Airlines Have an Accountability Problem

[W5]

An article in today's Atlantic, regarding Southwest Airlines $ 140 million fine and the industry in general.

https://www.theatlantic.com/newsletters/archive/2023/12/airlines-have-an-accountability-problem/

Southwest Airlines was just hit with a whopping fine for last year’s holiday breakdown, but the industry’s broader issues persist.

By Lora Kelley

 

The lines at the airport were cataclysmic. Travelers with haunted looks behind their eyes stretched out on jackets and backpacks. During one of the busiest travel weeks of the year, Southwest Airlines was in shambles.

If you were lucky enough to not be affected by the chaos, here’s a reminder of what happened: Around this week last year, Southwest’s system crumbled under a triple whammy of bad weather, an archaic scheduling system, and communication failures. Nearly 17,000 flights were canceled, and 2 million people’s trips were disrupted, scrambling Christmas plans for families around the country. For many Americans experiencing these delays or hearing the news, the feeling was, Of course. Southwest’s cursed Christmas week came at the nadir of an already messy year for travel, marked by high consumer demand and labor shortages that meant flights were often canceled and delayed.

Southwest has taken a beating for its failure: The company lost about $1 billion; its stock tumbled; its chief executive went on an apology tour. Now the Department of Transportation is levying its biggest consumer-protection violation fine of all time—$140 million, about 30 times higher than the previous record—on the company. Pete Buttigieg, the secretary of transportation, issued a warning in his statement about the fine, saying that it “sets a new precedent and sends a clear message: If airlines fail their passengers, we will use the full extent of our authority to hold them accountable.”

The fine is a step toward accountability. But the problems of the industry—massive consolidation being among them—persist. “I’d be a little surprised if [the fine] had any kind of seismic registration” for airline executives, Kathleen Bangs, a spokesperson for the flight-tracking company FlightAware, told me. Southwest will not actually need to cut a check of $140 million to the government: The company will pay $35 million into the Treasury over the next three year; the rest will be paid to customers as vouchers for future canceled and delayed flights or is being credited to Southwest for compensation the company already paid out to travelers last year. The Department of Transportation thought it was important, an official from the department told me, to impose a cash fine on the airline to reflect the severity of the problem but also to ensure that future consumers got relief as well.

More than this year’s fine, Bangs added, last year’s fiasco is what made airline executives quake in their boots, because it came after a series of smaller crises. Every airline CEO, beyond hoping their own company isn’t in trouble, has a vested interest in the reputation of the industry, she explained. (In a statement, Southwest said that it “shares the DOT’s goal of delivering the highest standard of service to the traveling public and is grateful to have reached a consumer-friendly settlement,” adding that it has so far seen few operational problems on big travel days this year.)

Although Southwest was an outlier in the sheer scope of its meltdown, it is not the only carrier that has lately failed to serve consumers. While airlines have consolidated tremendously in recent decades, shareholders have benefited. But consumers? Not always. As Ganesh Sitaraman wrote in The Atlantic this year, airlines’ point systems mean that they now operate as banks—they are “like financial institutions that happen to fly planes on the side.”

Airlines have changed radically in the past several decades. Until the 1970s, they were regulated like public utilities. The government had a say in where planes flew and how much airlines charged. After Congress moved to deregulate the industry in 1978, companies competed fiercely for a time, and then consolidated. Now the “big four” carriers, including Southwest, have turned into massive corporations that control about 80 percent of the industry; they have all received taxpayer-funded bailouts.

The airlines have argued, harkening back to their days as a public utility, that the industry is just too important to the nation to fail. After receiving a bailout of $50 billion in grants during the early days of the coronavirus pandemic, airlines’ practice of buying back stocks while failing to save sufficiently has come under scrutiny. In a consolidated environment, airlines have little incentive to make travel pleasant and comfortable for passengers, Bill McGee, a senior fellow for aviation and travel at the American Economic Liberties Project, an anti-monopoly nonprofit, told me. “Airlines misbehave because they can.”

[J.O.]

17 hours ago, W5 said:

airlines’ practice of buying back stocks while failing to save sufficiently has come under scrutiny

And why do they engage in share buybacks instead?

1. Because they can, and
2. Because it benefits the decision makers (and the shareholders who put them there) disproportionately vs. improving the company's cash position.

Edited December 20, 2023 by J.O.

[UpperDeck]

2 hours ago, J.O. said:

And why do they engage in share buybacks instead?

1. Because they can, and
2. Because it benefits the decision makers (and the shareholders who put them there) disproportionately vs. improving the company's cash position.

Raising capital by issuing shares dilutes the value of existing shares. Buying back those shares restores value.

Investing cash accrued in a "savings vehicle" generally returns far less value than debt reduction and/or share buyback. 

[J.O.]

My point still stands. The people making those decisions get a disproportionate benefit. It also PO'd the governments who handed out billions in supporting cash during COVID and then saw it spent on buybacks instead of compensating people whose flights were cancelled.