George Will

WASHINGTON--Even a short war can be a big boulder hurled into the pond of society, causing large waves. Today's wars against Iraq and terrorism are components of a perfect storm of converging calamities for America's airline industry. As a result, a conservative Republican administration is being forced into doing something conservatives distrust--administering ``industrial policy.'' By its actions, and even more by its inactions, the administration will preside over a radical transformation of the industry.

As of Sept. 10, 2001, the industry had not netted a nickel since 1913, when a Silas Christofferson was carrying passengers by hydroplane between San Francisco and Oakland harbors. And on Sept. 10 the 11 largest carriers were already well on their way to losing $7.7 billion in 2001.

Then came terrorism, the increased unpleasantness of the airport experience, and the (largely irrational) fear of airborne terrorism. Losses in 2002 were $10 billion. And now comes an additional reason for fear of flying--SARS, severe acute respiratory syndrome.

The industry's fundamental problem is oversupply--too many flights, and too many seats relative to the number of passengers prepared to pay what the major carriers need to charge in order to cover costs. This crisis began with the bursting of the tech bubble that grounded many previously high-flying business travelers who bought what the airlines most like to sell--high-priced first-class tickets purchased at the last minute.

Those free-spending fliers may never be back, now that low-priced carriers such as Southwest and JetBlue, and Internet ticket shopping, have made high-priced flying anathema to companies' comptrollers. In January, United, already in bankruptcy, lowered prices of unrestricted last-minute sales. It increased its passengers somewhat but lowered its take from such sales by $30 million a month.

Airlines are capital-intensive (today fliers landing in Tucson can see some of the 1,700 commercial aircraft now mothballed, but still being amortized) and highly leveraged (the debt of the 11 largest carriers is equal to 90 percent of their value). Airlines also are labor-intensive (labor is normally about 40 percent of an airline's spending), and because they are capital-intensive and leveraged, they cannot survive strikes. So bankruptcy has become a procedure for undoing the results of the asymmetry of power favoring unions.


George Will

George F. Will is a 1976 Pulitzer Prize winner whose columns are syndicated in more than 400 magazines and newspapers worldwide.
 
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