The Silver Lining In The Airline Shakeout

Industry shakeouts aren't pretty--and the current one in the U.S. airline industry is no exception. But when too many competitors put themselves deep in hock to add a bunch of unneeded capacity, the result is predictable: The worst offenders go out of business, others seek protection under bankruptcy law, and a few of the strongest try to turn their muscle into a long-term advantage.

There's been tremendous turmoil in the airline business ever since deregulation in 1978. There was a period of startups, a period of massive mergers, and then a period of consolidation that continues today. Bankruptcy laws have been used by weaker carriers to keep fighting against the big guys; stronger carriers have used their clout to lock up landing slots at major airports and add so many flights to key routes that no rival has a chance.

This has taken a toll on service. You can't count on airlines meeting schedules the way you once could. It's hard to keep up with all those different fares, despite the supposed simplification. Full-service airlines have dwindled from 18 to 9. Still, add it all up and the U.S. consumer has done pretty well. Airlines have become more efficient, run more as businesses than utilities--as in the regulated days--and the cost of air travel has remained fairly low. If you don't believe that, just pay for a ticket to fly between two European cities. Regulation and protectionist policies have led to such exorbitant fares that the European Community is seeking changes.

There is clearly more pain ahead. This year, U.S. carriers are losing money faster than they can lose your baggage. And this summer's fare war means the red ink will continue. But keep in mind that these losses are in large part the reflection of an overexpansion in the late 1980s, financed by a lot of easy money, and of a deep recession.

The bottom line is that deregulation is working just as it should. Sure, maybe it's unfair to this or that airline that Continental has lowered its costs by filing for Chapter 11, or that United and American have most of the landing slots sewed up at O'Hare. But the industry is making steady progress toward a day when they will be able to make a solid profit if they run their businesses correctly.

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