Updated 2005.02.02

Allen Sloan on Trains vs. Planes

Planes, Trains, and Politicians

"Planes, Trains, and Politicians", DEALS, by Allen Sloan, p.E3 Washington Post 2002.10.01

Okay, it's time for a pop quiz. The subject is transportation. Ready? Here goes. What two things do Amtrak and the airline industry have in common? The first one's easy: Both of them are running around Washington looking for federal money. What's the second one? Give up? Okay, it's that neither one makes money. One key difference, though, is that airlines, unlike Amtrak, are designed to be profitable.

It all makes for quite a show. We have Amtrak running around trying to beat a few hundred million extra dollars out of Uncle Sam. Meanwhile, the airlines—those folks who scarfed up $5 billion of taxpayer aid after 9/11—are back asking for yet another handout. The airlines say that security costs have put them on the brink of the financial abyss, and a war with Iraq will shove them into it—unless Uncle Sam comes across with major money. But look at the different ways these unprofitable outfits are treated. Amtrak is rebuked for not breaking even, while the airlines, which were in big trouble even before 9/11, get treated mostly with respect.

Why the disconnect? Largely, I think, because few people outside the airline industry realize what dreary financial performers airlines have been. Believe it or not, U.S. passenger airlines, those folks who charge $2,000 for a coast-to-coast trip in a seat suitable only for contortionists (and another 80 bucks if your suitcase is a freckle over the size limit) have barely broken even over their entire existence. By the end of this year, according to Air Transport Association statistics, the industry's total profit since 1938 is likely to be down to a mere $3 billion or so. In other words, you'll be able to attribute the airlines' entire profit over 65 years to the $5 billion that we taxpayers graciously gave them as compensation for having the air traffic system shut down for several days after 9/11. Talk about nonprofit organizations!

Once you see the airline industry for what it is—a public works project for airline employees and airplane builders—you feel lots less sympathetic to the industry's laments. Sure, 9/11 hurt air traffic. But it hurt a lot of non-airline businesses, too, and they didn't get federal handouts. Airlines are important, but so are other things, including train service. And it's not as if the airline industry has been a golden enterprise tarnished by problems that 9/11 created. Far from it. For more than 60 years, airlines have been an up-and-down business, so to speak. They make money for a while and then suffer losses because of overexpansion, excessive debt, and high labor costs. In fact, the industry had a cumulative $4.9 billion loss from 1938 through 1994, before embarking on a winning streak that probably would have ended even without 9/11.

It's not that Amtrak doesn't deserve scrutiny. It's clear even to a train fan like me—I live in Amtrak's core Northeast market, and I prefer taking the train to flying or driving—that Congress has been quite right to press Amtrak to show better financial results. Without outside pressure, Amtrak would still be the total mess that the government inherited from bankrupt rail lines. Now it's only a partial mess. But why is Amtrak expected to break even and cover its own capital expenses and serve financially hopeless routes, such as Orlando-Los Angeles? And why doesn't the airline industry, heavily subsidized by general tax revenue and ticket-tax money, get laughed out of town when it begs for money without cleaning up its financial act? Call me a cynic, but I suspect it has something to do with more politicians flying home from Washington than taking the train.

There are lots of theories why the airlines—except Southwest and some start-ups—don't make money. I'm no guru. But even an amateur like me can see that Southwest and the successful start-ups have different route structures and business models than the major airlines do. And management and labor seem to get along rather than always fighting to the death.

The industry has very high fixed costs for planes, labor costs, and debt. But it has low costs for each extra passenger. So it's tempting to add passengers, even at very low fares. That has created a pricing system in which higher-paying customers feel abused. It generates a huge amount of customer ill will, which isn't good for any business.

Amazingly, the airline loan-guarantee program set up last year as part of the post-9/11 industry bailout has done something unusual and beneficial. Airlines have to clean up their act to qualify for guarantees. That's why most of the $10 billion loan fund is still unspent. The House and Senate are squabbling over a $400 million difference in what Amtrak gets: a rounding error relative to what the airlines will extract. It would be nice if Congress leaned on the airlines the way it has leaned on Amtrak. That, alas, is about as likely as airlines treating coach-class fliers as customers rather than trying to play them for suckers.

Allen Sloan is Newsweek's Wall Street editor.

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