US airlines need some government push

Flying high on profits as never before, they need to put some of that for greater good

With power and wealth concentration on the minds of US politicians and voters in an election year, one overlooked culprit is the airline industry.

Thanks in part to the deregulation and consolidation of the industry during the past several decades, airlines have focused their operations in big hub airports and major coastal markets of the US 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 the 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 costcutting just as the economy rebounded from the Great Recession allowed airlines to finally earn their keep and reward investors.

Multiple tailwinds

But a convergence of other factors also helped. Interest rates remained near record lows during the past decade, letting airlines both pay down their debt and cut servicing costs on their remaining obligations. The job market remained relatively weak, giving airlines breathing room on labour costs.

And then in 2014 oil prices collapsed, in part because of the growth of domestic oil production, giving airlines cheap and stable fuel costs in a way that they’d rarely had in the past. All of a sudden, an industry known for losing money in good times and bad was reaping profits like never before.

Buffett went from making jokes about airline stocks to buying them.

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 buy-backs and dividends. The company no is longer reducing its debt load, suggesting that it’s comfortable with its balance sheet and is focused on rewarding shareholders. American Airlines and United Airlines have been buying back stock as well.

Hitting cities hard

The problem worth exploring gets back to how the industry restructured itself during the bleak 2000s, particularly the elimination of so many unprofitable regional routes. To an airline, closing a money-losing hub might make good business sense, but to Memphis, Tennessee, it meant the local airport saw passenger traffic fall 60 per cent between 2010-14.

It was a similar story for the Cincinnati/ Northern Kentucky International Airport when it lost hub status. Losing hubs and flight routes has a direct negative economic impact on the fortunes of a city beyond just making travel more inconvenient for residents.

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.