All aboard fiasco

Posted: Apr 28, 2003 12:00 AM
The fiasco at American Airlines illuminates a great tangle. The airline industry is not wholly subject even to sophisticated ministrations of the free market.

You had first the action of the chief executives of American. One more time, the jeremiad of the Austrian-American intellectual sharpshooter Willi Schlamm comes to mind. He said 50 years ago in private conversation, "The trouble with socialism is socialism. The trouble with capitalism is capitalists." The behavior of the AA executives is a brazen example of his point.

Karl Marx and his followers, including some tatterdemalion hangers-on who have dragged their ideology into the 21st century, reasoned from individual cupidity to an indictment of the capitalist system. Marxists were wrong in doing so, because capitalism is a mechanism for coping with cupidity, not for enhancing it.

Capitalism brings on disciplinary measures from competitors who maneuver to success for their enterprises by rendering services to consumers, and such services can't survive any institutionalization of cupidity. If Mr. Gotrocks's appetite for profit extends beyond his ability to manufacture competitive lawn mowers, his greed is contained and lawn-mowers' needs met by the implacable fraternity of unorganized, but supremely efficient, lawn-mower buyers, present and future.

American Airlines is only to some extent governed by market forces. On certain routes, yes, one can opt to fly Delta, or whoever else is going in your direction. But the airline system is sick on the inside. The new chief executive of AA, Gerard Arpey, was in charge of air flight operations as executive vice president, and arrived at his desk in Fort Worth on Sept. 11, 2001, at 7:15. The phone rang. He was the first senior airline official to learn that an AA aircraft had dived into the World Trade Center. His job became to abort the flight of every plane scheduled to fly, and to call down to the ground every AA plane in the air.

That isn't the kind of thing market forces dictate, suggesting the peculiar position of airlines, buffeted by regulations, by consumer caprice, by fluctuating federal subventions. That all added up, in the case of American Airlines, to $1 billion in operating loss in the last quarter.

What caused the uproar and the resignation of chief executive officer Donald Carty was corporate behavior in the matter of compensation for the cadre of 45 chief executives. In the case of some of them, the proposal was to set aside a sum of money equal to twice their annual salary as inducement to stay on with the company until the end of 2005. On top of that, there was an initiative to segregate their pensions in such a way as to protect the corporation from any charge of fraudulent conveyance in the event of bankruptcy. Just as there are laws against certain tax maneuvering in anticipation of death (you can't make otherwise permissible allocations of money the day after you are diagnosed as suffering from cancer), you can't shelter money from bankruptcy courts that was shelled out with uneven concern for the few.

The hero of the critical board meeting in Dallas was David Boren, former senator from Oklahoma, now president of the University of Oklahoma. He was the sole member of the board of directors who said it out loud to the press -- that he would demand the resignation of the CEO. Mr. Carty had bargained with several unions, asking for substantial concessions in wages in order to save the company from bankruptcy. A few days after he got contingent union consent, a filing with the SEC revealed that management had scheduled no proportional sacrifices in their own compensation.

That was politically stupid and lacking in pride. You don't do that, imposing on a subordinate a sacrifice you don't impose on yourself. The irony is that the justifiable anger of the pilots and flight attendants and mechanics is economically futile given the iron laws of the marketplace. If the reductions in wages paid out is less than what is needed to turn a profit, the whole company goes down.

Perhaps it's an understandable way to avenge themselves against the executives, but not an intelligent way of doing so. Executive compensation at AA is an almost invisible share of gross weekly money paid out to maintain operations. But it can be held that union members' willingness to incur bankruptcy is a show of pride by the workers unmatched by their executives, and as such, a show of Americanism by American Airlines personnel.