What’s causing the US airline chaos?

This is an audio transcript of the Behind the Money podcast episode: ‘What’s causing the US airline chaos?’

Michela Tindera
If you’ve flown on a commercial airline in the US recently, this might sound familiar to you.

Airline passenger 1
They won’t have flights for the next three days.

Airline passenger 2
You don’t know what to do. The only flights are way too expensive.

Airline passenger 3
Been stuck for, what, a good 18 hours now.

Michela Tindera
These clips are all from the last year. And it’s no secret that it was a tough time to be an airline customer. Here’s the FT’s Chicago correspondent Claire Bushey. She reports on the US airline industry.

Claire Bushey
Nearly a quarter of the 9mn flights that were scheduled last year were either cancelled or delays. And if you put, like, an extremely conservative assumption that 120 people on each flight, that’s nearly 25mn people who got their flights cancelled last year, that’s 25mn people who are angry in an airport.

Michela Tindera
Twenty-five million people. That’s a little less than the entire population of Australia all getting stuck and waiting for flights around the US. But Claire says the travellers aren’t only upset about cancelled flights.

Claire Bushey
There’s been an explosion in complaints to the Department of Transportation — missing baggage or airlines not refunding money in a timely manner. It’s kind of astonishing. It’s, like, five times more than before the pandemic.

Michela Tindera
But here’s the thing about the airline industry today. Claire says these problems aren’t just because of the pandemic or a broader economic slowdown. They’ve been brewing for decades.

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Michela Tindera
I’m Michela Tindera from the Financial Times. Today in Behind the Money, we’re taking a closer look at the US airline industry. We’re gonna talk about how we got to where we are now and if there’s any chance that we’ll see a change in the future.

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Hi, Claire. Welcome.

Claire Bushey
Thank you. Nice to be here.

Michela Tindera
So, Claire, I’m curious, have you flown recently? And how did that go for you?

Claire Bushey
Yes, I have flown recently, and I am happy to report that it did go smoothly. I visited my colleagues in the New York newsroom at the FT a couple weeks ago, and I was honestly quite worried, but ended up going smoothly.

Michela Tindera
Yeah, I flew for the holidays and I had, you know, a fair bit of nervousness, anxiety, because I was flying when there were a lot of cancellations. My flight did go smoothly, too. I felt like I dodged a bullet.

Claire Bushey
I think that there’s a real feeling that air travel has become more unreliable. There was a Gallup poll that was done in August. They found that 37 per cent of Americans had an unfavourable view of the airline industry, compared to 27 per cent who viewed it favourably. And that was the first time in more than a decade that that had been true. Usually there’s more people who are fans of the airlines than critics.

Michela Tindera
Right. So how did we get to where we are now?

Claire Bushey
When I was reporting, the theme that seemed to come out in interviews was that we didn’t get here overnight. The United States started regulating air travel in the late 1930s. And it was, you know, it was very expensive (chuckles) to fly during the jet age and what we often think of as like the golden age of travel.

[ADVERTISEMENTS FOR AIRLINES PLAYING]

Claire Bushey
But in the 1970s, President Gerald Ford wanted to take a crack at deregulating the industry. And then that cause was picked up by Democratic Senator Ted Kennedy because he argued that deregulation would lower fares and allow more people to fly. And President Jimmy Carter signed the bill deregulating it in 1978. And then essentially overnight, airlines could fly anywhere they wanted and they could charge whatever they wanted, whatever customers were willing to pay.

Michela Tindera
OK. And so back then, how did the airline industry react to the government’s push for deregulation? They must have been thrilled, right?

Claire Bushey
So one of the things that I thought was really interesting when I started reporting this is that the airlines were actually extremely against deregulation. The Smithsonian has this essentially a pamphlet from Delta Air Lines from the 1970s. And the pamphlet says that deregulation would, and I quote, “ . . . result in concentrating the airline industry in the hands of only a few carriers, of causing service deterioration at smaller cities and in smaller markets, and of jeopardising the financing of airport developments”. End quote.

Michela Tindera
How did that go once the industry was deregulated? What happened?

Claire Bushey
This, like, resulted in basically chaos. You had dozens of new airlines formed and they paid lower wages than the established carriers, allowing them to have a lower cost structure which allowed them to offer fares for much cheaper. And that in turn kicked off price wars among all the airlines, new entrants, old players, etc. And, you know, fares plummeted as airlines battled for market share because you had all this competition and instability and fighting on price. You had some major airlines go out of business, complete upheaval for like 15 to 20 years.

News clip 1
More big problems for Pan Am today. The airline filed for bankruptcy.

News clip 2
TWA would file for Chapter 11 bankruptcy on Wednesday.

News clip 3
United Airlines declared it may go bankrupt as early as this fall.

News clip 4
American Airlines filed for bankruptcy today.

Claire Bushey
Those bankruptcies really caused the airlines to focus on cost-cutting, not investing in their operations, not investing in their people, not investing in IT systems. Just, you know, cut, cut, cut.

Michela Tindera
That’s kind of when we start to think of the airlines seat growing smaller and smaller.

Claire Bushey
Yes, it is definitely not your imagination. Although, you know, that’s really more on the revenue side because at the same time as they were, like, cutting back on things, they also needed to increase revenue and one way that you can increase revenue is by putting more people on the plane. And so if you want to have more seats on the plane then those seats will get smaller.

Michela Tindera
OK. And emerging out of these bankruptcies in the 1990s and 2000s, airlines were looking to cut costs and they moved into this new era of consolidation, right? Could you talk a bit more about what happened with that?

Claire Bushey
Yeah. Consolidation swept through the sector as these airlines were trying to find a way to financial stability. And so you had lots of mergers in general, but you also had these three mega mergers in which United, Delta and American all basically swallowed someone who was about the same size as they were. And so you had fewer options. One of the consumer advocates that I spoke to said that between the four major carriers — which is United, Delta, American and Southwest — and their affiliated regional operations, they control 80 per cent of the flights in the United States.

Michela Tindera
So then over the last decade, it’s kind of been this era of consolidation that we’re now living in.

Claire Bushey
Yes.

Michela Tindera
So what does that look like for these companies, their financials and for investors during this time?

Claire Bushey
For much of the last decade, the financial picture for the airlines has been improving. And it has been improving to the point that they can buy stock back from investors, which of course, investors love. Between 2014 and 2020, they spent 115 per cent of their free cashflow on buying back shares. So if you’re spending money on buying back your stock, that is money that you don’t have to invest in operations. Running an airline is a really difficult operation and it requires capital. And you’ve got to buy planes, for the love of God. So it’s a capital-intensive industry. And if you’re prioritising giving money to investors, you are going to have less money for other priorities.

Michela Tindera
Right, yeah. And so, as you said, there were these massive stock buybacks in the years leading up to 2020 and then, of course, the pandemic hit. So how did that impact airlines’ financials?

Claire Bushey
The Covid-19 pandemic devastated so many industries, but I feel like you’d be hard-pressed to point to one that was harder hit than the airlines. In the United States, traffic of air travellers fell by 90 per cent in April 2020. It was existential for the industry and the chief executives for all the major US carriers went hat in hand to Capitol Hill and said the US airlines are essential to this country. They are the backbone of the economy. And legislators agreed. They gave them like an initial $54bn so that they could survive. And they told them, you cannot lay off people. And they adhered to that. But they encouraged early retirements and voluntary leave, and then demand rebounded faster than expected. In 2021, people started to fly again in the US and you started seeing operational problems then, and it has only continued and worsened.

Michela Tindera
Right. And so just to recap everything we’ve gone over so far: the US airline industry has gone through periods of regulation, deregulation, bankruptcies, consolidation and a pandemic. These massive bailouts helped to keep the industry afloat when demand was plummeting. But now the demand is back and surging, airlines haven’t been in a place to meet it. So it’s important to say that on top of the airline industry’s problems, the industry regulator, which is the Federal Aviation Administration or FAA, is in rough shape, too. Claire, what’s been their role in all this?

Claire Bushey
So the FAA is part of the Department of Transportation, and they are responsible for everything to do with civil aviation. They run air traffic control, which is probably the biggest deal. And they also certify aircrafts to make sure that they’re safe. Unfortunately for the FAA, their staff has been shrinking at the same time that their job has been growing. Civilian airspace is simply more crowded. There are more flights and they don’t have as many people to oversee the airspace as it’s becoming more crowded.

Michela Tindera
OK, then what’s the problem here? Is it that they don’t have enough funding?

Claire Bushey
The FAA does not receive its funding on any sort of regular basis. It receives its funding when there is an FAA reauthorisation bill. And getting that passed in Congress can take any amount of time, and it doesn’t necessarily fund them for very long. They’ve only had five years’ worth of funding approved at one time, once since 1982. And the problem is, when you’re an agency that funds large infrastructure projects, a five-year horizon is sort of important because no contractor wants to work with an agency that has one-year funding for a project. It also has had to deal with the fact that as anti-government forces in the Republican party have become more vocal over the last few decades, there have been many more threats of government shutdowns. And when there is a threat of a government shutdown, the FAA has to stop whatever it’s doing and plan for how air traffic control will operate.

Michela Tindera
Wow. This all sounds like a mess. I mean, there’s issues with the private side, these airline companies, which we have talked about earlier. And then there’s issues with the public side, with the FAA. Is anyone trying to fix any of this?

Claire Bushey
I mean, we didn’t get into this overnight. You know, it’s gonna take a long time to fix. However, there do seem to be some efforts that have come up recently and seem to be gaining a little more traction than they have in the past. For example, there are consumer advocates who are pushing for tighter regulation of the airline industry. That’s people like William McGee, who is a senior fellow for aviation at the American Economic Liberties Project, which is an anti-monopoly think-tank. And he wants to see airline passengers have the right to sue airlines over consumer issues. Because right now, the Department of Transportation is actually the only regulator that can administer any sort of punishment to airlines when they screw up on things like having mass flight cancellations that they are responsible for. There are also a couple of Democratic senators, Richard Blumenthal and Edward Markey, who have introduced bills calling for an airline passengers’ bill of rights, and that would entitle passengers to some compensation when there are cancellations and delays or if people are involuntarily bumped from a flight. And we’ve also seen the Department of Transportation take a more active role in the regulation of airlines because they sort of are the only sheriff in town. The DOT launched an investigation to Southwest for potentially having unfair and deceptive practices by publishing schedules that it knew it was unable to fly. Now, Southwest disputes this but the fact that the DOT has launched this investigation is . . . it is meaningful in that it is showing some signs of life.

Michela Tindera
This legislation that you mentioned that Senators Markey and Blumenthal are working on, if this gets passed, how do you think it could change the industry?

Claire Bushey
If this legislation is passed, it would be a huge deal. It would allow consumers to sue airlines, it would allow attorneys generals to sue airlines. It would give compensation to travellers.

Michela Tindera
So how likely is it that this does pass in Congress?

Claire Bushey
It’s very important to point out that as of now, this bill has no Republican support. Similar versions have been introduced before. They have not passed. And so it is possible, same thing happens again. What might be different this time is we have people who are angry about being stuck in airports. And you know, Senator Markey said that he thinks the incidents are going to keep happening and that that public anger is going to continue to build and create pressure to actually get this legislation passed. And also, Republican legislators fly too, is something that he pointed out and also something that the head of the flight attendants’ union pointed out: that most senators and congressional representatives commute by air to their home district.

Michela Tindera
And what do airlines think of this? I mean, I know the major airlines have all recently reported their quarterly earnings and held calls for that. Were they addressing these sorts of issues during those?

Claire Bushey
I was honestly surprised it did not seem to come up that much on the earnings calls. I asked the chief executive of American Airlines if the perception that air travel was increasingly unreliable, if that worried him, that it would lead to greater government regulation. He noted, you know, the airline would work with government authorities on customer care. And he told people on the earnings call, quote, “Our primary focus is making sure that we run the best airline we possibly can. That’s the way that ultimately we address customers’ needs and ensure our customers are being treated fairly.”

Michela Tindera
So do you see things going back to the way they were before 1978 any time soon with the airline industry?

Claire Bushey
I do not see us going back to a pre-1978 level of regulation. I think it’s possible that there could be greater regulation of the industry than we have now. I think that consumer advocates got fortunate in their timing and you’re seeing a confluence of public anger, a vehicle to focus it. That’s the FAA reauthorisation. And the very recent memory of exactly how much money the airlines received from taxpayers during the pandemic. So I think it’s possible the game could be different this time.

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Michela Tindera
Well, thanks, Claire, for being on the show.

Claire Bushey
Thank you for having me.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz and Manuela Saragosa are executive producers. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.