Counterparties: The misery of flying
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On some level, complaints about modern air travel are absurd. Think about that famous Louis CK bit: “You’re flying! It’s amazing!…You’re sitting in a chair, in the sky!” But Gary Shteyngart’s awesomely scathing rant about American Airlines relays an experience bad enough to go beyond Tyler Brûlé’s the walk-to-my-gate-was-too-long-and-I-had-to-interact-with-plebes shtick:
You, American Airlines, should no longer be flying across the Atlantic. You do not have the know-how. You do not have the equipment. And your employees have clearly lost interest in the endeavor. Like the country whose name graces the hulls of your flying ships, you are exhausted and shorn of purpose. You need to stop … Flight 121 from Paris to New York began on a clear autumn afternoon. It ended over 30 hours later.
Shteyngart’s experience is unfortunately an extreme example of a larger pattern. Since mid-September, half of all American Airlines’ flights have been delayed, while competitors’ on-time rates are 90%. The underlying reason for that abysmal record, Matthew Yglesias writes, is how the airline’s parent company has treated its labor force since filing for bankruptcy last year. One of the company’s aims (along with cutting its debt load) was to cut labor costs: It pays around $600 million more a year in employee salaries and has $200 million a year more in pension costs than its competitors. It also does spectacularly silly things like own a $30 million London townhouse. And looking back at the company’s 2010 financial statement, labor costs, while relatively high, are not rising that quickly.
Last month, a judge allowed the company to shred its contract with pilots. At that point, Yglesias writes, American lost the “active cooperation of skilled pilots who are capable of judging when it does and doesn’t make sense to request new parts and who conduct themselves in the spirit of wanting the airline to succeed” (translation: American pilots may be intentionally delaying flights). Ground crew and flight attendants agreed to new, more “flexible” contracts. Shortly thereafter, the company notified 11,000 workers they were at risk of being laid off. Owners of $450 million in bonds of American’s parent company aren’t happy either — they’re suing, claiming that the company’s planes, used as collateral for the bonds, are falling in value and no longer sufficiently secure the debt.
American Airlines is not alone in facing the ire of prominent writers. TechCrunch’s Michael Arrington has savaged Delta in the past for poor service. The fact is that when you have a miserable experience on US airlines, that’s probably because the employees are being treated miserably themselves. – Ben Walsh
On to today’s links:
Billionaire Whimsy
Billionaires “feel that they have become the new, vilified underclass” - Chrystia Freeland
“The sense of victimization is one part narcissism, one part greed, and one part tactical” - Felix
Apple
Apple controls the world’s largest hedge fund you’ve never heard of - Zerohedge
Tax Arcana
Regardless of who wins the election, you can kiss the payroll tax cut goodbye - NYT
Primary Sources
Ben Bernanke’s best speech in a very long time - Federal Reserve
Hope/Change/Etc.
Obamanomics, a study in massively underestimating the severity of the downturn - NYT
Financial Arcana
“One of the more ridiculous concepts that’s ever been invented in accounting” may be rolled back soon - WSJ
Big win for the bank lobby: Judge kills Dodd-Frank derivatives position limits - Bloomberg
Censorship
IKEA vanishes women from catalog in Saudi Arabia - WSJ
EU Mess
Greece is entering its sixth year of a “vicious spiral of austerity and recession” - Reuters
Data Points
$20 billion in costs, just $200 million in revenue: Spam’s “externality ratio” is 100 to 1 - Tim Harford
Awesome
The Marxian analysis of Police Academy you’ve been waiting for - The New Inquiry
Oxpeckers
Annals of journalistic innumeracy, cod edition - BBC
Take This Job
William Faulkner’s “I quit” letter to his boss at the Post Office - Open Culture
Dubious Milestones
Something called “The Oogieloves in the BIG Balloon Adventure” had the worst opening weekend of all time - Inside Movies
New Normal
I am a job creator: a manifesto for the entitled - WaPo
Wonks
Haldane: What have economists ever done for us? - Vox EU
Housing
Principal reductions were included in 10% of all modifications in the 2nd quarter – Credit Slips
New Normal
On the multi-decade rise of corporate welfare – James Surowieki
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“Apple controls the world’s largest hedge fund you’ve never heard of”
This is probably Apple’s biggest sin – extracting $30 billion or so per year from the economy, and putting it into publicly traded stocks. Sure, it probably drives the price of those stocks up a little, but it doesn’t lead to increased economic activity. In fact, it helps shrink the economy, as the money is not being used. It might as well be under a mattress.
I realize the tax laws don’t help much, and that much of their earnings are from outside the U.S., where they would be taxed even more, but they’re supposed to be the smart guys – they should figure out what to do with that hoard, so they’re not unintentionally reducing the size of their total available market – and everybody else’s – by keeping all that cash out of circulation.
If they want a suggestion from me (o.k, they don’t, so I’ll just give one anyway), they should use all those untaxed foreign earnings to buy T-Mobile USA from DT. Even after paying $30 billion or so for it and then putting in another $10 billion to give it the best mobile network, they would still have more money than they could lose in a decade if they suddenly shifted into RIM or Nokia mode. And the U.S. would then get a competitive mobile network.
Or they could pay their retail employees more, to reverse the race to the bottom. It wouldn’t just be tech companies that have to compete with Apple for talent, the stores in the US would also have to start paying more to keep their staff, and that might provide a bigger boost to the economy than a stimulus package (hint: it involves companies distributing more of their income, and the government doesn’t even have to be involved).
If the pilots want to put American Airlines out of business, it is no skin off my back. The company already is uncompetitive. Let them die and the pilots will be free to seek employment elsewhere.
Of course, they are already free to seek employment elsewhere. Do they realize this?
Worst opening weekend =of a film in wide release,= that should be.
There is the legendary film that made, iirc, $14 its opening (and final) weekend. (Not $14,000 or $14,000,000. $14.00.)
@TFF: “Of course, [airline pilots] are already free to seek employment elsewhere. Do they realize this?”
Airline pilots have a weird career; it’s not like most other jobs in terms of job opportunities. Seniority generally only counts within an airline, not across the industry, and what would be a lateral move in any other industry becomes starting over at another airline.
If you are an experienced, 777-qualified captain at AA, and want to fly for another airline, you go to the bottom of the ladder with United, and pick up routes flying 737′s from Cleveland to Wichita 10 times a week.
Salaries are also massively misinterpreted: starting pilots at regionals make $20-$30k. Only 30-year widebody pilots make the six-figure salaries you might hear about, and that after a career of not-great salaries, getting furloughed, moving to a different airline and starting over, etc.
It’s not quite as easy as “go find another pilot position elsewhere”. THAT is a problem that should be fixed, but as it stands, AA pilots can’t just switch without massive frictional costs.
The problem with air travel is like many industries driven by the marginal user. SO the 30% of the flying public that only flies once or twice a year for a vacation and wants the cheapest ticket period drives everything.
The 50% of people who have to travel for business and might flying a couple other times a year are stuck in a miserable coach experience because the government and most companies will not pay more than the “standard” fare.
This leaves the remaining 20% in business and first class with a reasonably tolerable experience.
Airlines should really cut the size of coach in half, and make business class much larger, but make that the “standard” class. That way they could capture the core business market and increase their revenues with fewer travelers, which would make everything easier.
Steve-
To be fair the pilots union is the group that established that system you are complaining about. Guilds/unions always do that, entrenching seniority and hurting future workers.
The first thing someone in a union does is make it 10 times harder to fire them.
The second thing they do is trade away compensation of new and future workers for more compensation for themselves.
The airlines would much rather have a more fluid market in pilots because costs would go WAY WAY down, but the pilots don’t want that, unless they are in danger of losing their jobs.
$30k annually for the person who flies the plane with 30 or 100 live humans on it, 30,000 feet up, with 8,000 pounds of kerosene in the tanks, five tons of cargo in the hold, at 600+ mph, and gets to the correct location, and then lands the plane. In the rain, snow, in 35-mph cross-gusts.
Yeah. That’s fair. Glad the unions are all defeated. They would mess up that sweet deal.
“It’s not quite as easy as “go find another pilot position elsewhere”.”
Understood, perhaps better than they do themselves. Their present job action will rapidly torpedo American Airlines, which is ALREADY a very marginal business. When fliers start to see it as a “carrier of last resort”, then all hopes of survival for the airline will be finished.
Really the only hope for AA to survive is for all the parties to work cooperatively towards a less profitable solution than some of them have enjoyed in the past. Not saying it is fair, not saying it is fun, but that’s the facts.
As a group, airlines – including U.S. airlines – have a dismal record of profits and return on capital. At various times over the past 15 years, I’ve seen articles stating that U.S. airlines as a group have, since the beginning of the industry, lost money. There are a variety of structural and historical reasons for this.
Airlines are a high fixed cost, low variable cost business, so there’s always that incentive to discount to fill the last seat. The main fixed assets (planes) are mobile and relatively long-lived, so there’s a tendency for capacity to move around or idle but not really disappear when the industry struggles. Air travel is a relatively sexy business, so it’s attracted more capital than it should have from people who like the idea of owning an airline.
Finally, there’s the history of regulation. The legacy carriers had their history of operating as an oligopoly with regulated routes and pricing, so ended up with a management mindset, including labor contracts and work rules, that look more like a government bureaucracy than a customer-oriented service business. Not surprisingly, Southwest and the other low-cost carriers have tended to hand them their heads on a platter. The problems of the legacy air carriers are pretty much what happened to the Big 3 automakers and most of the traditional U.S. steel industry – oligopolies that once had tremendous pricing power led to complacent management and unionized work forces who were unprepared when they faced a truly competitive environment.
To expand on realist50′s comment:
In 1992 the world’s airlines wrote off more money than all their CUMULATIVE profits since the dawn of civil aviation in the mid 1930′s.
It is a decentralised service business with very high CAPEX, whose business cycle is hostage to both fuel costs and the business cycle, and whose assets have a disturbing habit of falling out of the skies and killing all their customers.
eeri-
I hope you weren’t replying to me, because unions are what create the situation you are complaining about, depressing low seniority wages to increase high seniority ones.
Not to mention the fact that flying is not really actually that hard or demanding as far as professional jobs go, and a lot of people want to do it because it is fun and cool, and the military is constantly training tons of new pilots, so there is an oversupply problem.