A translation of the airlines’ “open letter” to customers
The airlines need you. In an open letter to customers published late yesterday, the chief executives of 12 domestic airlines urged customers to help them stop the oil speculation and bring fuel prices under control.
It sounds like a reasonable request. Until you consider who’s making it.
Here’s what the airlines say — and what they really mean:
Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now.
Translation: High fuel costs are going to push half of us into bankruptcy. We need you to bail us out.
For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers.
Translation: The fat executive bonuses that we’ve paid ourselves over the years are threatened. We don’t care about air service to your pitiful little communities. The only pain we really care about is that we can’t afford that third home in the Virgin Islands. This pain can be alleviated by you.
Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.
Translation: We’ve been speculating about air fares ever since the government has allowed us to do it. Gee, we hope you don’t see the irony in our request. You know, that’s it’s OK for us to change an airfare every 10 seconds, but it’s not OK for someone to do the same thing with fuel.
Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again.
A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.
Translation: We hope no one brings up the simplicity and common sense of fares before deregulation. Ahh, the good ol’ days.
Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed.
We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper. The nation needs to pull together to reform the oil markets and solve this growing problem. We need your help.
Translation: We’re asking the government and you, the taxpayer, to help us. But we pray to God that no one sees the extreme irony of an industry that has resisted any kind of government regulation and has taken its customers for granted, asking for help.
One final note. This letter is correct in one respect. Both the government and passengers can help.
American travelers can push for meaningful airline industry regulation and the government can comply by passing it. Now.
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14 Responses to “A translation of the airlines’ “open letter” to customers”
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I agree that the airlines’ problems are of their own making. I disagree that it is the executive remuneration that is at the core of the problem. The root of the problem is the capital structure selected by most US airlines, which is far too heavily weighted in debt financing, rather than using equity. At every opportunity airlines, rather than reinvesting profits in the business, pay a fat dividend to shareholders. Instead of making a share issue, they issue bonds on which they have to pay interest. It is no wonder that they’re constantly flirting with bankruptcy. Except of course for Southwest, which mostly uses shareholder funds to operate the business. The debt/equity ratios of US airlines tell the tale (source moneycentral.msn.com):
AirTran = 2.74
Alaskan = 1.60
American = 4.39
Continental = 3.57
Delta = 2.31
Hawaiian = 2.18
JetBlue = 2.33
Northwest = 2.21
Southwest = 0.39
United = 3.84
US Airways = 2.79
For comparison
Air France/KLM = 0.7815
BA = 1.006
Lufthansa = 0.482
Qantas = 1.006
When you’re financing most of your assets with debt, you’re going to have a cash flow crisis every time there’s a slight downturn, because you have to use cash to pay interest. If you use equity, the same doesn’t apply because the company is not legally obliged to pay dividends.
If Congress stupidly bails these idiots out again, I hope that we, the US taxpayers, get shares for whatever cash we give them.
I think the executive bonuses mainly contribute to poor labor relations, which is one reason why we get treated like dirt at times. It’s hard to fathom why the execs are entitled to performance bonuses these days. None of the legacy carriers is exactly performing well, in my opinion.
The debt vs. equity usage is a good point.
Thanks for the translation. We need that to keep us intelligently informed.
Let me try to understand this. Airline executives have been racing each other to the bottom in reducing customer service and otherwise treating their paying customers like rotting garbage. Their success is confirmed in their continually declining customer satisfaction survey scores. They’ve successfully lowered the regard people have for their industry to the same level as used car dealers and the IRS.
And now they want us to feel sorry for them and to help them preserve their bonuses and pensions? Hmm…. When a passenger needs help or “customer service” from an airline, they shove him into a long line or make him sit on hold waiting for an outsourced phone operator in Bangalore who has no idea what’s going on. So I think the appropriate response to this plea is to tell them “Please wait. We’ll get back to you.”
Hmmm. They want my signature? Of course I am willing to do that. In exchange for an end to all fees and surcharges, normal solid pricing, in-flight food, drinks and entertainment, friendly staff, and normal customer service. Oh, you don’t like quid-pro-quo? Well, perhaps you should change your own business model.
Although this letter from the airlines is certainly self-serving, they do make a good point and unfortunately the recent run-up in oil prices is affecting all of us. Whether or not clamping down on speculation will save the airlines is really not as important as eliminating the “middle men” in energy supplies. If we as a country do not do something to stop this speculation, we will all suffer, if we haven’t already. This recent 40% increase in gas prices over the last six months impacts food, goods, and services. The run-up cannot be solely based on supply and demand, there are obviously other factors involved and certainly speculation is a huge part. I’m really surprised that our “Department of Energy” hasn’t realized this is another Enron scenario and moved to stop it. Actually, I shouldn’t be surprised they haven’t done anything.
@ Lyngengr: The oil doesn’t go only up because of increased demand, but also by a decreased demands for US$. Have you checked your exchange rates recently? The Arabs are simply asking for more $ because those $ are worth less and less.
One way to start sorting out the mess we’re in - both airlines and passengers - would be to prevent airlines from being able to file for Chapter 11, continue with business as usual when they come out of it. The weakest airlines should go out of business. There are too many competing for passengers at prices that no longer cover their basic cost of transporting them. Those who stay should be able to charge fares that are covering them without regulation but based on a working marketplace based on supply and demand. Combined with this, the outdated rule of limiting foreign ownership should be abandoned as well. I’d rather have fewer, but profitable and stable airlines like Singapore Airlines, Lufthansa, BA etc. compete globally than the present situation.
oh, boo hoo hoo. If your financial house is so screwed up from debt and bad management then just go out of business and be done with it. Stop whining.
Didn’t your parents ever tell you that NO ONE ever likes to listen to whining.
Basic economics works if you let it. Sometimes you find yourself on the other side of the coin and you end up going out of business. The marketplace rewards good decisions and penalizes poor ones.
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[...] agree with Chris Elliott’s translation/analysis of what’s really being said to airline customers: “High fuel costs are going to push half of us into bankruptcy. We need you to bail us [...]
[...] agree with Chris Elliott’s translation/analysis of what’s really being said to airline customers: “High fuel costs are going to push half of us into bankruptcy. We need you to bail us [...]
The only time the U.S. Congress ever regulated the futures market, the commodity in question was onions. Have you checked the pricing of corn lately - half of the corn is going into the Congressional ethanol boondoggle - that’s why there’s no corn left over to feed the chickens or the pigs or the cattle or to make corn syrup, etc. The result is that the price of food is climbing every day, thanks to Congress!
And now Congress wants to push compact fluorescent lightbulbs and outlaw incandescent ones - of course the CFL’s contain mercury which will contaminate our waste dumpsites for millenia, but not to worry - our Congress is looking out for us every day!
And meanwhile, the Brazilians, who are clearing the Amazon jungle at a rate of 100’s of acres per day (and thereby contributing to global warming), just bought Budweiser.
Can I get somebody to freshen up this Bloody Mary - just ring for a cabin attendant, and pray you don’t get one with attitude!