In reporting the bankruptcy of American Airlines last night, Scott Pelley on CBS Evening News stated that the airline industry had lost $34 million dollars as a whole and I think he said since 1951. Date doesn't matter as much as two other points. I question the amount of money..$34 million seem like an understatement or underestimate, I would think it would be more, especially since 1951. He also commented that the figure meant that the passenger airline industry has never made money. With that statement comes the question, since the Federal government subusidizes the ailrine industry and operates its traffic and terminal systems without demanding that the industry make money, why does that same government demand that Amtrak make money? Note, too, no governtment in th US looks for any kind of profit report from trucks and buses whose rights of way are all provided by every level of government.
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Henry,
The reason is that airline stockholders and bankers absorb the airline operating losses but the government itself absorbs the passenger train operating losses.
Mac
henry6 In reporting the bankruptcy of American Airlines last night, Scott Pelley on CBS Evening News stated that the airline industry had lost $34 million dollars as a whole and I think he said since 1951. Date doesn't matter as much as two other points. I question the amount of money..$34 million seem like an understatement or underestimate, I would think it would be more, especially since 1951. He also commented that the figure meant that the passenger airline industry has never made money. With that statement comes the question, since the Federal government subusidizes the ailrine industry and operates its traffic and terminal systems without demanding that the industry make money, why does that same government demand that Amtrak make money? Note, too, no governtment in th US looks for any kind of profit report from trucks and buses whose rights of way are all provided by every level of government.
Whether the airline industry has made money since the dawn of commercial aviation is a moot point. Whether an airline has made money long enough to provide a vital service is the key question. And whether individual airline companies attract enough private capital to continue operations. The same concept applies to railroads, bus lines, steam ship companies, retailers, etc.
Factor in all the failed enterprises and your likely to find that many lines of business, in the aggregate, have been failures. Yet out of the dust heap will be a few very successful enterprises. Over the long run, if the criterial used by CBS was applied to the business world, one could say for the most part that all industries, including the railroad industry, have never made any money. For example, over 50 per cent of the start-up businesses in the U.S. fail within five years and more than 70 per cent are gone after 10 years. Failure? Not for the ones that got it right! Bad news for the majority that got it wrong.
Go back to the dawn of the railway age, factor in all the railroad bankruptcies, and you get a picture similar to the airline industry. Commercial transport is a tough nut to crack no matter what form it takes. Those who decry use of Chapter 11 by the airlines seem to have forgotten the heavy use of it or similar provisions by the nation's railroads.
The notion that the commercial airlines are subsidized by the federal government is largely a canard. Outside of the Essential Air Services Program, the federal subsidies per passenger mile to the airline industry are paltry compared to the subsidies for passenger rail. NARP as well as others consistently imply that the transfers from the general fund to the FAA go exclusively to the commercial airlines. The assertion is incorrect. Most of the subsidies, i.e. FAA operations, airport facilities enhancements, etc. go to general aviation, which accounts for approximately 70% of the FAA's activities.
The federal government through the FAA operates air traffic control. It does not operate the airports. Most of the airports in the United States are owned and operated by local authorities. They are expected to cover their costs through ticket fees, parking fees, FBO and vendor rentals, etc. And with the exception of a few rural airports, which may be subsidized with local funds, they do so.
The federal government does not guarantee any business outside of its sponsored commercial enterprises, e.g. Amtrak, Fannie Mae, Freddy Mac, FDIC, USPS, etc. a place in the sun. Prior to de-regulation of the airlines, the government used its regulatory powers to fix prices and assign routes, which fostered the continuance of poorly managed airlines and prevented millions of people from having access to affordable air service. That all changed with de-regulation, which amongst other things meant that millions of people who could not otherwise have done so could go home for the holidays or whoever they wanted to go. Along with de-regulation came risk. And many of the carriers, e.g. Pan Am, Eastern, etc. could not manage it. And they went under. No one bailed them out. In fact, the only form of commercial passenger transport that has been bailed out by the federal government, to the best of my knowledge, has been passenger rail.
Trucks and inter-city bus operators are commercial enterprises. They share the nation's highways. They pay user fees to use the roadways. Depending on whose analysis you want to believe, there is evidence that they pay their fair share.
Anyone who thinks that people are going to give up the advantages of aviation, especially for a trip of more than a couple of hundred miles, to ride a train is out of touch with reality. Airlines will come and go, as is the case with most businesses that provide a service that people want, but we will have commercial air service just as we have commercially generated electricity.
Passenger trains make sense in relatively short, high density corridors, where the cost of expanding the highways and airways is cost prohibitive. There are not many of these corridors, and there are not likely to be many for at least 50 to 75 years.
Ideally, each mode of transport should reflect its true cost at the price point, i.e. ticket counter, pump, etc. If that miracle could be pulled off, passenger trains might be able to make it in a few corridors, providing their business model is changed.
Yes. BUt it doesn't make sense does it? The Government...er us...is the stockholder/investor. Plus, investors are investing to make money, not abosrb losses. So you have given the reason but not the why.
Oh, I have no answsers...and I think everybody has opinions with no answers. I just put this out to see what is said.
PNWRMNM Henry, The reason is that airline stockholders and bankers absorb the airline operating losses but the government itself absorbs the passenger train operating losses. Mac
MAC: I have to disagree very sharply. I have been thru 4 bankruptcys of various companys and the looses when a bankruptcy occurs are spread out to many persons.
1. The employees -- may loose their last paycheck, unpaid insurance claims, lost retirement, unused vacation time, sick leave; have to purchase trip home if away, etc.
2. US government and foreign governments. Unpaid airway and navigation fees, violation fines, licensing fees, other national and local assestments. As well as lost business taxes from the below listed. Fuel taxes, passenger airport fees
3. State and local governments airport authorities -- Landing fees, gate fees, non needed gate rentals ( usually on long term leasse ); extreme examples Saint louis airport authority, Raleigh airport, Nashville , etc . As well as lost taxes to below companies. fuel taxes, passenger airport fees.
4. Airplane owners who loose their guaranteeeded long term leases to an airline and may not be able to lease aircraft to anyone else. Owners cannot reclaim aircraft for at least 60 days and may not be able to get any rental income during that non-reclaim period.
5. Banks and other financial institutions -- Loss of interest income and maybe some or all principal of loans.
6. Various vendors -- especially fuel and catering but anyone who has provided services to an airline.
7. Aircraft manufacturers, engine builders ( P&W, GE, Rolls Royce ) -- who may have built but not delivered or is building aircraft and will not get paid and will have to have a fire sale on those aircraft. Of course there are progress payments but they typically are 30 - 50% of final price,
8. Interior aircraft vendors
9. Persons who have won judgements but not been paid.
10. Passengers who do not get transportation but have paid by cash or check.
11. and in the worse case anyone who has been paid for anything in the last 90 days may have to pay it back by order of bankruptcy court unless they also declare bankruptcy.
So it is not just stockholders and bankers who absorb operating costs but government among others who subsidize the airlines thru lost government revenue.
MAC: one I forgot.
12. The sale of business losses by bankruptcy court to another company that then can claim this loss on the buyer's federal business tax returns and maybe state returns. However in certain circumstances the bankrupt company can retain those losses after coming out of bankruptcy.
So Sam and Blue Streak, another question arises. If every venture is going to end at some point and that it will never make money in the long run, why do anything?
Henry:
I watched the same news.
You HAD to know that posting that would be like dumping a bucket of chum in the water, didn't you? lol
Dave
Lackawanna Route of the Phoebe Snow
Phoebe Vet Henry: I watched the same news. You HAD to know that posting that would be like dumping a bucket of chum in the water, didn't you? lol
That, or the flinging of a substance a whirling blades!
henry6 So Sam and Blue Streak, another question arises. If every venture is going to end at some point and that it will never make money in the long run, why do anything?
No !!!! Not all ventures just airlines and transportation companies in general. Latest figures from CBS stated airlines net lost a total of $11B + since 1961. Taking in all the lost ancillary taxes I wonder how much subsidizing of airlines actually occurrs ?? This not counting all the money going to Boeing , McDonald, Douglas, Lockheed ??
To use an old saying. If you want to loose money fast buy an airline.
On that statement I would like to cite two exceptions. That would be FED EX and UPS mainly because they are an integrated transportation system.
Also so far Southwest Airlines seems to have advoided other airline problems by being well run but it only takes one mistake to eliminate 100 good ideas.
In part for the love of the game! And in part because some investors in the airlines have realized a reasonable return on their investment. The key to investing is to know when to fold them. It is a long term proposition. But not necessarily in one business or one industry. Diversity is the key.
I have been tracking the key financial results for the nation's major carriers for the last five years. Clearly, this is not since the beginning of the industry or since de-regulation. However, the results are not as bad as the news media would have us believe. This is especially true if one backs out the losses incurred by American, which tried to row against the tide, i.e. it was not able to renegotiate its labor contracts whilst is major competitors were able to do so through bankruptcy, and the huge one time loss incurred by Delta as a result of its merger with Northwest.
From FY07 through FY11 the major carriers had combined operating profits of $7.3 billion. However, because of restructuring charges, as well as the impact of the worst recession since the Great Depression, they had a combined loss (net income) of $486 million. The key number is operating profit. Net income usually includes non-cash items that can result in a loss over the short haul but do not threaten the financial viability of the entity. Of course, if a business does not turn the losses around, it will likely be toast.
In 2007 there were 23 carriers that were classified as major carriers, i.e. annual revenues in excess of $20 million. This year the number is 13. And some analysts believe that American will eventually merge with U.S. Air.
UPS and FED EX are not passenger airlines and not under discussion. CBS report said $34 billion total lost by all passenger airlines and that no airline ever made money.
henry6: Thanks for a great post. Someday, someone will uncover how that shell game worked all these years.
C&NW, CA&E, MILW, CGW and IC fan
blue streak 1 henry6: So Sam and Blue Streak, another question arises. If every venture is going to end at some point and that it will never make money in the long run, why do anything? No !!!! Not all ventures just airlines and transportation companies in general. Latest figures from CBS stated airlines net lost a total of $11B + since 1961. Taking in all the lost ancillary taxes I wonder how much subsidizing of airlines actually occurrs ?? This not counting all the money going to Boeing , McDonald, Douglas, Lockheed ?? To use an old saying. If you want to loose money fast buy an airline. On that statement I would like to cite two exceptions. That would be FED EX and UPS mainly because they are an integrated transportation system. Also so far Southwest Airlines seems to have advoided other airline problems by being well run but it only takes one mistake to eliminate 100 good ideas.
henry6: So Sam and Blue Streak, another question arises. If every venture is going to end at some point and that it will never make money in the long run, why do anything?
Where did CBS gets its numbers?
In October I watched the same news program. It contained a report regarding the layoff of 300,000 teachers since the start of the recession. It included the obligatory child crying over the loss of a favorite teacher, traveling a half mile further to his new school, and sitting in a larger class. Wow, I thought, it sounds pretty bad. Then I looked into it.
It turns out that there are more than 4.3 million primary and secondary school teachers in the United States. Moreover, according to the U.S. Department of Education, the number of teachers who have lost their job is closer to 278,000. Assuming, however, that 300,000 is a good number to round to, it means that roughly six per cent of the teachers lost their jobs. That is approximately the normal annual turnover rate for primary and secondary school teachers in the United States. So what does this have to do with this thread?
I am suspect of what I hear and see on CBS news. Or any other TV news broadcast. Television news is a study in superficiality. I watched it rarely. And I never give it any credence without double checking what is reported.
There is one other thing that I resolved to avoid. Responding to posts that have nothing to do with passenger rail. Whoops, looks like I fell off the wagon. Hopefully, I will do better in the future.
So what are you saying? That the railroads never went through bankruptcy? Or were built without government subsidies? Or the industry has not consolidated to meeting changing conditions?
If you have verifiable counter points, why don't you offer them up?
Trying to make money hauling human beings is a tough go, which is why most airlines outside the United States -- not just railroads -- are nationalized. Trying to make money hauling human beings without the help of significant freight revenue, as the airlines must, is even tougher. Through speed -- better utilization of equipment and crew -- the airlines do better than railroads at the passenger trade, but it is still a tough, tough proposition.
I and, I know, others on this forum own railroad stock. Is there a soul within the sound of my voice who has a penny invested in airlines?
dakotafred Trying to make money hauling human beings is a tough go, which is why most airlines outside the United States -- not just railroads -- are nationalized. Trying to make money hauling human beings without the help of significant freight revenue, as the airlines must, is even tougher. Through speed -- better utilization of equipment and crew -- the airlines do better than railroads at the passenger trade, but it is still a tough, tough proposition. I and, I know, others on this forum own railroad stock. Is there a soul within the sound of my voice who has a penny invested in airlines?
That used to be the case. Today, most of the nationalized airlines have been privatized, at least in part, or market driven discount airlines have popped up to compete with them. Easy Jet, Ryan Air, Air Asia, etc. are examples of free market start-ups in Europe and Asia that are beating the nationalized airlines, which like American are saddled with unworkable labor contracts and questionable management practices.
Qantas has been largely privatized. So too has Air Canada, Air France, etc. And a new government in New Zealand has put a significant portion of Air New Zealand up for privatization.
There is good reason why most of the nationalized airlines have been privatized. Even the most enthusiastic statist governments have come to realize that government is not very good at running commercial enterprises. Hopefully, this country, which some see as the epitome of free enterprise, would follow suit by privatizing intercity passenger rail. Alas, it won't happen. Too many vested interests in the status quo.
If you are invested in a broad market index fund, e.g. S&P500, Total Market, etc., your fund probably holds Southwest Airlines. It also may have United, Delta, Jet Blue, etc. Moreover, if you are retired with a legacy pension, your pension fund probably holds Southwest Airlines. It may also hold the shares of some of the overseas carriers.
Henry, you could ask the same question of life itself -- in which the best we can hope for, with Kenny Rogers' gambler, is to break even. Which doesn't mean life isn't worthwhile -- or individual business ventures within an industry that, over the long haul, loses money or eventually dies.
Sam1 If you are invested in a broad market index fund, e.g. S&P500, Total Market, etc., your fund probably holds Southwest Airlines. It also may have United, Delta, Jet Blue, etc. Moreover, if you are retired with a legacy pension, your pension fund probably holds Southwest Airlines. It may also hold the shares of some of the overseas carriers.
Right, Sam, but you know what I mean. Passive investments aside -- anyone on here have airlines in his portfolio?
After reading several articles, it seems clear that AA is simply using chapter 11 (as most of the other legacy airlines did earlier) to reduce labor costs and dump the pensions. They have a current cash reserve of ~$4 bil.
schlimm After reading several articles, it seems clear that AA is simply using chapter 11 (as most of the other legacy airlines did earlier) to reduce labor costs and dump the pensions. They have a current cash reserve of ~$4 bil.
The cash account is only one line in the financial statements. AMR filed for Chapter 11 protection because its financial position is unsustainable.
At the end of September 2011 the company had $24.7 billion in assets vs. $29.7 billion of liabilities, leaving it with a net negative equity position of $4.8 billion. Equally concerning, to creditors and auditors, was the current ratio of .82. A current ratio of less than 1 indicates that current liabilities exceed current assets, which can be an alarming sign in that the company cannot potentially pay its current bills.
AMR has been losing money for nearly a decade, e.g. $1.5 billion in 2009, $471 million in 2010, and $884 million through the first three quarters of this year. Numerous factors have contributed to this scenario and brought it to the point where the board felt the need for Chapter 11 relief. Labor was a factor, but there are others, to be sure. Moving to Chapter 11 whilst the company has adequate cash reserves means that the key stakeholders, including labor, are likely to come out of it better off than if the airline is liquidated, i.e. Eastern, Pan Am, etc.
One of American's first actions, according to the Dallas Morning News, which knows American as well as anyone, was to abrogate the leases on 24 parked airplanes. Labor will have to agree to more realistic wage scales, as well as productivity enhancements, if the airline is to survive.
That's it. They took longer than the others to reach this point because they were in better shape at the start. Ford is now at a cost disadvantage to GM and Chrysler (Fiat) because they didn't declare bankruptcy and dump pension costs. It seems to me that any Chap 11 should not allow dumping pension costs. If you are bankrupt and can't reorganize in such a way that keeps employee pensions intact, then you should have to liquidate.
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
Why is it bankruptcies are mostly used break freely agreed to obligations with employees and never to deflate the Golden Parachutes?
Never too old to have a happy childhood!
BaltACD Why is it bankruptcies are mostly used break freely agreed to obligations with employees and never to deflate the Golden Parachutes?
I think a good argument could be made in favor of bankruptcy clawbacks of highly compensated employees (e.g. C-level management), particularly where there was gross mismanagement. I somewhat doubt that bankruptcy law is written to support that. It would seem fair that the "golden parachutes" at least get cut back proportionately to obligations to other employees.
From what I can tell about AMR, management was making a good faith effort to do their job, unlike some bankruptcies where management had been plundering company assets.
- Erik
Sam1 Phoebe Vet: Henry: I watched the same news. You HAD to know that posting that would be like dumping a bucket of chum in the water, didn't you? lol So what are you saying? That the railroads never went through bankruptcy? Or were built without government subsidies? Or the industry has not consolidated to meeting changing conditions? If you have verifiable counter points, why don't you offer them up?
Phoebe Vet: Henry: I watched the same news. You HAD to know that posting that would be like dumping a bucket of chum in the water, didn't you? lol
I think what I said was very clear. I said that posting the original comment would precipitate the usual food fight, and that Henry knew that when he posted it.
I made no comment for or against the news article. I have no idea why you made the assumptions you did about my comment.
Phoebe Vet Sam1: Phoebe Vet: Henry: I watched the same news. You HAD to know that posting that would be like dumping a bucket of chum in the water, didn't you? lol So what are you saying? That the railroads never went through bankruptcy? Or were built without government subsidies? Or the industry has not consolidated to meeting changing conditions? If you have verifiable counter points, why don't you offer them up? I think what I said was very clear. I said that posting the original comment would precipitate the usual food fight, and that Henry knew that when he posted it. I made no comment for or against the news article. I have no idea why you made the assumptions you did about my comment.
Sam1: Phoebe Vet: Henry: I watched the same news. You HAD to know that posting that would be like dumping a bucket of chum in the water, didn't you? lol So what are you saying? That the railroads never went through bankruptcy? Or were built without government subsidies? Or the industry has not consolidated to meeting changing conditions? If you have verifiable counter points, why don't you offer them up?
Your comment about chum and Henry's comment about whirling blades added no value. I was seeking a clarification of what you intended to say.
You often times make pithy statements that add no value or you post a link to a site without comment, which oftentimes leads to misunderstanding of your intent or makes no sense whatsoever.
Maybe this has nothing to do with it, maybe it does, but it seems to me the airlines started to get in trouble when the original founders of the business like Eddie Rickenbacker, Juan Trippe, Howard Hughes, and the others either retired, died off, or moved on to other things. Remember these were men who loved aviation, believed in aviation, and and saw it as more than a path to a big paycheck. The fact they all became wealthy was icing on the cake for them. Does the current generation of airline execs have the same motivation as the founders? Somehow I doubt it.
Firelock76 Maybe this has nothing to do with it, maybe it does, but it seems to me the airlines started to get in trouble when the original founders of the business like Eddie Rickenbacker, Juan Trippe, Howard Hughes, and the others either retired, died off, or moved on to other things. Remember these were men who loved aviation, believed in aviation, and and saw it as more than a path to a big paycheck. The fact they all became wealthy was icing on the cake for them. Does the current generation of airline execs have the same motivation as the founders? Somehow I doubt it.
This discussion is a bit far afield, but what the heck. It is interesting even if it has little to do with trains.
The biggest game changer for the airline business was deregulation of the commercial aspects of the business with the Airline Deregulation Act of 1978. Prior to that time the commercial aspects of the airline business were tightly controlled by the regulator, who set prices, assigned routes, based on requests, and unwittingly guaranteed the carriers a positive return. Had it not been for this regulatory umbrella, it is doubtful if the founders would have fared as well as they did, which in retrospect was not all that good.
A case can be made that the executives, managers, and employees who have run the nation's airlines since deregulation are cut from a better cloth than the pioneers.
Ironic that deregulation saved the railroads and deregulation clobbered the airlines.
_____________
"A stranger's just a friend you ain't met yet." --- Dave Gardner
Don't forget to mention the hub system which made it difficult to fly from medium sized cities to other medium sized cities. With two flights there was always a chance that something would go wrong on one of the legs.
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