Bankruptcy as a competitive tool?

[Richard]

After reading this article it occured to me that some smart bean counter figured out how to use bankruptcy as leverage against the discount carriers. Whaddya' think?


GAO: Bankruptcy may not be so bad: Despite complaints to the contrary, "there is no clear evidence" that airlines operating under Chapter 11 bankruptcy protection "harm the industry by contributing to overcapacity or underpricing their competitors." That's according to Air Transport World (ATW), which cites a study by the U.S. General Accounting Office (GAO), the agency the serves as the investigative and research arm of Congress. In fact, the GAO study found that the liquidation of airlines "had only a very temporary or negligible effect" in reducing overcapacity since other airlines tend to rush in to fill the void. In what ATW says may be one of the report's more controversial findings, the GAO speculates that companies who rent to or do business with airlines are happy with the industry's current capacity levels. "Those companies further up the value chain face less competition and are able to impose higher costs on airlines," ATW cites the report as saying. "Accordingly, these companies have a vested interest in ensuring that airlines survive and that capacity [does] not leave the industry."

 

[Dave Krall CFII]

After reading this article it occured to me that some smart bean counter figured out how to use bankruptcy as leverage against the discount carriers. Whaddya' think?


GAO: Bankruptcy may not be so bad: Despite complaints to the contrary, "there is no clear evidence" that airlines operating under Chapter 11 bankruptcy protection "harm the industry by contributing to overcapacity or underpricing their competitors." That's according to Air Transport World (ATW), which cites a study by the U.S. General Accounting Office (GAO), the agency the serves as the investigative and research arm of Congress. In fact, the GAO study found that the liquidation of airlines "had only a very temporary or negligible effect" in reducing overcapacity since other airlines tend to rush in to fill the void. In what ATW says may be one of the report's more controversial findings, the GAO speculates that companies who rent to or do business with airlines are happy with the industry's current capacity levels. "Those companies further up the value chain face less competition and are able to impose higher costs on airlines," ATW cites the report as saying. "Accordingly, these companies have a vested interest in ensuring that airlines survive and that capacity [does] not leave the industry."

I never thought too much of bankruptcy protection laws in the first place.

 

[Richard]

I never thought too much of bankruptcy protection laws in the first place.

Should I take that to mean that the law itself is not good? The meaning I got from the article was that here's a novel use of a law designed to protect the debtor. That approach is not an indictment of the law.

 

[Dave Krall CFII]

Should I take that to mean that the law itself is not good? The meaning I got from the article was that here's a novel use of a law designed to protect the debtor. That approach is not an indictment of the law.

Correct, the law isn't that good of an idea but, capitalist creativity credits must nontheless be reluctantly awarded for the creativity of those using it in this scenario.

 

[Richard]

Correct, the law isn't that good of an idea but, capitalist creativity credits must nontheless be reluctantly awarded for the creativity of those using it in this scenario.

Dang, Dave. That sentence reminds me of a sign I once saw:

ESCHEW OBFUSCATION


​

BTW: here's an 'e' you can use.

 

[Let'sgoflying!]

Quit using big words where a diminutive one will suffice.

 

[poadeleted20]

This argument was first presented during the bankruptcies of Eastern and Continental many years ago, and hasn't changed since then. However, it hasn't changed the way bankrupt airlines operate, and its weight continues to decline as the number of significant major carriers continues to decline due to the failures/mergers of Eastern (gone), Braniff (gone), Pan Am (gone, routes/assets split among United and others), TWA (merged with American), and (most recently) America West (merged with USAirways) on top of the previous losses of National (bought by Pan Am) and Northeast (eaten by Delta). Twenty years ago, the top four carriers controlled about half the Revenue Passenger miles; today, they control over 70% of the RPM's. As we reach the lower limit of the number of significant major carriers suggested by Kahn as allowing viable competition, there will be further pressure to keep more carriers from disappearing. The only alternative is re-regulation, and nobody wants that.

 

[bstratt]

As the head of a bank's workout group I have restructured major companies both within and outside bankruptcy. Sometimes the bankruptcy rules make sense but often do not. The major problem is that they prevent the capitalist version of Darwin's theories - survival of the smartest. When companies over reach, make stupid decisions, they are rewarded by having the effects of these decisions negated, balance sheets cleaned up and actually ending up stronger than those who made correct decisions, thereby the domino effect forcing others into bankruptcy.

In addition, those companies are saved and the people who dealt with them in good faith, landlords, employees, pensioners, trades, etc. get hit.

 

[gismo]

The only alternative is re-regulation, and nobody wants that.

Nobody? I've got a few airline pilot friends (working and retired) who are thinking that a regulated airline system might be a good thing.

 

[Dave Krall CFII]

Dang, Dave. That sentence reminds me of a sign I once saw:

ESCHEW OBFUSCATION




​

BTW: here's an 'e' you can use.

Or one could also similarly say:

Legal bankruptcy is a bad law and dulled tool that costs us all too much money, only to subsidize and perpetuate poor business decisions but, we kinda got hand it to 'em for screwin' the rest of us so well and gettin' away with it repeatedly.

(Thank You very much...
where might I best use that 'e' you so generously supplied above ?)

 

[Ken Ibold]

(Thank You very much...
where might I best use that 'e' you so generously supplied above ?)

nonetheless, I believe.

 

[Dave Krall CFII]

nonetheless, I believe.

TKS,
So many letters and words...
Who can know what they all are and what they all mean ???

 

[Richard]

Or one could also similarly say:

Legal bankruptcy is a bad law and dulled tool that costs us all too much money, only to subsidize and perpetuate poor business decisions but, we kinda got hand it to 'em for screwin' the rest of us so well and gettin' away with it repeatedly.

(Thank You very much...
where might I best use that 'e' you so generously supplied above ?)

"...nonetheless..."

EDIT: I see Ken beat me to it. Figures, since he makes his living as a wordsmith.

 

[Dave Krall CFII]

"...nonetheless..."

EDIT: I see Ken beat me to it. Figures, since he makes his living as a wordsmith.

Oh sure there's that...
no doubt due to bankruptcy of my desire to use my 'spell checking-account' !

 

[Richard]

Oh sure there's that...
no doubt due to bankruptcy of my desire to use my 'spell checking-account' !

Do you need protection?

 

[wsuffa]

As we reach the lower limit of the number of significant major carriers suggested by Kahn as allowing viable competition, there will be further pressure to keep more carriers from disappearing. The only alternative is re-regulation, and nobody wants that.

I understand Kahn, but I think in the end we'll get down to about two major carriers, plus some substantially smaller ones. Most other major industries are at or on the verge of duopoly (at least on a national basis).... broadcasting media, cellular telephone, land-based telecomm, etc. come to mind. The cost basis in those industries is somewhat lower than travel. The best way to assure competition is to limit regulatory barriers to entry. SWA owes a fair amount of success to serving lower cost/underserved airports that are not subject to the slot rules.

Just my opinion.

 

[poadeleted20]

I understand Kahn, but I think in the end we'll get down to about two major carriers, plus some substantially smaller ones.

Not without re-regulation starting when we get down to three. While SWA, JB, and AirTran have been very successful financially, they strictly limit their market entries (e.g., SWA won't touch a market with less than 500K boardings a year), so they will never be as big as the current Big Four, which serve a much wider variety of national markets as well as the international ones which aren't in those three LCC's plans.

 

[wsuffa]

Not without re-regulation starting when we get down to three. While SWA, JB, and AirTran have been very successful financially, they strictly limit their market entries (e.g., SWA won't touch a market with less than 500K boardings a year), so they will never be as big as the current Big Four, which serve a much wider variety of national markets as well as the international ones which aren't in those three LCC's plans.

I understand how JB/SWA/AT do it.

I am not convinced that reregulation will occur if we get below 3. In fact, with the LCC's around, two might be all the market can support for close to national coverage.

We've seen other industries get down to two - without political interference (and I'm not willing to bet on that) two network carriers might be all the market can support. If you look at wireless, there are only two carriers that currently offer true nationwide service (Verizon and Sprint/Nextel - SBC & T-Mobile only offer new GSM service without analog rollover, and there are a lot of markets that doesn't cover at all). We're really down to two national chains for home hardware (Lowes & Home Depot) and warehouse stores (Sam's and Costco). Ultimately, the politicians are going to deal with it as they choose, and airline service is a 'motherhood issue'.

The LCC guys will continue to cherry-pick the big markets, and I wouldn't be surprised to see one of the LCC guys link up to an European carrier at some point.

That's only my opinion, though.

 

[poadeleted20]

I am not convinced that reregulation will occur if we get below 3. In fact, with the LCC's around, two might be all the market can support for close to national coverage.

All the economic theory and experience around say that with less than four competing full-service major carriers, there is not enough competition to achieve adequate supply/demand based pricing and service. Those involved in deregulation made that clear back in 1978 -- without enough major carriers, there is no choice but to return to the fare/route regulation of the CAB days. This is recognized in law in the Essential Service rules, whose provisions come into play if the number of carriers in a market gets down to two.

 

[bbchien]

I am not convinced that reregulation will occur if we get below 3.

It will happen because of the left wing of the democratic party. Not a statement of judgement good/bad, but just a political reality.

 

[Richard]

It's interesting how this thread started out by taking issue with the imagative manipulations of bankruptcy laws yet now the discussion is about who will be left to maintain the capacity.

To me, the two are at opposite ends of the spectrum.

 

[poadeleted20]

It will happen because of the left wing of the democratic party. Not a statement of judgement good/bad, but just a political reality.

I think it will happen not because of either political party or segment thereof, but rather because, to quote Tip O'Neill, all politics are local. Too many folks will be screaming to their local congressperson because they can't get an airline ticket out of their under-500,000 boardings town on a reasonable schedule going to anywhere they have any interest in going other than one big city hub where they can connect to Point C (and maybe even Point D) before they can get where they want to go. It will end up as a bipartisan deal that every congressperson can use to argue for their own reelection.

The air carrier unions will be thrilled because it will enable the carriers to pay better salaries and guarantee pensions. Business travelers will pass the higher costs on to their customers, and the only real losers will be pleasure travelers in smaller markets who will have to pay more to go where they want when they want out of their own pockets. And the USA will look like morons in front of the rest of the world because after making a push for international deregulation a congressionally-mandated bargaining point in international air travel negogiations for two decades and then dumping the concept ourselves.

 

[gismo]

And the USA will look like morons in front of the rest of the world because after making a push for international deregulation a congressionally-mandated bargaining point in international air travel negogiations for two decades and then dumping the concept ourselves.

Do as we say, no as we do. Like we've never been down that road before.

 

[wsuffa]

I think it will happen not because of either political party or segment thereof, but rather because, to quote Tip O'Neill, all politics are local. Too many folks will be screaming to their local congressperson because they can't get an airline ticket out of their under-500,000 boardings town on a reasonable schedule going to anywhere they have any interest in going other than one big city hub where they can connect to Point C (and maybe even Point D) before they can get where they want to go. It will end up as a bipartisan deal that every congressperson can use to argue for their own reelection.

The air carrier unions will be thrilled because it will enable the carriers to pay better salaries and guarantee pensions. Business travelers will pass the higher costs on to their customers, and the only real losers will be pleasure travelers in smaller markets who will have to pay more to go where they want when they want out of their own pockets. And the USA will look like morons in front of the rest of the world because after making a push for international deregulation a congressionally-mandated bargaining point in international air travel negogiations for two decades and then dumping the concept ourselves.

I'll admit up front that I'm very much a free market person. And I don't often disagree with you, Ron. I don't wish to argue any point of the existing laws governing air service - those are what they are.

If the market can support service, an airline will serve it. There are lots of 50-passenger jets sitting around begging stay in service. Cheap airfare is NOT a right. IN fact, getting down to a smaller number of carriers would maintain the service because I have no doubt that the service would exist if it were profitable and because the one thing that differentiates the major network carriers from the LCCs is the ability to reach the smaller markets. Ya can't reach all the smaller markets now on one carrier..... one could argue that a smaller number of bigger carriers would permit more universal service and benefit to the consumer.

I would submit that
1) regulation would make the situation worse, as it would discourage industries from getting inefficiencies out of the system.
2) regulation would be opposed politically by all sorts of business interests, ranging from the LCCs to business users. In today's environment, businesses simply can't 'just pass along the costs' to purchasers. Any company that thinks about doing that will be eaten alive by folks with lower costs, such as outsourcers. Businesses would rather deal with inconvenient flights than high fares. Fortress hubs such as Cincinnati (no SWA service despite high boardings) and employers forcing employees to spend a Saturday night in a hotel have proven that.
3) Pleasure consumers will complain to their elected representatives that costs have gone up, negating any effect from not having service. Consumers have already proven that they will drive many miles for a cheaper ticket - or even further if fares are too high or inconvenient. The great mass of leisure flyers arose from the fact that airfare was cheaper than driving,
4) there is no political appetite right now for increased regulation, and there is absolutely no appetite for adding regulatory costs such as the CAB had. You can bet that LCC's will oppose that and mount a protracted, noisy, and expensive advertising campaign against regulation.

Maybe someday we'll see a push to more regulation, but I just don't see it in today's environment. Enough folks live near airports served by LCCs at this point that it may be political suicide to suggest something that would limit their service and raise their costs. Folks who are facing pay cuts themselves won't exactly be thrilled to see unionized airline employees getting fat on higher airfares caused by thier politician.

I would go so far as to suggest that part of today's problem is that the anti-merger folks at DOJ have prevented major airlines from merging, which would permit economies of scale & more efficiencies.

That's my opinion - it may not be anything that happens in the long term, but it certainly represents a free-market view.