McCain: Let weak airlines fail
by Jaret Seiberg in Washington
Updated 06:41 PM EST, Jan-9-2003
The incoming chairman of the Senate Commerce Committee warned the airlines Thursday, Jan. 9, that he would rather see carriers fail than waste billions of dollars to sustain economically doomed companies.
We should be reluctant to do anything that might keep inefficient businesses afloat, Sen. John McCain, R-Ariz., said at a hearing on the health of the airline industry. Many people believe that the basic business model of the traditional hub-and-spoke carriers was broken long before the current difficulties.
McCain said he is especially troubled about bailing out the major carriers because the discount airlines, which follow a different business model, have remained profitable and grown despite the economic downturn.
We must ask whether our actions would improperly distort the marketplace, McCain said. The ability of some carriers to remain profitable in the current climate raises questions about whether there is something wrong with the rest of the industry.
Still, McCain refused to shut the door to offering additional federal relief. Permitting airlines to fail would strengthen the dominant carriers even more, which would mean higher prices for consumers and less service to rural markets. We face no easy choices, he said.
The senator suggested the hub-and-spoke carriers need to first clean up their own houses, including getting labor costs under control. Along those lines, McCain is the primary sponsor of a bill that would force labor disputes in the airline sector to binding arbitration if the parties reach an impasse.
Executives from AMR Corp., Northwest Airlines Inc. and U.S. Airways Inc. may have inadvertently provided support for the camp that argues against propping up these hub-and-spoke carriers.
As American Airlines chairman Donald Carty testified, hub-and-spoke airlines are suffering primarily because their system is premised on business travelers paying premium prices for seats. Yet business travel was down 40% in 2002 compared to 2001, he said.
Northwest CEO Richard Anderson said the business travelers who are flying have become accustomed to discounted fares and are no longer are willing to pay top dollar. Business passenger revenue was down 21% in the first 11 months of 2002 compared with a year earlier and off 36% from 2000, he said.
Yet these executives said their business models are viable. Hub-and-spoke systems are the most efficient means to provide frequent service to most Americans, especially those outside of major cities, Anderson said.
Perhaps recognizing that additional cash outlays are not forthcoming, the executives instead called for the federal government to pick up a greater share of security costs and to cut taxes on airlines.
Public officials must abandon their convoluted view of the industry in which they profess to value its importance and then turn around and tax, regulate and fine us to the point of operational paralysis, U.S. Airways President David Siegel said.
Anderson also demanded that regulators permit code sharing agreements to advance. An arrangement between Northwest, Delta Air Lines Inc. and Continental Airlines Inc. has been stalled for months at the Department of Transportation.
Sen. Ernest Hollings, D.-S.C., said the airline sector is too important to the economy to permit it to collapse. Yet he said it was unclear what Congress should do.
We need to see real fixes with real results, not a system of booms and busts that overcharges customers in good times and asks for handouts from them in bad times, he said.
by Jaret Seiberg in Washington
Updated 06:41 PM EST, Jan-9-2003
The incoming chairman of the Senate Commerce Committee warned the airlines Thursday, Jan. 9, that he would rather see carriers fail than waste billions of dollars to sustain economically doomed companies.
We should be reluctant to do anything that might keep inefficient businesses afloat, Sen. John McCain, R-Ariz., said at a hearing on the health of the airline industry. Many people believe that the basic business model of the traditional hub-and-spoke carriers was broken long before the current difficulties.
McCain said he is especially troubled about bailing out the major carriers because the discount airlines, which follow a different business model, have remained profitable and grown despite the economic downturn.
We must ask whether our actions would improperly distort the marketplace, McCain said. The ability of some carriers to remain profitable in the current climate raises questions about whether there is something wrong with the rest of the industry.
Still, McCain refused to shut the door to offering additional federal relief. Permitting airlines to fail would strengthen the dominant carriers even more, which would mean higher prices for consumers and less service to rural markets. We face no easy choices, he said.
The senator suggested the hub-and-spoke carriers need to first clean up their own houses, including getting labor costs under control. Along those lines, McCain is the primary sponsor of a bill that would force labor disputes in the airline sector to binding arbitration if the parties reach an impasse.
Executives from AMR Corp., Northwest Airlines Inc. and U.S. Airways Inc. may have inadvertently provided support for the camp that argues against propping up these hub-and-spoke carriers.
As American Airlines chairman Donald Carty testified, hub-and-spoke airlines are suffering primarily because their system is premised on business travelers paying premium prices for seats. Yet business travel was down 40% in 2002 compared to 2001, he said.
Northwest CEO Richard Anderson said the business travelers who are flying have become accustomed to discounted fares and are no longer are willing to pay top dollar. Business passenger revenue was down 21% in the first 11 months of 2002 compared with a year earlier and off 36% from 2000, he said.
Yet these executives said their business models are viable. Hub-and-spoke systems are the most efficient means to provide frequent service to most Americans, especially those outside of major cities, Anderson said.
Perhaps recognizing that additional cash outlays are not forthcoming, the executives instead called for the federal government to pick up a greater share of security costs and to cut taxes on airlines.
Public officials must abandon their convoluted view of the industry in which they profess to value its importance and then turn around and tax, regulate and fine us to the point of operational paralysis, U.S. Airways President David Siegel said.
Anderson also demanded that regulators permit code sharing agreements to advance. An arrangement between Northwest, Delta Air Lines Inc. and Continental Airlines Inc. has been stalled for months at the Department of Transportation.
Sen. Ernest Hollings, D.-S.C., said the airline sector is too important to the economy to permit it to collapse. Yet he said it was unclear what Congress should do.
We need to see real fixes with real results, not a system of booms and busts that overcharges customers in good times and asks for handouts from them in bad times, he said.
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