Comment by bko
3 months ago
> From its deregulation in 1978 to the end of 2025, the airline industry has cumulatively lost money: its net profit over those 47 years sits at negative $37 billion.
That was surprising. Goes against the idea that deregulation allows companies to squeeze consumers and earn excess profits. My understanding is that before regulation, routes were allotted by the government. So an airline might own New York to Boston, so they didn't have to compete. Obviously de-regulation changed that.
The article doesn't go into it, but unions are also a challenge. Much of the airline industry is unionized. So you have situations where pilots that have been there a while get a lot more money. You have people doing essentially the same job but some are getting paid 3x as much just because they've been there a long time. In most industries, there is higher pay for senior talent, but that's because they're more effective at their job, and produce higher output. In this case it's just a legacy cost that makes some airlines incredibly uncompetitive through structural features.
A race to the bottom on pilot pay won't help anything. Well it may lead to less qualified pilots. You can ask Boeing how well screwing over labor has worked for them if you like.
All US airlines have the same labor costs for pilots and it isn't their highest cost anyway. That would be fuel.
If you want to divvy up costs that way: Boeing is probably the biggest problem. Both them and Airbus eat up all possible excess profit on the back end via the cost for airliners. Break up Boeing, bring back competition in airliner manufacturing. People who want to screw over labor don't usually frame things in those terms for some reason.
How exactly does Boeing drive up the cost? The cost of the aircraft is less than 20% of the lifetime cost of operating an airliner and a lot of the maintenance cost is not related to the cost of parts from Boeing, since most parts that get replaced on an aircraft are not made by Boeing and airlines do not go through Boeing to buy them.
Are you sure about that number being ex-fuel?
FWIW I'm not interested in flying commercial with non-union pilots so that airlines can become cheap labor body shops.
I'm also not interested in saving money by having Boeing outsource to kick as many people out of their machinist union as they can (and screw those people out of retirement and healthcare benefits).
I got my pilot certificate last year (zero plans to go ATP/commercial). Its a lot of work. Then you've got years of getting paid pennies to earn your 1500 hour ATP. Then you've got more years of taking the crap routes and not making super dollars. Much like a doctor its after you've put in 10-15 years that it starts really paying off.
The union also protects pilots from blame culture and trying to game metrics. If it isn't based on seniority then what metrics do you use? And do you want pilots to start making flying decisions based on on-time percentage instead of safety?
If your business needs to screw over labor to survive you don't have a worthwhile business.
> Break up Boeing, bring back competition in airliner manufacturing.
Sounds backwards. Pilots have a total monopoly. Boeing doesn't.
Pilots have a total monopoly... in the occupation of piloting?
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sure, airlines have a choice among tens of US aircraft making companies other than Boeing... oh wait...
> was surprising. Goes against the idea that deregulation allows companies to squeeze consumers and earn excess profits.
That's because this assertion is economically illiterate. Deregulation can lead to increased profits where otherwise companies have monopoly power. But often, the regulation was there in the first place to ensure that companies had sufficient profit to invest in expensive infrastructure. (E.g. railroads).
That also didn't work well. The US is notoriously very poor in railroads.
For passengers, yes, but primarily it’s poor for passengers because the infra is owned by freight companies that aren’t interested in passenger service. And rail freight service in the US is mostly pretty good.
And, at the time, they needed a lot of rail across huge distances. The transcontinental rail lines were hugely expensive and had immense amounts of graft involved in every step of their construction, but they got built. Also enabled the crushing of Native Americans, which was a usually-somewhat-tacit (though sometimes very explicit) goal in Washington.
The U.S. has the best rail infrastructure in the world. It’s just designed for moving cargo across what used to be the world’s largest industrial center instead of moving passengers around.
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The US, before deregulation, had a whole lot of railroads going bankrupt. This was partly because factories closed but the railroad couldn't abandon the line that served those factories, because of regulation.
I mean, they are still regulated, and they still have to go through regulators to abandon a line (IIUC), but it's much faster than it was.
Airlines are popular employers specifically because they offer a clear vision of future pay increases and better, more prestigious, schedules. People, especially pilots, are willing to put up with a lot early on because they are confident that sticking with the plan will eventually allow them to earn double and triple their early-career salaries.
Same thing happens in law, investment banking, etc... the hardest workers are often the youngest and least-paid. They do it because they know big money may come later.
> That was surprising. Goes against the idea that deregulation allows companies to squeeze consumers and earn excess profits.
It really depends on the market. In a potentially competitive market, deregulation can work as a function to drive down margins.
Air travel is such a market. Prior to deregulation, routes were set by government action and competition was limited. With deregulation, it's not that hard to setup a commercial scheduled airline, and new airlines popup relatively frequently to address routes where there is margin. It doesn't take that much capital to start an airline; you can lease the aircraft and contract out maintenance (might be part of the lease) and start with a single round trip per day. You don't need to start with a big network or a lot of aircraft. It's not so easy to get slots at busy airports, but you don't have to start there either.
Where deregulation ends up leading to outsized profits is where the market leads to natural monopoly and regulation provides an upper bound on margin, rather than a lower bound. Things like last mile utilities, where it's difficult to run multiple networks in the same space: ex water, sewage, electricity, telecom. In situations like that, to promote competition you want to do regulated unbundling, so there's one organization that runs the last mile and choices for service over the last mile: ex you pay the last mile for delivery of water per acre foot and also your water supplier who must deliver the same number of acre feet to the water network. (or probably a little more, water networks have shrinkage)
> That was surprising. Goes against the idea that deregulation allows companies to squeeze consumers and earn excess profits
Sometimes it does and sometimes it doesn't. It depends on the industry, as the article goes into detail to explain.
That was surprising. Goes against the idea that deregulation allows companies to squeeze consumers and earn excess profits.
I've held the belief that an occasional bankruptcy is basically a sign of healthy competition within an industry: those companies going down literally didn't know how to be any more efficient or they could've survived.
Regarding airline business, a crapload of more people are flying now with better prices than before the industry was deregulated. Sure it must hurt someone at one end, eventually. Part of the business is standing through price wars because someone will always lose: the best companies can endure that. While airline industry probably fluctuates as described in the article there are plenty of other cyclic industries. Churn itself isn't anything new.
The article does discuss union collective bargaining agreements and labor cost structure in several sections.
> Labor costs might seem variable, but they’re actually not: pilot, flight attendant, and mechanic compensation in the United States is governed by the Railway Labor Act of 1926 (which was extended to airlines in 1936), which stipulates that collective bargaining agreements don’t actually expire but rather remain in force until they’re replaced. So even your wage bill is more or less fixed over multi-year horizons.
> Chapter 11 bankruptcy protection—which allows a company to continue operating while it restructures its debts under court supervision—is practically the only mechanism by which an airline can renegotiate its rigid cost structure, from aircraft leases to collective bargaining agreements. Oftentimes this renegotiation takes on a rather predatory character. When United Airlines filed for bankruptcy in 2002 in the aftermath of the September 11th attacks, it terminated its pension plan...
> So Chapter 11 is a relief valve for airlines struggling under the weight of their fixed costs; but it doesn’t really do much to help the system as a whole. For airlines, bankruptcy rarely culminates with liquidation; airlines that emerge from bankruptcy proceedings, having voided pension obligations and rejected aircraft leases, can operate at a fundamentally lower cost basis than their competitors. So bankruptcy doesn’t really restore the industry to a competitive equilibrium that can cover the cost of capital: it resets the floor at a lower level, from which a new round of ruinous competition can begin.
Could it be Hollywood accounting?