Regulation Policy

Airline Deregulation And Bankruptcy

Various new rules have been proposed that would substantially re-regulate the airline industry, says Robert L. Crandall, chairman of American Airlines. Yet many of the problems new regulations would address -- such as fare structures and service requirements -- are the unintended consequences of past regulatory actions that weren't adequately analyzed.

One example is the failure to understand how bankruptcy laws would impact the deregulated airline industry. U.S. bankruptcy laws, which are quite different from most other countries', account in large part for the extreme ups and downs in the airline industry since deregulation in the late 1970s, says Crandall.

  • As a network, an airline's assets always have a higher present value if the airline continues to operate, even at a loss, rather than liquidate its assets.

  • Thus in the 1980s and 1990s many failed airlines used bankruptcy to keep operating while repudiating prior obligations, negotiating reduced aircraft lease payments, persuading debt holders to exchange debt for equity and wringing concessions from unions.

  • After a carrier enters bankruptcy, it typically offers lower prices to sustain its traffic.

  • Its competitors lower fares also, rather than allowing traffic to be diverted, setting off the fare wars that plagued the industry throughout the 1980s and reduced most U.S. carriers to non-investment-grade credits by the mid-1990s.

Absent U.S. bankruptcy rules, failing airlines would have to be more prudent, knowing the consequences of failure would be the real losses associated with liquidation. Instead, U.S. bankruptcy laws weakened the competitive capacity of the more successful U.S. carriers.

Airline deregulation has worked well, says Crandall; but it would have worked better and the U.S. airline industry would be healthier if its probable outcomes had been more carefully anticipated and if appropriate changes had been made to U.S. bankruptcy laws.

Source: Robert L. Crandall (American Airlines), "Leave It to the Market," CEO Series Issue No. 20, February 1998, Center for the Study of American Business, Washington University, Campus Box 1027, One Brookings Drive, St. Louis, Mo. 63130, (314) 935-5630.

http://csab.wustl.edu/papers/manage/ceo20.htm

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