1 Financial data are from the airlines’ published quarterly results. In 2019, the Big Four carriers and their regional partners accounted for 86 percent of the total U.S. airline industry. At the beginning of 2020 they had over 342,000 employees and operated 4,992 aircraft with another 1,185 aircraft on firm order.
2 Analysis by Hunter Keay of Wolfe Research puts airline cash drain estimates on an “apples to apples” basis, cited in Holly Hegeman, Plane Business Banter, October 23; and November 10, 2020. This analysis showed that negative cash flows were 54–144 percent higher than carrier-published cash burn numbers, which are not calculated on a consistent basis.
3 The legacy carriers were originally founded in the 1930s or earlier, and were the only airlines allowed to offer scheduled interstate service prior to deregulation in 1978.
4 Kyle Arnold, “Southwest Airlines Needs ‘Business to Double in Order to Break Even,’ CEO Says,” Dallas Morning News, August 28, 2020; Southwest’s advantage also applies to low-cost carriers in Europe such as Ryanair and EasyJet. Ben Goldstein, “S&P Global Sees Just Three Investment-Grade Airlines Left,” Aviation Week, August 12, 2020.
5 Delta took a $5 billion third quarter write-off for its program, illustrating that near-term labor savings are extremely limited.
6 Ted Reed, “When Will American Airlines Get to Breakeven Cash Flow?,” Forbes, November 12, 2020.
7 Bankruptcies to date include latam, Avianca, South African, Kenya, Norwegian, Virgin Australia, Virgin Atlantic, Interjet, Aeromexico, Thai, and numerous smaller carriers. Other government-supervised restructurings include forced mergers (e.g. Asiana into Korean, the proposed Japan Airlines-ANA merger) government capital infusions provided in exchange for major shareholdings and strategic control (Lufthansa, Air France), and formal re-nationalization (Air New Zealand, Alitalia).
8 Jens Flottau, “Airlines Bet on Traffic Comeback in Second Half of 2021,” Aviation Week, December 7, 2020.
9 CAPA Center for Aviation, Airline Leader 53 (2020): 6.
10 Kevin Michaels, “Why Business Travel Could Change Forever,” Aviation Week and Space Technology, January 18, 2021; Doug Cameron and Eric Morath, “Covid-19’s Blow to Business Travel Is Expected to Last for Years,” Wall Street Journal, January 17, 2021.
11 The author worked at the United States Railway Association, which was established by Congress to handle the reorganization of the Penn Central (at the time the largest corporate bankruptcy in world history) and other eastern railroads. The restructuring process took nearly a decade but successfully reestablished efficient and profitable freight railroad services.
12 Mary Schlangenstein, “American Air CEO Says Bankruptcy Is an Option He Won’t Consider,” Bloomberg, May 27, 2020.
13 Joe Rennison, “United Throws ‘Kitchen Sink’ at Investors to Secure $3bn Borrowing,” Financial Times, October 20, 2020.
14 United claimed their spun-off frequent flyer program would have a standalone value of $22 billion (versus a market cap for the entire airline and frequent flyer program of $10 billion at the time); Delta claimed theirs was worth $26 billion (versus a total combined market cap of $20 billion), while American claimed a valuation range of $18–30 billion (versus a combined $7 billion market cap). Hubert Horan, “The Airline Industry Collapse Part 2—Can Collateralizing Frequent Flyer Programs Help Save the US Airlines?,” Naked Capitalism, July 6, 2020.
15 Although hoarding cash on corporate balance sheets is legitimately criticized in some sectors, levering up to fund cash payouts to shareholders—which create no offsetting assets or operating improvements—was bound to exacerbate the next crisis in the inherently cyclical airline industry.
16 The details of the airline stock buybacks and the executive compensation tied to them are laid out at Ben Hunt, “Do the Right Thing,” Epsilon Theory, March 19, 2020. Many companies are guilty of more extreme value-extractive self-dealing than these airlines (Boeing is an especially egregious example). It will be very difficult for any restructuring effort that ignores these issues to succeed.
17 Hubert Horan, “The Airline Industry Collapse Part 3—Recovery Expectations Were Always Dreadfully Wrong,” Naked Capitalism, August 4, 2020; Judson Rollins, “An Economic Crisis on Top of a Medical One: Why Airline Traffic Won’t Fully Recover until the Mid-Late 2020s,” Leeham News, July 13, 2020. Rollins cited twelve forecasts from major airlines, Boeing, Airbus, and industry financial analysts and trade groups. None of the industry forecasts contemplated second or third infection spikes or long-term border closures, although by the fall estimated “full recovery” dates started gradually getting pushed back beyond 2022–23.
18 Rusty Guinn, “Hook, Line, and Sinker,” Epsilon Theory, October 1, 2020. Guinn cites multiple examples of media stories that fully accepted the industry narrative, conflating “survival of the airline” with “survival of current executives and ownership positions.”
19 David Slotnick, “Southwest Is Turning Down $2.8 Billion in cares Act Aid to Avoid the Federal Government’s ‘Onerous’ Conditions,” Business Insider, August 21, 2020; Kyle Arnold, “Airlines Have Given Up on 2020. Now Next Year Is Looking Bleak Too,” Dallas Morning News, October 16, 2020.
20 David Slotnick, “United’s CEO Argued It’s Not a Problem That Airlines Will Keep Burning Tens of Millions of Cash per Day for Months,” Business Insider, October 15, 2020; Justin Bachman, “United Airlines Sinks as Loss Undermines Vow to ‘Lead the Rebound,’” Bloomberg, October 15, 2020.
21 The three historical charts use data (limited to passenger airlines) from the Department of Transportation (DOT) Form 41. The cost efficiency chart track changes in real CASM (cost per available seat mile, the standard industry measure of unit costs, in 2019 cents) while the pricing chart shows changes in real revenue per ASM (also in 2019 cents.) The international sector in figure 2 would be twice as large if one included the U.S. service of non-U.S. airlines.
22 Figure 3 understates regional airline capacity prior to 1992 because of DOT data reporting limitations. The practice of regional airlines codesharing with legacy airlines was pioneered by Allegheny Airlines 1965, but regionals did not become an integral part of the legacy hub networks and business models until after deregulation. Regional airlines allowed legacy airlines to arbitrage their labor contracts, outsourcing part of their networks to companies that paid their employees less.
23 The LCC business model originated with PSA’s intra-California services, and was directly copied by Southwest, which began intra-Texas service in 1971; intrastate airlines had been exempted from CAB regulations. LCC data in the charts includes Alaskan and Hawaiian carriers.
24 Carriers do not report those passenger payments as “passenger revenue.” For decades, “total revenue” had run ~11 percent higher than reported “passenger revenue,” with the difference being mail, belly cargo, and excess baggage charges. Today’s higher difference (36 percent) is due to the new legacy passenger fees.
25 Thomas McCraw, Prophets of Regulation (Cambridge: Belknap, 1984), 263.
26 A full Northwest chapter 11 filing had been delivered to the bankruptcy court in Delaware but was pulled back the night before filing when major new funding was provided by KLM and Northwest’s largest unions. The author was directly involved with the chapter 11 filing, Northwest’s subsequent network restructuring, and led the development of its alliance with KLM. Pan Am effectively liquidated in stages, with its three valuable international networks sold to stronger carriers before its uncompetitive other routes were finally shut down.
27 The Hughes Airwest network was shut down shortly after being acquired by North Central (Republic) in 1979. National’s network was shut down after the merger with Pan Am in 1980. People Express collapsed into bankruptcy soon after acquiring Frontier. The Air Cal, PSA, and Jet America networks were shut down after being acquired by American, USAirways, and Alaska. American shut down the Reno Air operation shortly after merging. In a few cases, valuable hub assets were part of the deal (Texas International’s Houston hub, People Express’s Newark hub, Piedmont’s Charlotte hub, Western’s Salt Lake hub) but other assets were liquidated, the overall merger had negative returns, and the acquiring airline soon went bankrupt.
28 The failed operations were at Los Angeles (Delta, United, USAirways), San Jose (American), San Francisco (USAirways), Baltimore (USAirways), Washington and Boston (Northwest), Greensboro (Continental), and Raleigh-Durham (American). These were competing with much more efficient hubs (Newark, Atlanta, San Francisco) for a very limited volume of hub connecting traffic, and with Southwest, which could serve nonstop traffic at much lower cost.
29 Continental initially followed Northwest’s lead in adopting the strategic focus that drove the industry’s mid-’90s profit rebound, but fell off the capacity discipline wagon after Gordon Bethune, a former Boeing sales executive, became CEO in 1996.
30 The courts automatically granted any bankrupt airline the right to reject its existing labor contracts and impose the contract terms of the lowest-cost airline contract in the industry (America West at that time). In these cases, USAirways had a plausible “could not survive without these contract rejections” case, but none of the other airlines did. The author was personally involved with the post‑2002 bankruptcy cases at United, USAir, Hawaiian, ATA, and American.
31 American was the only Legacy carrier that had not gone through bankruptcy prior to 2007. American was led at that time by Gerald Arpey who was determined to protect his shareholders, but Arpey was sacked in 2011 for his failure to have exploited the labor impairments that gave its competitors an important cost advantage. See Phil Milford, Mary Schlangenstein, and David McLaughlin, “American Airlines Parent AMR Files Bankruptcy,” Bloomberg, November 29, 2011.
32 American, under Horton, prepared a reorganization plan that claimed it could match Delta and United’s profitability on a standalone basis despite being one-third smaller. Horton had agreed to massive new purchases from Airbus and Boeing in return for their support for allowing the debtor exclusive control of reorganization (and sizeable shareholdings) that Tilton achieved at United. Once American emerged, Horton’s actual plan was to eliminate the scale/network disadvantage by acquiring USAirways at an extremely low price, just as Delta had done with Northwest. This plan was thwarted by USAirways (under Doug Parker and Scott Kirby), who wanted to present a competing merger-based reorganization plan, with substantially better payments to creditors and substantially better prospects than Horton’s standalone plan. But instead of accepting the superior merger plan, Horton, Boeing, and Airbus delayed emergence for eighteen months until they got USAirways to accept excessive fleet purchases that American could not afford, and a $10 million “consulting contract” for Horton.
33 In the United States, this group includes LCCs like Southwest and leaner legacies like Continental and America West. In Europe, LCCs like Ryanair and EasyJet and rapidly growing Asian and Middle Eastern intercontinental carriers.
34 Other important elements of this story are academic corruption, and bureaucratic wars between the White House and the DOJ Antitrust Division. See Hubert Horan, “Double Marginalization and the Counter-Revolution against Liberal Airline Competition,” Transportation Law Journal 37 (2010): 251–91. This article references testimony presented to Congressional hearings on the Northwest-Delta and Continental-United mergers and testimony presented to the DOT in multiple antitrust immunity cases. Key portions of this story were summarized in a recent series of ProMarket articles: Hubert Horan, “Why Consolidation Undermined the Airline Industry’s Ability to Recover from the Coronavirus Crisis”; “The Airline Industry’s Post-2004 Consolidation Reversed 30 Years of Successful Pro-Consumer Policies”; “How Alliances Carriers Established a Permanent Cartel”; “How Airline Alliances Convinced Regulators That Collusion Reduces Prices,” ProMarket May 5, 2020.
35 Comments of Hubert Horan, “American Airlines-British Airways-Iberia et al. Joint Application for Antitrust Immunity,” Docket DOT-OST-2008-0252, March 4, 2010. The explosive growth of domestic and regional carriers after 1990 was mostly in rapidly developing markets such as China, India, and Russia.
36 All of the DOT decisions approving consolidation of the North Atlantic were explicitly based on the claim that eliminating competition automatically increases consumer welfare. For the painful details, see Horan, “Double Marginalization,” 269–76. Without this willfully fraudulent claim, none of the subsequent the mergers that reduced the U.S. legacy sector to just three players would have been possible.
37 This comparison understates the actual reduction in consumer welfare. After 2003 domestic markets continued to follow normal supply/demand dynamics, where fares are highly responsive to changes in capacity, as fares rose 15 percent because capacity had only grown 1 percent. But the increased market power in the North Atlantic allowed carriers to raise fares 46 percent even though capacity had increased 45 percent. This chart was originally published in “Statement of Hubert Horan, Proposed United-Continental Merger: Hearing Before Subcommittee of the House Transportation and Infrastructure Committee,” 111th Congress (2010).
38 Alison Sider, “Delta Looks toward Recovery after Dark Pandemic Winter,” Wall Street Journal, January 14, 2021.
39 These efforts are already underway. Qantas and JAL have requested increased ability to collude in a market where they already had an 86 percent market share. CAPA Centre for Aviation, “Covid-19 Crisis Strengthens Case for JAL‑Qantas Partnership,” January 6, 2021. On her last day in office, DOT Secretary Elaine Chao approved the first ever application for airline collusion in domestic markets: Leah Nylen and Stephanie Beasley, “Approval of American-JetBlue Deal Draws Warnings of Rising Airfares,” Politico, January 16, 2021.