Why Airlines Keep Going Bankrupt : Planet Money The industry underwent a massive change 30 years ago. Since then, airlines have lost some $60 billion. Some are still trying to adapt.
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Why Airlines Keep Going Bankrupt

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Why Airlines Keep Going Bankrupt

Why Airlines Keep Going Bankrupt

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Southwest Airlines just placed the biggest aircraft order ever - $19 billion worth of jets. But among airlines, its success is the exception not the rule. One of Southwest's biggest competitors, American Airlines, just declared bankruptcy; something just about every major U.S. airline has done at some point.

Caitlin Kenney from our Planet Money Team explains why so many airlines seem incapable of making money.

CAITLIN KENNEY, BYLINE: The airline industry breaks the number one rule of business, the job of the company is to make money.

PROFESSOR SEVERIN BORENSTEIN: The industry in aggregate has lost about $60 billion over the 32 years since deregulation.

KENNEY: This is Severin Borenstein. He's an economist at the Haas School of Business at U.C. Berkley. He's crunched the numbers and he says the airline business is notoriously difficult. Planes are expensive. Fuel prices jump around a lot. It's hard to predict how many people will want to fly next year.

But all airlines face these challenges and only some file for bankruptcy. He says it's usually a certain type.

BORENSTEIN: The legacy airlines.

KENNEY: Legacy airlines date back to the days when airlines were heavily regulated by the government. And it does seem like they've had a particularly hard time. American, Delta, Northwest, United, US Airways, Continental have all declared bankruptcy. Some of them have done it twice.

Before 1978, life for the legacy airlines was pretty sweet. The government set ticket prices and if it didn't think airlines were making enough money it would raise them. So, instead of competing to offer the lowest ticket prices, the airlines offered more and more amenities - bigger seats, some 747s had piano bars. All that changed with deregulation in 1978. Bob Crandall was working at American Airlines at the time.

BOB CRANDALL: Somebody decides to start a new airline and they come into the business and decide that they're only going to charge $29 for a seat, then I don't have any choice. I have to charge $29 for my seats too, even if the seat cost me $100.

KENNEY: Think about it. When you search flights on Kayak or Orbitz today, what do you search by? Price. The legacies had to lower their ticket prices with AirTran, Southwest, and Jet Blue on the scene, but their costs weren't going down. Here's Borenstein again.

BORENSTEIN: There's no question that a big part of the cost control problem was in labor relations. If you look at what the low-cost carriers do that's different, they get much higher productivity out of their workers, the jobs are defined more broadly and their workers tend to be able to cover more of the work load.

KENNEY: The Transport Workers Union says workers aren't to blame for airlines going bankrupt. The union says management focused too much on building up hubs and didn't buy enough fuel-efficient planes. But Crandall, who ran a legacy airline, says it was clear to him that labor contracts were a big part of the problem.

CRANDALL: You can't keep your costs in line if you have labor unions that can go on a strike. And if you cannot tolerate a strike, because you will run out of money during the strike, then you give the union what it wants.

KENNEY: And that's where bankruptcy comes in. When you see a bankruptcy, think of it as an airline saying we want to renegotiate our contracts so we can be more like newer airlines. James Sprayregen is a partner at the law firm Kirkland and Ellis. He's worked on the bankruptcies of United Airlines and TWA.

JAMES SPRAYREGEN: Those contracts, albeit amended, you know, dozens and probably hundreds of times, they sort of grew on themselves almost like a coral reef. And a lot of inefficiencies got built into those.

KENNEY: In bankruptcy, work rules change, vacation days go away, pensions and benefits get reduced.

SPRAYREGEN: Unfortunately, bankruptcy is all about breaking promises.

KENNEY: Breaking those promises means the legacy airlines are going to start to look a lot like the newer airlines. Southwest is already bracing for that. Southwest CEO, Gary Kelly, recently sent a letter to employees that said this, quote: "The sloth-like industry you remember competing against is now officially dead and buried. We fought them and we won. Now, the enemy is our own cost creep, our own legacy-like productivity, and our own inefficiencies." Caitlin Kenney, NPR News.

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