – not to mention the other players in businesses that support the industry or that are dependent upon it (travel and tourism is just the most obvious). .

I believe that this is a challenge that markets alone cannot solve. Government, however, can stabilize the situation as they have tried to do recently in the financial markets. They can create a "time out" when everyone can take a much needed deep breath.

Here is what I propose:

Declaration of a 24-month period of reregulation (funny, MS Word declares this a non-word with “deregulation” as the first suggested alternative – it shows you how far we have gone toward complete laissez-faire) of the industry. This would need to be legislation with a rock solid, iron-clad termination date. No extensions would be possible. This is meant to be a time-out, not a new way of doing business, and the knowledge that open competition is only two years away should keep everyone’s game sharp.

During this period, fares would be set so s to provide airlines a modest but reliable rate of return based on cost-plus pricing (the old standard was 12% profit margin for flights at least 55% full according to the Times). We need to get customers used to paying at least the marginal cost-per-mile to fly. A reliable rate of return would be attractive at least to conservative investors and keep capital flowing into the industry. I advocate that rate of return be a rangeto encourage the airlines to find new ways to create value and keep a level of competition in the system.

Let’s say that the range is 7 – 17%. In return for the guarantee of 7%, the airlines would have to agree to give up anything more than 17%. Customer service standards would be part of the plan and those carriers that make customers happier would get to keep a greater percentage of their revenue. Customers would be financing this guarantee but we already pay the price for the sad state in which the industry finds itself.

All compensation would be frozen except for cost-of-living raises – that goes for the CEO as well as the flight attendant. And any stock options granted during this time would vest over five years. There should be no surprising giant paydays during this period.

The government would convene a group of industry experts to put together the details of a proper framework. I’d give them 90 days to figure it out. If they didn’t have it ready, I’d sequester them in a cheap motel at the end of a runway somewhere to provide the extra incentive to get them to finish their work. .

Things are unsustainable the way they are now. It’s time to take a hard look at any and all alternatives the might save this industry from itself.

Airline Mergers

I posted a question on LinkedIn that asked if people saw any potential benefit to the proposed airline mergers that have been drifting about lately. It generated a flurry of responses.

Aside from one person associated with the industry who saw benefits for customers, employees, and investors alike, everyone was pretty vitriolic that there would be no benefits at all. I agree with the voice of the crowd.

The research with which I am familiar shows that 60 - 70% of all mergers fail to deliver any shareholder value over time. In a struggling industry where the mergers are combinations of operationally and profitability challenged players, I would say that the odds are lower still. Some, however, disagree.

As a frequent flyer, I haven't seen anything make the flying experience better in some time. Worse still, there doesn't seem to be much effort being exerted by the airlines. It seems more like they are putting up with customers (especially in coach) rather than trying to satisfy them. Airplanes are more crowded, staff is more stressed, and the amenities ever fewer. The latest report on customer satisfaction with U.S. airlines is due out tomorrow and was previewed on Good Morning America today.

I am on the US Air shuttle between Boston and New York or Washington on a regular basis. Once US Air merged with America West, the only change I saw was fewer options available at the automated kiosks. It became harder and took longer to check in. And have you tried to use your miles to get a flight lately? Don't get me started.

Now that all of the majors seem to be edging closer to the M&A dance floor, there could be a significant impact on a number of routes.

The rumour mill has quieted a bit in recent weeks but don't expect it to stay that way.

What do you think? Will the mergers, should they come to pass, benefit or hurt passengers?