Attention All Passengers (9 page)

Unlike many organizations that focused primarily on consolidation of legacy carriers, the AAI raised concerns about the “novel issues” generated by the first major merger of low-cost carriers, Southwest and AirTran. As Moss says, “The real worry is if you take out the low-cost carriers—then where are we? The prices creep back up to the legacy levels. As there is more consolidation it's harder to enter the airline industry. Who wants to compete against eight-hundred-pound gorillas?”

During those United/Continental hearings, then congressman James Oberstar—a Democrat from Minnesota—fought against consolidation, but within months he was voted out of office after thirty-six years (and beaten by a former Northwest Airlines pilot).

As for the future wedded bliss of United and Continental, former Continental CEO Gordon Bethune is painfully blunt in recalling an earlier occasion when United attempted to acquire his old carrier: “I told them, you can't run water.” He believes the real challenge now is cultural, as the two company workgroups are slugging it out to determine which group is stronger. But he pulls no punches in detailing United's shortcomings: “It's the same malaise as [at Continental] in 1994 and 1995 when I got there. Employees treated each other like shit. We turned it around. They don't have that culture at United.” He should know: before Glenn Tilton became CEO of United, the company's board approached Bethune about taking the job.

What's particularly compelling is that the same pattern is repeated over and over and over: Airline CEOs promise Congress, local politicians, unions, and the media that they will not downsize in a given city and they will not cut jobs. And then once the merger is approved, they do just that. It was demonstrated yet again last year, when Minnesota politicians howled after Delta announced it would move several hundred training and technical jobs from Northwest's former home state to Delta's hometown of Atlanta. Of course, there's a bit of a dog-bites-man aspect to such stories. Any analyst could have pointed out that Delta did not need two sets of pilot training centers, flight attendant training centers, and flight simulators. Consolidation is all about economies of scale, so why the shock when Delta did just that—consolidate?

The Politics of Merging

As for the “too big to fail” argument raised by me and others, some experts believe we're rapidly approaching that threshold, while others think we're already there. I agree with this second group, and think that if United/Continental is in danger of collapsing, then the government will have to step in and prevent that. Unfortunately, there is a lot of misinformation supplied by the media when airlines consolidate or shut down, as detailed in chapter 12. But Horan points out the “experts” who are quoted are often in the tank as well: “The Wall Street analysts never saw a merger they didn't like because they want the [merger-and-acquisition] fees.”

Loyalty program expert Tim Winship points out that “consolidation is all about pricing power, and pricing power, by definition, benefits the airline, not the consumer. So all of this chatter about benefits to consumers is overstated at best and downright false at worst.” He continues: “What additional value does a consumer get after the merger? For every benefit there's probably a countervailing negative. Ultimately it takes a competitor out of the market, and anyone who says that won't lead to higher prices has never studied economics. The net effect is negative.”

In June 2011 the American Customer Satisfaction Index stated that airline mergers typically have a “destructive effect” on customer satisfaction, citing the examples of US Airways and Delta following their respective mergers. Although the jury remains out on United/Continental and Southwest/AirTran, the historical record is not good from a passenger perspective.
5

In early 2007 US Airways warned of “hiccups” during the integration of the computer reservations systems used by US Airways and America West during their merger. In fact, during the melding of these systems, only about half of the new carrier's flights arrived on time. We've come to expect such problems when airlines merge, but employees point out there are potential safety risks as well.

Philomena Larsen was a longtime employee of Northwest Airlines, but she began her career at Republic Airlines in the mid-1980s just prior to that carrier's acquisition by Northwest in 1986. She calls that merger “horrendous” and notes there were widespread problems with lost bags when the two airlines' baggage tracking systems were melded. But Larsen also points out that mergers and acquisitions have a safety component as well: employees unfamiliar with new aircraft, ground vehicles, ramp equipment, and baggage belts are often rushed through training. In the case of Northwest/Republic, Larsen says the integration of two very different weight-and-balance systems meant employees were learning the new system on the job—a dangerous proposition for such a critical safety function. “We were lucky there wasn't an airplane accident,” Larsen recalls.

3

Collusion and Confusion:

How Airlines Don't Play by the Rules—and How Passengers Pay

ROBERT CRANDALL, CEO OF AMERICAN AIRLINES:
Raise your goddamn fares 20 percent! I'll raise mine the next morning!

HOWARD PUTNAM, CEO OF BRANIFF AIRLINES:
Robert! We—

CRANDALL:
You'll make more money and I will too!

PUTNAM:
We can't talk about pricing.

CRANDALL:
Oh, bullshit, Howard! We can talk about any goddamn thing we want to talk about!

—Taped telephone conversation submitted as evidence by U.S. Department of Justice in Antitrust Division civil lawsuit, 1993

A
irline executives like to talk about the need for a “level playing field.” On the other hand, many of these same execs do their best at all times to unlevel the corporate playing field. And it can take many forms: industry lobbying (both on and off the record), predatory pricing and dirty tricks against competitors, biased distribution that taints airfare shopping, codesharing and airline alliances, and antitrust exemptions and violations.

The key is buying influence. The transfer of wealth—and we're talking “regressive distribution” here, where money flows from the poor to the rich and not vice versa—remains the most important and underdiscussed issue in American life, at least until the Occupy Wall Street movement shone a light on it. There is a growing library of documentation illustrating how government and corporations work hand in hand to redistribute wealth through “trickle up” economics, under both Republican and Democratic administrations and majorities in Congress. In February 2011, CNN.com compared Internal Revenue Service data from 1988 and 2008 and found that, adjusted for inflation, the average American income fell slightly from $33,400 to $33,000. But during that same twenty-year period, the incomes of the richest 1 percent of Americans rose by 33 percent.

These issues not only cross party lines but permeate the entire American political system, in all branches and at every level. In January 2010 the U.S. Supreme Court officially granted the right of free speech to corporations, by lifting all restrictions on how much companies can spend to support and assail political candidates. Meanwhile, executive compensation soars.

The flow of money to politicians from the aviation industry remains a tangible fact of life. I began joking about it during FAAC meetings: the airlines have a permanent lobbying presence in Washington; consumers take what they can get from passenger advocates who can't compete on staffing and budgets and contributions.

Consumer advocates point out the airlines have virtually unlimited resources, so those defending the rights of passengers are at a disadvantage What's more, it's been well documented that there's a revolving door between the airlines and government service. In fact, one report from Public Citizen cited dozens of former higher-ups at the Department of Transportation, the Federal Aviation Administration, the National Transportation Safety Board, White House, and Congress who shilled for the airlines—and some who made the journey in reverse.

Make no mistake. Airlines constitute one of the most powerful of all Washington lobbies, totaling nearly six hundred individuals. In fact, from 1998 through 2011, air transport ranked fifteenth in the nation in dollars spent in an attempt to buy influence, amounting to a total of $793 million.
1

That's some army of lobbyists, and unfortunately they're often laboring against the best interests of customers and employees. First of all, there are the one hundred or so folks working for Airlines for America. Then there are independents such as Linda Hall Daschle, former Miss Kansas, who has lobbied for aircraft manufacturers Boeing and Lockheed-Martin, and just happened to have served as acting administrator of the FAA (customers first!). Her husband, of course, is former senator Tom Daschle of South Dakota, the Democrat who served as Senate majority leader. That $15 billion bailout for the airline industry, rushed through the Senate just eleven days after the 9/11 attacks? Yep, at the time Linda was an airline lobbyist and Tom headed up the Senate. Her other clients have included American Airlines, Northwest, and L-3 International, a company the FAA paid for airport security scanners that, well,
happened
to leak radiation. After President Obama tapped Tom for a cabinet position (Daschle later withdrew), Salon.com profiled the couple as “The Daschles: Feeding at the Beltway Trough.” That article quoted
Rolling Stone
contributor Matt Taibbi: “In Washington there are whores and there are whores, and then there is Tom Daschle.”

Obviously there are also countless lobbyists working for individual airlines. And representing outsourced maintenance we now have the Aeronautical Repair Station Association staking its claim in Washington as well. ARSA recently launched the “Positive Publicity Campaign Plan,” which includes an allotment of $1 million annually for targeted public relations outreach and creating “a tactical plan to deliver those messages to key audiences” (including policy makers) over three years.

Hope and Change for Passengers?

During the second term of President George W. Bush I saw countless bumper stickers with the simple message
1-20-09
. Yet only one month into the Obama administration I spotted a sticker touting
1-20-13
. We seem to have entered an era of permanent teeter-totterism in American politics: the populace is perpetually angry with incumbents, and the next government-in-exile carps from the wings. Yet the most pervasive issue of our time—the wholesale purchase of democracy by corporate interests—is never discussed in a meaningful way by
either
party.

So does it matter which party is at the helm? I reached out to Ralph Nader for edification; after all, who better? He claimed it doesn't matter if Democrats or Republicans are in power: “It's a permanent government. The airlines and the manufacturers pick the head of the FAA. Have you ever noticed there is never a contentious hearing for the FAA administrator?”

During the 2008 campaign, the Teamsters were early and strong supporters of Senator Barack Obama rather than Senator Hillary Clinton or any of the Republican contenders, perhaps not surprising given both the Clinton and Bush records on free trade agreements such as NAFTA. In a letter addressed to the Teamster Aviation Mechanics Coalition, the future president stated: “The practice of outsourcing aircraft maintenance overseas raises security concerns and pits our skilled mechanics making a middle class living against less skilled, less well protected workers abroad. I applaud your efforts to organize a strong union at United Airlines, and look forward to working with you on the critical issue of outsourcing now and in the years ahead.”

Unfortunately, the outsourcing crisis has only gotten worse. As labor leader Tom Brantley says, “Senator Obama supported oversight of repair stations. President Obama doesn't.” And let it be noted one year after inauguration, the forty-fourth president's secretary of transportation tapped the chairman of United Airlines to head the FAAC Competition Subcommittee.

Some argue Obama has been an improvement, however, and point to DOT secretary LaHood's passenger rights regulations as proof. “There's been a decent amount of change,” says Paul Hudson of the Aviation Consumer Action Project. He asserts Republican views toward passengers were unduly harsh: “The DOT secretary would tell Congress that market forces would address all problems. Or else people don't have to fly.”

There's also no denying that some presidential administrations have been more proactive than others on airline safety. For example, an analysis conducted in 2010 by News 21–Center for Public Integrity found the NTSB “issued significantly fewer recommendations for improvements” under President George W. Bush. Here's the tally of average annual NTSB recommendations for improvement under five consecutive White House staffs:

Carter                        384

Reagan                      445

G. H. W. Bush           417

Clinton                      329

G. W. Bush                155

In response to how both Republicans and Democrats have served the interests of the airline industry rather than the interests of passengers, there is strong evidence such influence may affect even the most high-profile politicians. Industry veterans recall that Senator John McCain was an outspoken advocate for passenger rights reform in 1999 and sponsored the Airline Passenger Fairness Act; I can recall a telephone conference with him on the topic. Then, in June 1999, he suddenly switched course and supported a watered-down voluntary pledge from the airlines, and this
Washington Post
headline sums it up succinctly: “A McCain Crusade Faded as Airlines Donated.” Yep: that month the airline industry proffered $226,000 in “soft money,” including $85,000 from American Airlines for the National Republican Senatorial Committee. The
Post
also reported that Phoenix-based America West (now Phoenix-based US Airways) was “one of McCain's top benefactors.” Hudson recalls being stunned by McCain's actions: “He ditched the bill and said the airlines would address it themselves. Coincidentally he had gotten lots of donations from airlines. We've seen this movie before.”

Allegations of unlevel playing fields apply not only to airlines but also to commercial aircraft manufacturers. In March 2011 the World Trade Organization issued a lengthy “dispute settlement” in response to a complaint filed by Europe-based Airbus, finding that Boeing had been unfairly subsidized by a host of U.S. government entities, including NASA, the Department of Defense, and the states of Washington, Kansas, and Illinois. However, one year earlier the WTO had found that the European Communities and the nations of Germany, France, the United Kingdom, and Spain had unfairly subsidized Airbus. Clearly when it comes to corporations bending the rules, there's plenty of blame to be spread on a global basis.

So how did a government of, by, and for the people suddenly become a government of, by, and for the S&P 500? “It's all caught up in this free trade/free market mantra,” says airline academic Paul Dempsey. “You have high school graduates, blue-collar workers with no jobs. But that doesn't matter. They're told they can go flip burgers. What matters is that consumers are given lower prices.” Dempsey believes Oscar Wilde's assessment of cynics also applies to economists: “They know the price of everything and the value of nothing.”

Predatory Behavior = Higher Fares

An industry executive once put it best: “The hub airlines are like badgers in their lairs. They won't come out looking for you, but you're in trouble if you go in and screw with them.” Many low-fare airlines have found this out—in some cases, too late. When a smaller airline starts flying on a major's bread-and-butter route, the result can be all-out war—and passengers are the casualties, with less service and higher fares in the end. The weapons of choice can include predatory pricing—temporarily offering rock-bottom fares to drive out low-cost competitors—or the majors can even engage in dirty tricks, such as poaching passengers.

For those who thought the legacy airlines had moved beyond such behavior, in March 2011 the Business Travel Coalition pointed out it was déjà vu all over again, this time with Delta's retaliation against low-cost Frontier Airlines for starting scheduled flights out of Delta's hub at Minneapolis–St. Paul International Airport.
2
Bob Harrell notes about predatory pricing: “You can smell a rat, but it's hard to prove.”

Both the departments of Transportation and Justice have attempted to do just that. For context, it helps to review what the airlines are capable of, by illustrating how they have behaved until now. What's more, the myriad ways in which major airlines have attempted—both legally and illegally—to bankrupt low-fare airlines further hurt consumers by dampening enthusiasm within the financial community to support start-up carriers.

In 1993 an influx of predatory pricing charges were leveled by new-entrant airlines against hub-and-spoke majors. That July, Houston-based UltrAir shut down, claiming “illegal, anti-competitive, monopolistic, and predatory behavior” by the other hometown carrier, Continental; similar charges were leveled against Continental at Newark, New Jersey, by KIWI. Soon after, the Justice Department investigated claims that Salt Lake City–based Morris Air was being penalized by Delta's override policies, which rewarded travel agents for steering customers away from Morris. And the transportation secretary personally intervened when Reno Air cried foul against Northwest. The obvious irony is that all four of those start-ups soon went through mergers or bankruptcies (then again, so did Continental and Northwest).

An industry white paper by Clinton V. Oster Jr. and John S. Strong, “Predatory Practices in the Airline Industry,” illuminates the Reno Air–Northwest brawl. The new guys began service between Reno and Minneapolis–St. Paul in 1992. Northwest had abandoned the same route one year earlier, but after Reno Air met with success Northwest announced new service. Pulling out all stops, Northwest also said it would match the low-cost carrier's fares; it offered bonus frequent flyer mileage, and those overrides for bookings out of Reno. Then Northwest lowered its
nonstop
fares between Minneapolis and the West Coast, an obvious effort to attract Minnesota-to-California-bound customers flying Reno Air's
connecting
service through Reno.

So far it seemed like good old-fashioned bare-knuckle capitalism. To the surprise of no one, the big guy won, and Reno Air discontinued its flights in June 1993 (by 1998, it was acquired by American). But that's where “free marketism” crosses over into “illegalism.” Once Reno Air pulled up stakes, Northwest's fares on those routes began climbing. And climbing. In fact, they not only returned to pre–Reno Air levels but surpassed them. According to Oster and Strong, Northwest's average fare between Minneapolis and Reno in April 1993 was under $100; within six years the ticket prices ranged from $345 to $1,476.