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Begging Airlines
Charles Leocha · October 4, 2002

The airline industry is in a bind. The major airlines, for the most part, have created a business where every time a plane takes off they lose money. From a small businessman's point of view, this situation can't last long without some "white knight" swooping in with a parade of wagons full of money.

In the old days, airlines could float bonds and borrow money. Not any more. One of the majors is in bankruptcy, others teetering on the brink of insolvency and the rest have collateralized almost everything of value in their holdings, including planes, spare parts, vehicles and office buildings.

Without money, without a plan for making money, without loyal and motivated employees, without business travelers willing to spend six times leisure travel costs, and without an aggressive distribution system to stimulate travel, the airlines are, as we used to say in the Army, up a creek without a paddle.

Today, the airlines are weeping and wailing in Washington, DC. They are whining for more money. It is a pathetic cry.

I am not blind to many of the airline claims. I agree that the mandated airport security and antiterrorism activity is a federal responsibility and should be paid for by the government. I agree that the airlines need some form of terrorism insurance underwritten by the government. But that's where I stop. There is a limit.

Propping up money-losing airlines is simply foolish and is not in the interest of the American public. So far every American citizen has had a chance to vote personally for airline support by buying airline tickets. Their votes have been counted and leaner, customer-friendly airlines such as Southwest, AirTran and JetBlue are the hands-down winners.

Giving the airlines government money only allows the major airlines to prey upon smaller airlines rather than fix their own problems.

American Airlines and United Airlines are flying money-losing flights in direct competition with JetBlue. United Airlines has the audacity to initiate these routes while standing in front of airline loan panels with hat in hand. Delta Airlines has hired banks of consultants to figure out how to keep arch rival AirTran in check in Atlanta. And whenever Southwest announces a bargain transcontinental airfare even airlines in bankruptcy normally match the Southwest price.

Giving the airlines money only allows the major airlines to continue their ruinous employee relations. US Airways, inexplicably, is demanding wage concessions from its rank and file employees, while requesting that the bankruptcy courts allow them to pay bonus to management.

Giving the airlines government money only allows the major airlines to continue destroying the travel agent and travel distribution infrastructure in the United States.

In the name of saving money and cutting distribution costs, the airlines have steadfastly campaigned against travel agents, especially the small, Mom-and-Pop agencies. Most of the major airlines have eliminated commissions and attempted to corral as much of the airline ticket distribution into their own channels.

Mom-and-Pop travel agencies are not the only one feeling the airline heat, but they have been hit the hardest. Larger agencies are now earning "incentives" rather than commissions. No matter what the airlines want to call it, the result is the same. Distribution costs money. It now seems that the bets the airlines placed on trying to cut out travel agents are backfiring.

Now, when the travel industry can use some local cheerleading and grassroots support the airlines are finding that they have killed one of the geese that laid a golden egg. Studies are now emerging indicating that the old "expensive" travel agent distribution model is less costly than the new direct systems.

In their blind flailing against distribution costs, the airlines decided that even online travel agents such as Travelocity (their own creation) and Expedia are "enemies" as well. Five of the major airlines poured hundreds of millions of dollars into a new online agency that the airlines can control, Orbitz.

Orbitz cost $204.8 million to create and run through March of 2002, according to SEC filing provided by Orbitz. It costs millions to keep operating -- Orbitz is losing money every day. Orbitz has already accumulated losses of more than $150 million. And everyone agrees that Orbitz will continue losing millions of dollars for years to come.

Orbitz is no bargain for the airlines. It is a costly, money-losing grab for distribution control that will have no benefit for the greater travel industry or consumers.

The major airlines are standing in Washington holding their collective tin cup. They are lining up for government-guaranteed loans. All the while, they continue unprofitable, destructive and ultimately unpatriotic boondoggles.

If the government in its wisdom decides that the airlines should be bailed out the money should come with strong medicine:

• No predatory pricing against smaller airlines.
  
  
• Forbid payments of bonuses to managers.
  
  
• Re-institute the old systems of minimum base commissions for travel agents.
  
  
• Dismantle or force the sale of Orbitz without its restrictive covenants.
  

Charlie Leocha is the Boston-based author of Travel Rights: Know the Rules of the Road and the Air Before You Go. Cheap Charlie appears every Monday on this site. E-mail him at leocha@aol.com or access his Web site.