Last Monday’s bankruptcy petition of UAL, parent company of
United Airlines, will prove to be a watershed moment in the history
of air travel. The free market has broken down and can’t fix
things: the dominant players have developed an unsustainable
economic model, but they are unable to change it and the profitable
players are in no position to take over the market. Under the
bankruptcy court’s protection, United will be able to throw out its
cost structure in favor of one that will allow it to operate
profitably. The other carriers will make the same changes, either
filing for bankruptcy or otherwise. When the dust clears,
everything about the industry will be different: the costs to
businesses and consumers, schedules, service, even our concept of
working for an airline.
The airline industry needs to exist, so the government has the
choice of nationalizing it or wiping the slate clean so market
forces can start over to reshape it. Things are proceeding as they
should, but there are still plenty of disturbing elements about the
process.
United’s First-Ever Early Departure
A key player in this industry revolution is Judge Eugene R.
Wedoff of the U.S. Bankruptcy Court for the Northern District of
Illinois. The Wall Street Journal on Tuesday wrote about
how the Chicago court has been openly courting big companies for
their bankruptcy business, an unseemly use of judicial
influence.
That lobbying obviously had an effect. The first page of the
petition indicates that UAL filed it on “12/09/02, 6:19 a.m.”
6:19 a.m.? I once got kicked out of the library of
Chicago’s Dirksen Building, which houses the bankruptcy court, for
making too much noise clearing a paper jam in a copier. Apparently,
if you owe $20 billion, you get to use the VIP entrance.
Food for Thought
Considering how much is at stake in this bankruptcy, a perusal
of the papers indicates how little we actually know about airlines.
For instance, aren’t we all in agreement that airplane food stinks?
And isn’t that practically a moot point because the airlines don’t
offer food service anymore for security reasons? Before now, I
assumed this was profiteering disguised as a security measure. I’ve
never eaten a meal in coach that required teeth, much less a sharp
knife.
According to UAL’s petition, the airline has apparently still
been buying all those lasagna and
chicken-in-an-unidentified-yellow-sauce TV dinners and throwing
them in a landfill someplace. Two food service companies are among
its twenty largest unsecured creditors, with outstanding bills of
nearly $18 million. Judge Wedoff has already approved an order
allowing United to continue paying “crucial suppliers such as fuel
companies, caterers and the like,” according to a Journal
article.
The Worst Job in the World
The real losers in this process will be United’s employees, and
they aren’t even going to get much sympathy for it. Voiding their
contracts is the real reason for the bankruptcy. “Changing the cost
structure of the airline” is just a euphemism for “paying the
employees a fraction of what they had previously negotiated.”
What was their crime? How did they overreach? Like any
employees, they took advantage of the free market and the existing
laws and negotiated contracts for their services. Any member of the
capitalist system would do the same.
Frankly, airline employees merit a premium wage compared with
Earth-bound employees with the same skills. How could you possibly
overpay a pilot? Pilots keep these giant devices in the air by
means unknown to 99% of the people inside, and now we’re asking
them to carry firearms to thwart terrorist uprisings. And flight
attendants? Trust me, the job looks a lot more glamorous in R-rated
movies of the Seventies than it does in real life. You spend all
day on your feet and you never know where you will end up. Wild
romps to gain membership in the Mile High Club? If a flight
attendant is ever on all-fours in an airplane bathroom, it is to
engage in such “sexy” activities as cleaning up after incontinent
toddlers and fishing lost jewelry out of the toilet.
The employees have tried to help. The machinists are owed $500
million in back pay. In 1994, United’s employees made huge wage
concessions — I saw an estimate of $5 billion — in exchange for
55% ownership. That stock is now worthless, and they are going to
have to take additional, more drastic cuts in pay.
Mileage Maniacs Unite(d)!
On the other hand, United’s frequent fliers should be at the
bottom of the food chain, and they will emerge unscathed. United’s
41 million Mileage Plus members, who have about 700 billion miles
accumulated, are unsecured creditors if UAL voids its contracts
with them, as it has a right to do. But UAL won’t do this, because
these are the airline’s most loyal customers, and everybody with a
stake in United’s future places a high priority on placating
customers.
Too bad. According to UAL’s most recent annual report, its
liability to frequent fliers is over $600 million a year. Gaming
the system has become so prevalent that millions of people have
become obsessed with frequent flier miles, altering their lives in
dramatic and, frankly, creepy ways to accumulate them. “Pudding
Guy” has become part of the popular culture for buying 12,000 cups
of pudding to gather 1.25 million miles as part of a Healthy Choice
promotion. Back in my lawyer days, I was stuck in New York for
seven weeks reviewing documents with a guy named Darren, who
literally traded his sanity for frequent flier miles. He’d taken to
staying in some fleabag chain in a bad neighborhood because of its
generous mileage bonus. After a while, he refused to eat dinner
with me, choosing room service for the bonus miles. He also became
addicted to action movies, sometimes calling me in the middle of
the night. “Hey Mike, Swamp Thing is on TNT at 2:30. You
gotta check it out.” He tried hosting horror-movie parties in his
room — catered by room service, of course - but the hotel was in
such a bad area that I wouldn’t go. So he sat alone in his room,
eating French fries and watching I Know What You Did Last
Summer on pay-per-view.
I hope these people realize the dangerous game they are playing,
especially when they turn their credit cards into mileage machines.
Consumer credit has gotten way out of hand, and racking up debt to
accumulate mileage can’t be helping. If they aren’t careful,
they’ll wind up in bankruptcy. Guys like me will be able to paw
through their private business and, unlike UAL, they won’t get to
use the Winona Ryder-Michael Jackson entrance to the
courthouse.
