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Crandall Calls For Re-Regulation

Jun 11, 2008

By Anthony L. Velocci, Jr./Aviation Daily

Decrying the “sad state” of U.S. commercial aviation, former American Chairman and CEO Robert Crandall yesterday declared three decades of deregulation a failure and said that treating airlines like a regulated utility must be a part of a broad solution to their current financial crisis.

“We have failed to confront the reality that unfettered competition just doesn’t work very well in certain industries, as aptly demonstrated by our airline experience and by the adverse outcomes associated with various state efforts to deregulate electricity rates,” Crandall told aviation and financial industry professionals gathered at the Wings Club in New York City. “It’s time to acknowledge that airlines look and are more like utilities than ordinary businesses.”

While the rapid rise in jet fuel prices has complicated the job of airline managers, fuel prices are not at the core of the industry’s precarious financial state. Inadequate scale isn’t to blame either, he added.

“The arguments in favor of consolidation are unpersuasive,” he said. “Mergers will not lower fuel prices, and they will not increase economies of scale for already sizable major airlines. If consolidation were really the answer, it is conceivable the system could be run by a single efficient operator.”

Instead, Crandall continued, the industry’s goal should be to harness competition and regulation to create a system responsive to both the imperative of efficiency and the desirability of decent service — now unacceptable “by any standard.”

In addition to reregulation, Crandall called for:

• Overhauling price structures to “recapture” full costs and earn the profits needed to sustain the huge investments essential to the industry’s future.

• Amending the Railway Labor Act to require binding arbitration to encourage both labor and management to adopt more moderate positions than has been true in the past while simultaneously moving all airlines closer to labor-cost parity.

• Revising U.S. bankruptcy laws to deprive failed carriers of the right to use lower costs to undercut the fares offered by “their more prudent rivals.”

• Regulating the number of flights scheduled to what runways, terminals and air traffic control facilities at airports can handle.

• Shrinking schedules proportionately to each airline’s current frequency share as a way to pressure carriers to use the largest feasible aircraft in each slot.

• Imposing more stringent financial standards that new airlines must meet to eliminate or discourage “short-term antics” by start-ups that have destabilized the pricing structure required by a healthy industry.

• A more accommodating stance by Washington towards industry collaboration to achieve more intensive asset utilization and more efficient operations.

3Cforme

If industry leaders (and Crandall surely still qualifies) want to make the regulated utility comparison and get regulation to prop up returns, they should recognize that regulated utilities also face service standards and penalties for failing to meet those standards. Bring it on. Seat pitch, schedule reliability, baggage delivery time from gate arrival...

Changing bankruptcy laws to prevent lengthy and multiple trips seems sensible, but his fare control remarks are quite something else entirely.

Under U.S. law, employees have rights to union representation and bargaining, including strike action for private employment, so I don't see unions embracing binding arbitration. It's clear, however, that many labor/management relations across the industry are sometimes wildly disfunctional.

Rationing slots to fit established capacity makes sense. Cementing current airline share does not. It blocks new entrants and rewards firm that have performed poorly. What's wrong with auctioning slots at overcrowded airports?

A few more legacy airline failures in the past decade might have largely avoided the present situation where six of seven major carriers go into a downturn in a very unhealthy state.

KD5MDK

The inability of the airlines and unions to get along is no one's fault but their own, and if other airlines can get along with their employees, they're the ones who should reap the benefits.

Maybe we need to reregulate and have WN, B6, F9 and VX as the official domestic air carriers of the USA...

mikeef

I have no doubt that many Americans, picturing fewer delays, better onboard service, etc. would agree with Mr. Crandall. Until they found out exactly how expensive air travel would get. Most people have forgotten how much more expensive it was to fly back in "the good ol' days."

Mike

Steph3n

really I find it odd people calling for regulation when it should be calling for corporate responsbility.

Shareholders and directors should be holding their executives feet to the fire and making them EARN what they are taking in bonus.

You know I bet most of this country would be fine with them making 10 million a year, IF they were doing their job and running a profitabel company that people could invest in and get a return.

Right now we are seeing the black hole of investment, AIRLINES. 'Investing' in an airline that is run by most of the executives today is like throwing good money in the garbage bin, except you could trace the money to fuel and executives.

Make these guys earn their pay by good management. Good management means making profitable routes even when it hurts sometimes. Good management means good labor relations even if it means you have to ruffle some feathers a few times a year, good management means changing what has been the status quo for a long time in the industry.

WN is not the best airline, but they are profitable, and others could learn from them in many ways and it is NOT JUST about fuel hedging. People like to say that every time, but it is simply not about hedging as much as having a reliable services with reliable people and reliable business.

Justin026

I am sorry to say that Crandall is living in the past. The problem legacy carriers face is not poorly financed startups with low fares; it is Southwest. Southwest now is the price leader throughout the country; it makes solid profits on its fare structure and it maintains stable pricing and service in face of what is hapening with oil prices and the economy. In one region, the southeast US, they still are missing coverage, but there AirTran's pricing structure sets the pace by following Southwest's lead with a few wrinkles. The other LCCs and the other legacies then match these levels.

The legacies have two advantages in the process:

Each one has a collection of domestic routes where LCCs are not yet providing service. Then the legacy can charge fares 50 to 100% higher.

Each legacy has a collection of international routes where LCCs can't go (yet).

The real threat to deregulation that Alfred Kahn has written of is the way established carriers match lower fares to pinpoint destinations against a new entrant and then reraise them immediately after the new entrant departs. In his writings he has reviewed the legal issues behind that tactic, feeling it was just a shade of grey on the right side of the law.

A separate issue affecting American (to its credit)is that it has not used the bankruptcy process to self-cleanse itself, as have DL, UA, US, NW (and CO in times past).

3Cforme

There's no reason to think that the only form of regulation today would be the price regulation of circa 1977 plus increases in the consumer price index.

In most competitive industries, wages rise with productivity. In 1977, a 737 had a flight crew of two, carried ~130 people, and flew at 0.80 mach. Yet I don't think pilots today would be satisfied with nominal 1977 wages.

mvoight

If fares were going to be 1977 prices plus the change in CPI, why would pilots get only 1977 wages, without the CPI adjustment?

Tango

. . . and you don't think airfares are going to climb back up to previous levels in real terms? --the only difference is the service levels will not return to pre 1980 standards. Southwest's fuel hedges are only going up in price and they will soon be paying the same price for Jet A as everyone else and that translates into much higher prices for everyone.

For everyone who disses Mr Crandall's remarks, he is one of the few people that really understands the industry and his comments should not be taken lightly.

martin33

Nor should the fact that he has been an unrepentant advocate of price-fixing since well before the infamous Putnam/Braniff phone call of 1982.

Tango

Who would you rather have running AA right now--Aprey or Crandall?

Steph3n

A blind hippo with a horses tail?

zman

Crandall

zman

That sounds like Carty, not one of the offered choices

3Cforme

Fares wouldn't sensibly be 1977 levels adjusted upward, but's that's the favorite bogeyman of parties who are opposed to regulation. The argument takes the form of 'LAX to NYC was $500 back in the day. That's $2000 in today's money. Nobody wants to pay that.'