Economic predictions are a sport too…

I had a thought today.  Tell me if I’m too off-base.

There was a time in this country when the automobile industry was dominated by domestic names.  Everyone had a Ford, GM, Cadillac etc.  Over time, foreign companies that were run more efficiently and produced better product began to take over.  Now foreign cars make up the majority of the vehicles in the USA. 

ATA airlines closed its doors very suddenly yesterday, to the point that passengers came to the airport expecting to get on a plane, and ended up stranded.  Aloha airlines went under earlier this week.  These are small regional airlines, but…

The American carriers have not been the same since 9/11.  They were basically bailed out by the government at that time.  Nothing wrong with that, it’s not as if the federales saved them from mismanagement or scandal (for the most part).  However, look at the situation now.  Another news story of yesterday involved Southwest and maintenance/inspection problems.  The chairman of the FAA said that it is entirely possible that it is “systemic”.  If that turns out to be true, part of the responsibility falls on a government entity (the FAA), but it will no doubt touch the airlines.  Fuel costs are crushing airlines right now.  The passenger bill of rights offers some great assurances for passengers, but there will be penalties and consequences, further increasing the pressures on airlines.  The mere fact that we need a p.b.o.r. indicates major customer care problems within the American carriers.

I flew on Lufthansa when I went to Turkey.  It was without a doubt the most enjoyable experience of my flying life.  We were served food (amazing!)  We were offered free beer (not bad beer either – Warsteiner) and/or well drinks.  The plane was clean, the staff was courteous.  The blankets were free for the taking.  Not an issue in sight either on the ground or in the air.  Meanwhile, you’re lucky to get a free bag of peanuts on domestic carriers and I’m hearing more problems with lost luggage, delays, etc.

On a whim, this morning I looked at the financial reports of Lufthansa versus the two major domestic carriers – United and American.  United’s after-tax net income was $403 million for calendar year 2007.  American’s was $504 before taxes – taxes were not itemized.  I’m not sure if they don’t pay taxes or if they simply weren’t included in the report.  So $504 is the best case scenario.  If they do pay taxes similar in percentage to United’s, that net will be more like $315. 

Meanwhile, Lufthansa’s net profit post-taxes was 1.5 billion – EUROS.  That works out to roughly $2.5 billion.

With foreign companies having better service, better financial performance, better liquidity and better resources to react to a difficult market, is it long before the airline industry becomes a mirror of the auto industry?  From the perspective of an amateur politician and economist, that troubles me greatly.  However, from the perspective of a passenger I can’t wait for the first Lufthansa DFW-Orange county route.  It’s that consumer choice that may drive the American carriers into the status of the next Detroit.   

3 thoughts on “Economic predictions are a sport too…

  1. mike Post author

    Unfortunately, there are protectionist laws in place to prevent foreign-owned carriers from operating domestic US flights. I know that Virgin had to jump through some hoops to be able to operate their trans-con flights a year or so ago. I’m not sure what the rationale is for the protection, but it is ridiculous. I’ll try and dig up some links.


  2. Mario Post author

    Ah, I see. So that’s why it hasn’t happened yet. I say yet because all it will take is a desperate enough situation and/or an administration + congress that decides to de-regulate ala Texas electric providors.

    I’m guessing the protection is because they may have learned a lesson from other industries like automotive.



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