Larry Kellner served me a cup of coffee with the aplomb of a veteran flight attendant, and then, a few moments later, served up a stunning comment about the airline industry.
“If the government wanted to re-regulate the business, I wouldn’t be opposed to it,” he said.
While he didn’t mean the wholesale regulation of yesteryear, it’s still a surprise coming from the chief executive of Continental Airlines, the nation’s fourth-largest carrier by traffic.
Thirty years ago, airline executives battled fiercely to preserve government control of routes and pricing. Former American Airlines chairman Bob Crandall, then a rising executive, declared profanely that deregulation would ruin the business.
Fast-forward to today, and Kellner, agrees, at least up to a point.
“What we’ve got today doesn’t work,” he said in an exclusive meeting with me and several Chronicle colleagues. “It isn’t creating a stable industry.”
Kellner isn’t calling for a return to the good old days when fares were so high most people took the bus. Airline deregulation has always been about price, and in that sense, it’s been a roaring success.
Where it has failed, though, is on the cost side. Most airlines today have a cost structure that’s changed little since deregulation, which impedes consistent profitability.
Airlines’ profit margins are dictated almost solely by fuel and labor costs, which almost never decline in tandem.
New government rules?
Kellner said he prefer new government rules that would remove some of those cost constraints, allowing airlines to make money, employees to earn decent pay and passengers to feel they’re getting a good deal.
Among the biggest rule changes would be revamping the Railway Labor Act, which has governed labor agreements since the dawn of passenger air travel.
The RLA was designed to keep railroads running during labor disputes at a time when trains were the nation’s lifeblood of commerce and travel. For airlines, it means lengthy contract talks, which often wind up in mediation that leaves both sides unhappy.
“The problem is the structure of the RLA creates a very cumbersome process,” Kellner said. “It hasn’t worked well since deregulation. It creates a tremendous amount of angst on both sides.”
Customers’ anger
Previous attempts to alter the RLA, though, have failed in Congress, and few lawmakers have shown an interest in revisiting it.
Over the years, airlines have tried to revamp labor agreements with disastrous results — strikes, bitter negotiations, acrimonious relations between unions and management.
If the current state of the industry doesn’t benefit workers, it also doesn’t benefit investors. Continental’s market share, for example, has fallen to about $1.1 billion from $3.8 billion in 2006, and the airline lost $585 million last year.
Nor are customers happy about the current state of the industry. Passengers angry over flight delays and poor service are pressing Congress to enact minimum standards for the industry.
Equal playing field
I had intended to ask Kellner if he thought the airline industry could ever achieve sustainable profitability, but his comment about regulation made the question moot.
The industry, he said, needs new rules, ones that make the playing field equal for all carriers while still allowing competition to thrive.
Kellner may be right, but I was surprised by his candor. It’s the first time in more than two decades of covering airlines that I’ve heard an executive pine for more regulation.
Then again, it’s also the first time I’ve had an airline executive serve me coffee.
