Airlines have habit of flying on empty

By DAVID MOON, Moon Capital Management
May 16, 2004

It's bad enough when there is one little boy who constantly cries 'wolf.' Imagine an entire neighborhood of little boys crying wolf, while at the same time setting out food for the wolves.

That is the airline industry. Airlines regularly warn of their impending doom, while often acting in ways that actually bring about that doom.

This past Monday, Delta Air Lines warned that it might have to file for bankruptcy if its pilots' union didn't make certain salary concessions. A few months ago, someone related an experience to me. She was in a meeting with Delta executives discussing distribution systems. The Delta executives warned the meeting attendees that they would likely issue a bankruptcy warning this summer, but no one should worry; it was all part of their negotiation strategy with the pilot's union. 'Wolf' anyone?

It's not just Delta; it's almost the entire airline neighborhood.

A year ago, American Airlines wrestled wage concessions from three major unions after threatening to file for Chapter 11 bankruptcy without the salary cuts. The company had just announced a loss of a billion dollars for the first quarter of 2003.

US Airways, which emerged from bankruptcy in 2003, is now threatening another bankruptcy filing if it doesn't get employee wage concessions.

Don't forget, these companies received $15 billion in federal financial assistance following the 9/11 attacks. A year later, the industry went back to the feds asking for another $9 billion. The airlines are money addicts and the government is an enabler.

Local governments are as enabling as the feds. San Francisco International Airport just cut its landing fees in an attempt to help already-bankrupt United Airlines

In additional to financial bailouts, politicians are willing to help the airlines with their negotiating strategy. Florida Congressman John Mica, chairman of the House Aviation subcommittee, suggested that 'the best thing that could happen to the large US carriers is being forced into bankruptcy,' acknowledging it would increase their negotiating leverage with employees.

For every airline that threatens bankruptcy, however, it seems another two or three actually file for protection.

The problems aren't just limited to well-known airlines or just those in the U.S. Current bankruptcies include Royal Tonga Airline, Armenian Airlines, Russian Vnukovo Airlines, Hawaiian Airlines, Las Vegas-based National Airlines, Belgium's Delsey Airlines, Trillium Air, Pem-Air Limited and Brussels-based Sobelair.

Last year, pilots around the world celebrated the 100th anniversary of the Wright brothers' first flight at Kitty Hawk, NC. On December 17, 1903, the aviation industry was born. Since that day, the airline industry has, in total, failed to produce a profit. Since inception, it has posted a net cumulative loss.

With the exception of Southwest Airlines (which is such a different creature that it warrants an entire column), I cannot imagine why anyone would commit a long-term investment to this industry, except as a result of high-flying ego or stupidity. Either that, or they are drawn to little boys and wolves.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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