Thinking Outside the Boxe

Saddam Hussein's Return

     The resignation of Judge Rizgar Amin, the lead judge in the trial of Saddam Hussein, jeopardizes the imposition of justice upon the former dictator.  With the trial dragging on with O.J. Simpson-like qualities, there is an increasingly higher probability that Saddam Hussein will elude justice.  Since the trial started, concerns over security have been high. 

    Judge Amin was one of only two judges to appear on television.  Members of the defence counsel have resigned and been murdered.  This should come as no surprise in a country where the dictator’s supporters are numerous and capable of doing anything to help get their leader acquitted.  Witnesses, whose appearances in court were already tenuous, are likely to be more apprehensive in the wake of the judge’s resignation.  Many will likely refuse to testify for fear that they too may become a target of Saddam’s fanatical supporters.  With Saddam Hussein’s supporters likely still active behind the scenes, can there be any question that the trial may yet fail? 

    With the court weakened, Saddam Hussein may be set free due to a lack of evidence, a legal technicality discovered by one of the defence counsel, or a failure of the prosecution to adequately prove its case.  With Saddam free and the insurgents still inflicting damage on the coalition forces, the Iraqi police and security forces, and ordinary Iraqi citizens, a new party would undoubtedly surface with a galvanizing leader at its helm.  Promising to end the insurgency (which may be backed by his own supporters) and bring peace to Iraq, Saddam Hussein and his loyalists could quickly rise to power with their new party and seek to recapture control of Iraq.  Presenting himself as a reformed man and ensuring that he will uphold democracy in Iraq by working with the duly elected parliament, Saddam Hussein could be quickly swept back into power only to eventually return to his dictatorial ways and undo all the good work that has been done since he was ousted from power nearly three years ago.  He would return to power wrapped in the Iraqi flag by uniting people with empty promises, rhetoric, and propaganda in the same legal fashion that brought Hitler to power in Germany in 1933.

    The trial of Saddam Hussein can indeed survive the resignation of one judge.  However, the new government of Iraq must ensure that their legal system does not fail this important test.  The failure of the legal system would have devastating consequences for Iraq and its people and would set a dangerously destabilizing precedent for the future.  Therefore, the trial must continue and be seen through to its conclusion.  The prosecutors, the judges, and the witnesses must be brave, courageous, and bold in the defence of their legal system and rise to the challenge to ensure that justice is served.  To fail is to set back the clock in Iraq and to hand the country back to Saddam Hussein and his loyalists for good.

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Iran Revisited or Why Iran Must Never Be Allowed to Develop Nuclear Weapons

       In February 2005, Thinking Outside the Boxe discussed the issue of Iran’s desire to acquire or develop nuclear weapons and how the EU3’s strategy of negotiation was doomed to fail.  At that time, we suggested that appeasement would not contain Iran or prevent their radical Islamic regime from seeking weapons of mass destruction.  In that article, Thinking Outside the Boxe concluded the following:

    The EU3 should recall appeasement’s dismal historical record—Hitler wanted still more than was given to him under the Munich Agreement.  On Neville Chamberlain’s return to Great Britain in September 1938 following the signing of the Munich Agreement, Winston Churchill stated, “He was given a choice between war and dishonour.  He chose dishonour and he will have war anyway.”  Negotiating with Tehran could ultimately be a dishonour, particularly if the regime eventually realizes its nuclear ambitions.  The EU3 fits Churchill’s explanation of an appeaser:  “An appeaser is one who feeds the crocodile, hoping it will eat him last.”  The EU3 should recognize the folly of pursuing appeasement of Tehran and should support the United States in referring the matter to the United Nations Security Council with the intention of enforcing the NPT.       

    It has been ten months since we proposed referring Iran to the United Nations Security Council, an ineffective bureaucracy that has a dismal history of failures.  However, Thinking Outside the Boxe is willing to support a process of going through the appropriate channels at the United Nations so that when the United States ultimately has to confront the issue on its own, no nation can say that we did not give the negotiating process a chance.  Since February, there have been no gains in the negotiating process.  The Iranian government has obstructed any progress that could possibly be made, despite the very admirable and legitimate efforts made by Great Britain, France, and Germany.  Here is a look at the developments in the last ten months.

    During the summer, the EU3 offered Iran cooperation with its civilian nuclear power programme in exchange for Iran’s abandonment of its nuclear ambitions.  The proposal suggested that the European Union, along with other nations, would supply Iran with fuel supplies and assist in the development of nuclear power stations, thereby reducing Iran’s dependence on Russia for fuel imports.  Iran would, in turn, end nuclear fuel production within the country and would dismantle its fuel cycle/uranium enrichment programme.  Iran, however, continued to maintain its right to a small scale uranium enrichment facility for peaceful purposes.  Iran did agree to suspend its uranium enrichment activities during negotiations with the EU3.        

    Thinking Outside the Boxe finds Iran’s insistence on keeping a uranium enrichment programme suspicious.  Why would Iran need to maintain its own programme if other nations are willing to provide development of the nuclear fuel cycle and energy sources.  This is like money for nothing and women for free.  We can only conclude that Iran’s insistence on its right to a small scale uranium enrichment programme is an indication that it fully intends to pursue development of nuclear weapons.  If Iran’s development of nuclear power is only for peaceful purposes, why not accept the offer from the EU3?  Iran’s “peaceful” purposes are disingenuous.    

    By August, however, it was apparent that the talks were at a stalemate and likely to collapse after nearly two years of negotiations between the EU3 and Iran.  Tehran continued to demand that Iran be allowed to resume its fuel cycle activities at its Isfahan facility.  Iranian officials indicated that the negotiations would be over if the EU3’s incentives did not include a nuclear programme for peaceful civilian use.  At this point, Iranian officials indicated that “This means the end of this round of talks with Europe.  Iran has decided to resume activities in Isfahan and no one at home and abroad can stop it.”  The threat to resume activites at Isfahan would be in direct violation of an agreement reached in Paris in 2004.  In response, the EU3 began seeking an extraordinary meeting of the International Atomic Energy Agency in Vienna, Austria, to deliberate the matter and to possibly refer the matter to the United Nations Security Council.  Russia and China at this point still claim to believe that Iran has purely peaceful intentions in developing a nuclear programme.  Thinking Outside the Boxe believes that this further illustrates that Iran has absolutely no intention of abandoning its clandestine nuclear programme.  Rather, Iran is merely stalling for time, using the current round of negotiations to delay further action by the United States and the United Nations.   

    The IAEA, ultimately, did not refer the matter to the United Nations Security Council in September, even though Iran resumed conversion activities at the Isfahan facility in August.  However, the IAEA did state that the issue was “within the competence of the Security Council.”  Condoleezza Rice, US Secretary of State, then attempted to build support for a referral to the Security Council following the IAEA meeting in November.  No time tables were set for referral of the matter to the Security Council.  Russia still implicitly objected to any referral to the UN. 

    In late October, tensions mounted between the West and Iran after Mahmoud Ahmadi-Nejad, Iran’s president who took office in August, declared that Israel should be “wiped off the map.”  In a speech at a conference entitled “A World without Zionism,” the Iranian president referred to an Islamic Jihad bombing that killed five Israelis in the town of Hedera and indicated that there was “no doubt the new wave in Palestine will soon wipe off this disgraceful blot from the face of the Islamic world.”  He also made reference to Arab countries’ economic relations with Israel, stating that “Anybody who recognizes Israel will burn in the fire of the Islamic nation’s fury.  Any [Islamic leader] who recognizes the Zionist regime is acknowledging the surrender and defeat of the Islamic world.”  European leaders, following the lead of the United States, quickly condemned the comments of Mr. Ahmadi-Nejad, with a statement signed by twenty-five European leaders stating that the comment was “manifestly inconsistent with any claim to be a mature and responsible member of the international community.” 

    Thinking Outside the Boxe believes that these comments further illustrate the religious fanaticism that characterizes the Iranian government and its culture.  This should be a clear signal that Iran is a nation that should not have weapons of mass destruction in its possession or at its disposal.  If Iran is willing to wipe Israel off the map, their aggressive nature will not stop there.  They will, undoubtedly, seek to annihilate all the nations that do not believe in their religious fanaticism.  All those nations who differ on the issues of liberty, justice, freedom of speech, and the values of the West will be a target for violence and destruction of a nuclear armed Iran.  This should illustrate why it is crucial that Iran is never allowed to develop a nuclear weapon.

    As if these displays of religious fanaticism were not enough, Mr. Ahmadi-Nejad claims to have sensed “a light” while addressing world leaders at the United Nations in September.  A transcript from www.baztab.com, a leading Iranian website, stated the following from a member of Mr. Nejad’s entourage:

    When you began with the words “In the name of God”…I saw a light coming, surrounding you and protecting you to the end.

    Mr. Ahmadi-Nejad also indicated the following:

    I felt it myself, too, that suddenly the atmosphere changed and for 27-28 minutes the leaders could not blink.  I am not exaggerating…because I was looking.  All the leaders were puzzled, as if a hand held them and made them sit.  They had their eyes and ears open for the message from the Islamic Republic.

    Even some Iranian members of parliament were dismayed by the comments, suggesting that even in the early days of Islam people did not make such comments.  This should clearly illustrate that Iran is not mentally capable of possessing weapons of mass destruction.  The radical Islamic fanaticism of the Iranian leaders is dangerous and frightening.  Iran and its leaders enjoy the popular support of the people, who all share in a deep rooted hatred of the West and its values and way of life.  A nuclear armed Iran would stop at nothing in destroying anyone and any nation that it believes does not share its radical Islamist views—western nations and Middle Eastern neighbours alike.  Furthermore, Iran would use its religion to pervert truth and to justify any action it takes against another nation.

    Let there be no doubt, Thinking Outside the Boxe believes that Iran is the most dangerous threat to the world and global security going forward.  They place little value on human life, even their own.  No nation—the United States, Great Britain, France, Germany, Saudi Arabia, Iraq, Russia—is safe or guaranteed protection from the dangers posed by Iran and its radical Islamic fanaticism.  Iran and its jihadist fighters will hide behind Islam in order to commit mass murders of innocent men, women, and children.

    The Iranian regime and Islamic extremists in general, many of whom Thinking Outside the Boxe believes are supported by factions within the Iranian regime, share a common set of violent ideals.  Islamic extremists have killed Muslims throughout the Middle East—in Iraq, Saudi Arabia, Lebanon, etc., and have openly rejected the newly-democratic governments in Afghanistan and Iraq in favour of outdated, religious based theocracies where the rights and liberties of individuals are virtually nonexistent.  These same Islamic extremists have historically committed murders of innocent peoples in Britain (the July Underground bombings), Scotland (Pan Am Flight 103 over Lockerbie), the Netherlands, New York, Berlin, etc.  They neither understand nor respect the West and what it stands for with respect to liberty and human rights.       

    Is the world oblivious to the situation that now stands before us?  It is just a matter of time before Iran resumes enrichment of uranium at its existing nuclear facilities.  The past two years of negotiations between the EU3 and Iran have been a grand failure—a vast waste of time and resources as the Iranian regime has had no intentions of securing a negotiated deal.  Their intentions were further made clear by their rejection of a Russian proposal to enrich the uranium in Russia.  All indications suggest that Iran will continue to seek development of nuclear weapons.  Should they develop nuclear weapons, the Iranian regime would likely attempt to blackmail the West or its Arab neighbours.  As a worst case, Islamic extremists could be provided with these nuclear weapons to spitefully inflict death and massive destruction upon the West.  Iran and the Islamic extremists must not be allowed to hold the world hostage in a grip of fear through either possession of a nuclear weapon or the threat of developing nuclear weapons.        

    The West must not waste any more time in negotiations that are nothing more than an exercise in futility.  This matter must be referred to the United Nations Security Council immediately.  The Security Council must then take the steps necessary to force Iran’s compliance with any resolution regarding abandonment of nuclear ambitions.  Sanctions alone will not work—after all, the United States has had sanctions against Iran since the 1979 revolution.  These sanctions have failed to prevent Iran from growing increasingly dangerous on the global security front.  Now is the time for the United Nations Security Council to redeem itself and to assert its authority by taking unanimous, firm, and resolute action to force Iran to abandon its nuclear program.  Words alone will not stop Iran.  The Security Council must be prepared to take any and all actions necessary to prevent Iran from acquiring or developing nuclear weapons—including the use of military force.  Whilst military action is not a particularly palatable choice in dealing with the issue, a few thousand lives now may be an unfortunate sacrifice on both sides to prevent the senseless killing of millions should Iran develop nuclear weapons and use them against the West, give them to terrorists to use against major metropolitan areas throughout the world, or use them to destroy oil fields in neighbouring Arab countries.        

    The fate of the Middle East and global security hangs in the balance .  The United Nations, in considering the appropriate actions to take against Iran in preventing the regime from developing nuclear weapons, would be wise to heed this advice:

    All that it takes for evil to triumph is for good men to do nothing.

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Appeasement Has Failed Before

       France, Germany, and Great Britain (a.k.a. the EU3) have repeatedly called for the United States to participate in their negotiations with Iran aimed at ending the country’s development of nuclear technology.  The EU3 has made little progress in their negotiations, citing Washington’s failure to offer Tehran economic incentives and security guarantees.  With negotiations apparently deadlocked and the extent of Iran’s nuclear programme still unknown, it is worth considering whether appeasing Tehran will ultimately achieve the objectives of all parties.    

    Though its nuclear programme is alleged to be for civilian purposes, intelligence sources suspect otherwise.  An Iranian opposition group, Mujahideen-e Khalq, has suggested that Tehran obtained nuclear technology from Pakistan’s Abdul Qadeer Khan.  Mohamed ElBaradei, head of the International Atomic Energy Agency, has even suggested that “If you have nuclear material, the weapon part is not far away.”   With Iraq’s Saddam Hussein deposed, however, a major threat to Iran’s security has been removed, lessening the need for a nuclear deterrent.  Iran’s desire to continue its uranium enrichment programme and its negotiations to freeze the programme are suspect.  Is Tehran’s objective to use its nuclear ambitions to extort economic benefits from the West?  Negotiating with Iran could end up like former President Clinton’s deal with North Korea—a deal which ultimately failed. 

    Iran along with over 170 countries that are party to the Nuclear Non-Proliferation Treaty agreed to extend the NPT indefinitely and without conditions in 1995.  Therefore, under the NPT, Iran has already agreed not to seek to develop nuclear weapons.  Why should the EU3 and the US offer Iran any incentives to honour a treaty which it has already signed?  This equates to rewarding a child for bad behaviour.  As President Bush stated on his recent trip to Europe, Iran should be held to account rather than the EU3 or the US.

    Appeasing Iran by offering economic incentives and security guarantees is likely to fail.  Iran, a country with known connections to terrorist organizations, will undoubtedly continue to pursue development of a nuclear weapon.  And a few years from now, they may attempt to extract more concessions from the West whilst continuing with their programme.  The events of September 11, 2001 placed us on the threshold of a new world in which terrorism is the greatest threat to global security.  Nuclear weapons in Iran’s possession pose a grave threat to the stability of the Middle East and the security of the rest of the world.  To forsake a hardline approach towards Iran and its nuclear ambitions in favour of appeasement only postpones the inevitable confrontation over the issue at the United Nations.  By allowing the tail to wag the dog, the costs and risks of appeasement come at a great price in the long-run.

    The EU3 should recall appeasement’s dismal historical record—Hitler wanted still more than was given to him under the Munich Agreement.  On Neville Chamberlain’s return to Great Britain in September 1938 following the signing of the Munich Agreement, Winston Churchill stated, “He was given a choice between war and dishonour.  He chose dishonour and he will have war anyway.”  Negotiating with Tehran could ultimately be a dishonour, particularly if the regime eventually realizes its nuclear ambitions.  The EU3 fits Churchill’s explanation of an appeaser:  “An appeaser is one who feeds the crocodile, hoping it will eat him last.”  The EU3 should recognize the folly of pursuing appeasement of Tehran and should support the United States in referring the matter to the United Nations Security Council with the intention of enforcing the NPT.

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The European Union: A House Divided

    The rejection of the EU constitutional treaty in referendums in France and the Netherlands sounds the death knell for the European Union, which had been in the throes of death for sometime.  Perhaps the politicians will now see the folly of continued unproductive investment in the European Union and end what will only be an exercise in futility in the future.  Disbanding the EU and abandoning the euro without further delay would avoid the prolonged and agonizing demise that is inevitable.

    In theory, the establishment of the EU and the introduction of a single currency were sensible and ambitious ideas.  The EU could serve as a counterweight to the United States in world politics and provide significant competitive advantages such as a more flexible workforce and travel between member countries.  The euro would provide economic benefits such as lower transaction costs for commerce and capital market integration.  However, the underlying requirement for success in this enormous project was greater political integration, harmonization, and cooperation.  Here is where the EU has been fundamentally flawed—a flaw that is the largest contributor to the failure of the system.

    Though EU member countries were initially successful in implementing fiscal rules to ensure a successful introduction of the euro, establishing the ECB, and in organizing the bureaucracy in Brussels, the first wound inflicted upon the EU came when France and Germany breached the fiscal rules relating to budget deficits set forth in the stability and growth pact to which they had agreed.  The stability and growth pact was murdered in 2003 when ministers suspended action against France and Germany, in effect granting these countries more flexibility with respect to budget deficits and bringing them back into alignment with the pact.  Currently, there is little prospect that this will happen before 2007, if even then.  The European Commission now wants to enforce the revised stability pact on Italy and is seeking disciplinary action to set an example for other EU member (with the exception of France and Germany presumably) that budgetary unruliness will not be tolerated. 

    With the creation of the European Union came the establishment of a huge bureaucracy.  However, the European Parliament suffered from the lack of formal powers.  Eurozone finance ministers could not formally coordinate fiscal policy.  There is currently no foreign minister for the EU.  Transparency is questionable.  The EU Constitution was to give the Parliament more teeth and ensure further political integration, a necessity if monetary union is to succeed.  The rejection of the constitutional treaty suggests that Europeans are skeptical regarding further political integration or the evolution of the EU into a more federal system such as that in the United States.  This may not be surprising given that the twenty-five members are a disjointed and disparate group of countries pursuing vastly different agendas and having significantly different cultures. Most are reluctant to give up much autonomy to the government in Brussels.  This all suggests that political integration at the level required to ensure the EU’s success is highly unlikely.  Therefore, it hardly seems feasible that the EU is a viable union for the long-term. 

    Supposing the EU did managed greater political integration, at some point, difficult decisions would have to be made if one member country were to take action contrary to the European Parliament.  For example, in the United States in 1832, South Carolina nullified a federal law relating to a permanent, protective tariff on imported goods (in order to benefit trade in the northern states) and threatened to secede from the Union.  This Nullification Crisis was resolved peacefully, but a dispute between the federal government and the southern states over states’ rights relating to slavery led to the creation of the Confederate States of America in 1861 and four years of civil war.  How would the EU respond to a similar situation?  Would the EU wage war against a member country for the sake of political preservation of the union?  That seems highly unlikely, even if it were necessary in order to preserve the Union.                 

    Upon his nomination as the Republican candidate for the United States Senate seat from Illinois in June 1858, Abraham Lincoln stated that “a house divided against itself cannot stand,” when referring to slavery and the conflict it created amongst the states.  Indeed, America engaged in the Civil War for four years following Lincoln’s election as President in an effort to bring the Union back together for political harmonization.  The European Union will not survive with many factions pursuing their own agendas and changing the rules when it suits only them.  Furthermore, the EU could hardly be considered a major political force on the world stage if the members were constantly bickering amongst themselves to craft a common policy.  To avoid what could be a very unpleasant showdown in the future between the European Parliament and the member countries, the EU may as well die peacefully now.  Perhaps a new model for integration will emerge many years in the future and be successful, but the existing EU is a vast failure.

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Liquidating United Airlines & US Airways is in the Industry's Best Interests

     There has been much speculation in recent weeks over the possibility of a liquidation of both United Airlines and US Airways.  With the rejection of United’s $1.6 billion loan guarantee by the Airline Transportation Stabilisation Board (ATSB) on June 17, 2004 (a decision reconfirmed on June 28, 2004 despite United’s efforts to secure $500 million in private equity), the carrier was sent into a tailspin and forced to warn that it would not make $500 million in pension payments this year.  Despite two years of restructuring and cost cutting under Chapter 11 bankruptcy reorganization, United’s finances still remain in fragile condition and its business plan offers little hope of the miracle turnaround required to save the second largest carrier and make it competitive.  US Airways, though it did secure a $900 million loan guarantee and a $1 billion loan from the ATSB, emerged from bankruptcy in March 2003 only to file for Chapter 11 again on September 12, 2004.  In the past few weeks, Delta and ATA have also been brought to the verge of Chapter 11 filings, which would result in half the airline industry in bankruptcy.  Though these bankruptcies are likely to squeeze more concessions from the labour unions, the liquidation of United and US Airways may actually be a silver lining for an industry that has been plagued by financial turmoil for the last three years.

    It is important to recall that the airline industry was facing severe troubles prior to September 11, 2001, with expected losses for the year in excess of $2 billion.  The terrorist attacks brought the industry to a standstill and precipitated a sharp drop in air travel, further compounding the industry’s financial woes.  September 11 also provided an excuse to provide the industry with federal assistance of up to $10 billion by way of loan guarantees administered by the ATSB as well as $5 billion in pretax cash to compensate for the four day government imposed halt to commercial flights.  Congress also authorized additional assistance to the industry such as a $2.3 billion reimbursement for security fees and $100 million for cockpit door fortification.  The total financial relief following September 11 totaled over $20 billion. 

    Despite the federal assistance, according to data from the Air Transport Association (ATA), the airline industry reported a net loss of over $8 billion in 2001, a figure that increased to over $11 billion in 2002.  From 2001 through 2003, the industry’s net losses totaled over $23 billion—a figure that indicates the industry has no cumulative profits from 1940 to present day.  As if these figures were not bad enough, for the first half of 2004, the industry lost nearly $2 billion.  For the third quarter of 2004, American Airlines reported a net loss of $214 million, Delta reported a net loss of $646 million, Northwest reported a loss of $46 million and Continental reported a net loss of $16 million.  Forecasters expect the industry to lose over $3 billion in 2004 with further losses, perhaps significant, in 2005.

    In response to the industry’s financial instability, the airlines did their part (to their credit) by cutting an estimated $10 billion in annual costs from 2001 to 2003.  This was accomplished by making 140,000 jobs redundant, cutting flights, dropping unprofitable routes, etc.  Despite these efforts and as a result of the continued weakness in air travel along with tremendous losses, many carriers including United, US Airways, Hawaiian, Midway, and Vanguard (to name a few) filed for bankruptcy.  Delta and ATA now face possible filings if the financial picture does not improve.  However, despite the industry’s turbulence during the last three years, many low cost carriers have remained profitable.  Southwest, for example, reported a net profit of $119 million for the third quarter—it’s fifty-fourth consecutive quarter of profitability.  What is so terribly wrong in the industry that the response following September 11 largely failed to improve the airlines’ situation, particularly at United and US Airways?  And how have many low cost carriers been able to thrive and put the legacy carriers at such a competitive disadvantage?

    The trouble behind many of the airlines’ woes, particularly United and US Airways, stems from exorbitant labour costs.  Labour, which has been the industry’s second fastest growing cost in the last twenty years, currently accounts for roughly 38% of the industry’s operating expenses.  The bargaining power of the unions has enabled pilots and mechanics to enjoy generous pay increases, such as the 28% immediate one-time raise negotiated for United’s pilot in the summer of 2000, benefit packages, and pension plans.  This has placed a massive burden on the carriers’ finances.  Given that low cost carriers are likely to have employees at entry-level salaries and who have not reached retirement age, they have lower labour costs than the legacy carriers with their massive pension obligations.  As Caroline Daniel reported in “Airlines Seek Shelter in a Storm” on October 19, 2004 in The Financial Times, salaries for workers at Delta averaged $68,698 in 2003 as compared to an average of $40,972 for the low cost carriers.  This disparity in labour costs is highlighted further in the carriers’ labour costs per available seat mile.  United’s labour costs per available seat mile for 2003was 3.9 cents as compared to 5.2 cents at US Airways, 3.9 cents at Continental, 4.4 cents at American, and 4.6 cents at Delta.  These figures are significantly higher than labour cost per available seat mile of 2 cents at Jetblue, 2.3 cents at Airtran, and 3.1 cents at Southwest for 2003.  This implies that the legacy carriers are already at a competitive disadvantage versus the low cost carriers. 

    In addition to having significantly higher labour cost structures, productivity between most low cost carriers and the legacy carriers is dramatically different.  The FAA mandates that no pilot may fly commercially more than 1,000 hours in a calendar year, 100 hours in a month, or 30 hours over seven consecutive days.  According to the American Bar Association Section of Public Utility, Communications, & Transportation Law Report of the Aviation Committee (2003 Spring Council Meeting), Southwest pilots flew an average of 62 hours per month in 2001 as compared to 36 hours per month for pilots at United and 39 hours per month at American.  This relatively low productivity environment further compounds the financial problems.  In a manufacturing context, this equates to having a machine that can produce up to 1,000 widgets per month but only using the machine to produce 500 widgets per month.  When more than 500 widgets are required, the company acquires a new machine to produce the incremental widgets.  The economics of this make little sense.

    Critics of this entire stance would be quick to point out that labour costs are only one component of a carrier’s cost structure.  Fuel prices, which are the industry’s second highest single cost running between 11-12% of operating expenses, have risen dramatically in the past year with West Texas Intermediate Crude trading well over $40 per barrel.  For an industry that consumes an estimated 18 billion gallons of fuel per year, each $1 dollar increase in oil prices may cost the industry an additional $425 million annually according to the ATA.  Despite this, oil prices are a constant factor that all airlines in the industry must confront.  Effective use of hedging, however, should help protect against any significant rise in oil prices, which have such an adverse effect.  By hedging 80% of its fuel needs, Southwest managed to limit the negative effect of rising oil prices during 2004.  Though average fuel costs rose roughly 10%, Southwest’s third quarter unit costs increased by only 1.3%.  Hedging by the legacy carriers could have mitigated the massive losses blamed on rising fuel prices during the third quarter.  Failure to hedge equates to skydiving without a parachute.

    Liquidation of United and US Airways could bring about much-needed industry change with respect to labour and cost structures.  First, a liquidation of United and US Airways would force those carriers’ passenger traffic to be redistributed to other carriers—both low cost and legacy.  This redistribution of over 140 billion revenue passenger miles to the other carriers would significantly boost carrier load factors—a crucial factor in determining a carrier’s financial status.  In 2003, the industry’s load factor was 73.4% with a breakeven load factor of 76.4%.  Low cost carrier JetBlue posted a load factor of 84.5% for 2003, well above its own breakeven of 72.5%.  Airtran’s load factor of 71.1% was also significantly above it’s own breakeven of 64.1%.  Legacy carriers, however, often experienced significantly lower load factors.  Delta’s 2003 load factor was only 73.3% but breakeven was 77.8%.  Passenger load factor at United was 76.5% with a breakeven load factor of 87.6%.  US Airways’ load factor in 2003 was 73.3% with Continental and American posting load factors of 75.5% and 72.8%, respectively.  None of these load factors were above the industry breakeven load factor.  With United and US Airways out of the way, Delta, for example, could significantly improve its own load factor to above the breakeven level—assuming it could secure a portion of former customers from United and US Airways.  As a whole, the competitors would benefit significantly by improving load factors, which could help the remaining competitors break even and begin to restore financial stability to the industry.

    Second, it would provide the industry a valuable opportunity to negotiate with the labour unions for restructuring of labour costs.  With the liquidation of United and US Airways, executives at the other legacy carriers could seize upon the opportunity to bring the labour unions to the table to negotiate agreements that provide for both the long-term interests of the carriers as going concerns as well as the employees.  Labour unions will have to realize that the overly generous compensation packages of the past decades are likely a creature of the past.  Leaner finances would mandate lower labour costs in order to remove the competitive disadvantage of the legacy carriers as compared to the low cost carriers.   Since the pendulum previously swung too far in labour’s favour, the industry executives should be cautious not to allow the pendulum to swing too far in the other direction.  A balanced approach where both parties reach an agreement that is feasible for securing industry stability is certainly preferable to one where either party wields its influence unreasonably. 

    Finally, the logistical complexity of air traffic in the United States has typically resulted in delays nationwide, which often leads to irate travelers, as well as an increase in the risk of accidents.  These problems result simply from congested skies.  Though many airlines have cut flights since September 11, the congestion in the skies would be further alleviated once United’s and US Airways’ flights were discontinued.  Given the excess capacity at other carriers, the increased number of flights (at the other carriers) required to continue to satisfy customers from United and US Airways would be less than the number of flights previously operated by the two liquidated carriers.  On-time performance should improve, as flights are not forced to circle an airport several times whilst awaiting clearance to land.  As such, customer complaints would likely be reduced by improvements in on-time arrivals and departures.  The airlines should be smiling at the prospect of higher customer satisfaction and less disgruntled passengers creating disturbances whilst in the air and on the ground. 

    Though passengers may be inconvenienced at first by the reduction in the number of flights at some locations, the public should look forward to the possibility of a financially stable airline industry.  In the long-term, a healthy airline industry could lead to expansion of flights and routes, improvements in performance, and continued low fares as the price competitive nature of the industry is unlikely to disappear change significantly. 

    The troubles facing the United States’ airline industry may yet precipitate a positive outcome by enabling the industry to become financially stable through a fundamental restructuring.  Perhaps it is time to let United and US Airways fly off into the sunset in the best interests of the industry as a whole.

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