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.
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