The National Corridors Initiative, Inc.

James P. RePass - President & CEO
Phone:  617-269-5478

The Hon. John Robert Smith - Chairman

MA Office: 59 Gates Street, Boston, MA. 02127
CT Office, 8 Riverbend Drive, Mystic, CT, 06355
RI Office, 35 Terminal Road, Suite 210, Providence, RI. 02905

Fax (CT): 860-536-5482

January 28-29, 2008
St. Louis, Mo

The First Carmichael Conference
on Transportation

Position Paper To the Candidates for President
and the Party Platform Committees


Text of Major Address by Robert Crandall,
former Chairman and CEO of American Airlines
To the Carmichael Conference, St. Louis

Delivered at the Carmichael Conference, January 28-29, 2008

First Appearing In NCI’s Destination:Freedom Weekly Newsletter
Vol. 9 No. 5 - February 4, 2008
See This Link For The Original Article And Photos

 

Thanks to you all for being here today.

I am delighted to be part of an effort to attract political attention to the gathering crisis in American transportation, and to have had an opportunity to hear others confirm the concerns I have long had about the atrophication of our rail system and the deterioration of our highway system. It’s late in the game, and we are far past the time when our national leaders should have laid out, debated and implemented an integrated, carefully thought out and effective national plan for developing and deploying an optimized national transportation system.

Unhappily, we live in a time – as Joe Klein observed in his recent and excellent book ‘politics lost’ – in which “the very notion of planning, especially planning for the common good, seems vaguely socialist.” that reality underscores the fact that we must do more than merely describe problems and recommend solutions -- we must also persuade our political leaders that those problems deserve the attention of our government. We must either persuade lots of folks who don’t want government in the game to change their minds or, alternatively, change the leadership in favor of those who will pay attention!! And that, of course, is what politics is all about.

We have had the good fortune during the last couple of days to hear from a number of people well qualified to comment on, and offer solutions to, our rail and highway problems. As you all know, my background is in the aviation sector – so let me spend a few minutes talking about what has gone wrong with our aviation system, why I think it is important for us to fix it, and what I think should be done. Then we can come back to the importance of working to develop an integrated approach designed to optimize the contribution all our transportation capabilities.

In my view, the deterioration in our aviation system has its roots in the badly conceived airline deregulation act of 1978. Myself and many others were fiercely opposed to the bill, and did all we could to defeat it.

While I was opposed to the deregulation bill we got, it was absolutely clear that some modifications to the regulatory scheme then in effect were need. Moreover, it is clear that deregulation has had some favorable effects.

Absent deregulation, the industry would likely have moved much more slowly towards optimization of the hub and spoke methodology which has worked so well to connect the many dots that make up America, would have taken far longer than it did to develop the automated reservations and operational systems now used throughout the industry, would have been far slower to create fare and load factor management tools like yield management and almost certainly wouldn’t ever have launched the frequent flyer plans which are so ubiquitous today. The competitive juices that opened the way for these and other innovations were sorely lacking in the airline industry of 1970’s, and it is clear that deregulation was a great stimulant.

Indeed, absent deregulation, it is very doubtful that American Airlines – my alma mater – would be anything like the size it is today. Because we grasped the nettle more quickly than our competitors, we gained a first mover advantage in many areas and were able to translate that leadership into a dramatic growth and profitability advantage throughout the 1980 and early 1990’s.

Unhappily, all that good news is belied by the sad state of affairs of our present air transportation system, which isn’t much of an endorsement for the presumed virtues of unrestricted competition. While the industry’s decrepit state can’t be blamed entirely on deregulation, the devil has proven to be in the details. The economists and academics who fathered the idea – and whose forecasts of probable industry responses were wildly off the mark -- cannot have imagined that their successors in government would be neither as indifferent to the need for fine tuning, nor as abjectly inept as they have proven to be.

Thus, while most who opposed deregulation would acknowledge that competitive freedom has brought many benefits to an industry that certainly needed changing, I am sure many would share with me some sense of vindication from the headlines and stories so frequent in today’s press.

Consider these few examples:

  • During the first nine months of 2007, the airline industry lost – at least temporarily – one of every 138 checked bags, as compared to one of every 155 the year before and far fewer ten years ago.
  • At one of our leading airlines, the number of involuntarily bumped passengers – that is, people denied boarding despite having a reservation – rose by 50% in the summer of 2007 as compared to the summer of 2006. Industry wide, involuntary bumping was 22% worse than last summer.
  • Airline on-time arrivals have fallen to less than 75%, and the number of delayed flights has risen by more than 600,000 from ten years ago. At some major airports – particularly Kennedy and Laguardia – the numbers are far worse
  • On November 25, an article in the New York Times proclaimed “flying … has become an increasingly miserable experience. Legroom is practically nonexistent. Passengers are more tightly packed together. Hot meals have been eliminated. Ditto pillows and blankets. All of which has created a generation of fliers who now view getting on a plane as roughly akin to entering the ninth circle of hell.
  • And finally, and in the long run most importantly, U.S. Aviation leadership is a thing of the past. While both Boeing and airbus are building and selling lots of new planes, the fleets of the major U.S. Carriers are growing steadily older. It has been many years since any U.S. Airline has warranted a place on any list of the world’s best airlines.

The industry’s impact on our collective well-being is profound. Numerous studies have shown that aviation accounts for more than a trillion dollars – 10% plus – of our GDP and drives about 11 million jobs. Taken together with the economic implications of inadequate rail and highway structures, these numbers imply ever-deepening troubles ahead.

Think back, if you will, to the second presidential debate of the last campaign. A woman in the audience inquired of the candidates how America could sustain its standard of living if more and more good jobs are flowing to places where wages are low. Neither candidate, in my view, gave much of an answer.

But there is a good answer, which is that all jobs do not flow to those places where wages are low. Instead, jobs flow to those places where the total costs of production and distribution are lowest. Thus a country like America – where wages are not as low as in many other places – needs to be good at all the things that contribute to production and distribution leadership. Among those things are efficient capital markets, outstanding educational institutions, a strong information technology and telecommunications sector, and efficient transportation systems able to move materials, people, and finished goods quickly and cheaply from place to place.

These activities have catalytic impacts on many other businesses, and are thus key drivers of superior economies. In the U.S., each of these things has made a big difference.

  • America’s educational institutions are a prime reason the United States has had a commanding lead in new patents for many years -- although we are now losing momentum as we make it more difficult for students to come here and even harder for them to stay after they graduate.
  • the remarkable information technology and telecommunications developments of the 90’s made an enormous contribution to the productivity growth our overall economy has realized in recent years, and are something we should be able to count on in the years ahead. However, if we continue to make it difficult for the best and the brightest to come here, our leadership will gradually wither away.
  • In the early years of the telecommunication revolution, everyone looked to America for leadership. Today, many countries have superior cell phone service and in lots of places around the world, what we call high speed access would be regarded as rather pokey.
  • Finally, in years past our superior aviation system made it lots easier to do three cities in one day in the U.S. Than is was in Europe and Asia, which meant it was easier to put a deal together or run a business here than it was there.

In all these areas, our government ought to be doing everything possible to sustain America’s advantages --to be sure that higher education, information technology, telecommunications and transportation remain areas of U.S. leadership -- because continued leadership in these areas is the only way we can hope to sustain our present standard of living.

While leadership in some areas requires only policy leadership from government, with the private sector carrying the burden of execution, transportation is different. In transportation we depend on government for both sound policy and active participation since there are some things that only government can provide.

Safety regulation is one such activity, and in this area, at least as it relates to aviation, the public and private sectors have worked quite effectively together. Everyone involved in aviation safety – the FAA, the airlines, and the front line folks who make it happen every day – can be rightfully proud of the extraordinary job they have done in making commercial flight ever safer.

Unhappily, despite Herculean self-help efforts by the industry – including the bankruptcy of almost every legacy airline – not much else has gone well. Given the reality that things could – and probably will – be even worse unless we do something different, I think it’s about time for government to come to grips with our pressing need for new aviation policies. During the course of the last couple of decades, there have been numberless conferences, commissions, conclaves, papers and speeches – but damn little action.

In my view, it’s pretty clear what we need to do:

  • We need to change our bankruptcy laws to prevent failed carriers from operating under the protection of the bankruptcy court for extended periods of time. Allowing failed ventures to continue, while gaining huge cost advantages relative to more successful competitors, serves as a fail safe for imprudent managements and reckless unions and denies successful competitors the pricing leverage essential to restoring financial health. Denying failed ventures this unique protection would allow the survivors to rationalize their route structures and exercise sufficient pricing power to recapture the costs of the hub and spoke system so essential to small communities across the country. Moreover, and perhaps most important, the specter of liquidation would provide real incentives for labor and management to work together to avoid failure.
  • We need to change our deeply flawed labor policies. As far back as the 1930’s, while grappling with vastly different problems, the government mandated pilot pay rates which, when incorporated into union contracts, have made it impossible for the airlines to capitalize on the remarkable aircraft productivity gains of modern times. Then, in 1978, the congress stripped the airlines of the right to mutual aid, and finally, in 1985, denied bankrupt companies the option of abrogating labor agreements, which removed any incentive for unions to moderate their contract demands. The cumulative impact of these policies, has been to drive airline labor rates far above those paid for comparable skills in other industries.
  • We need to reconsider our government’s view that low prices always trump the interests of producers and employees. In the years since deregulation, the U.S. Has made a series of policy choices which handicap the ability of our legacy carriers to create strong market positions. These policies stand in sharp contrast to the policies of other governments, and account, to a considerable degree, for the fact that foreign legacy carriers have done far better in recent years than their U.S. Counterparts.
  • We need to re-examine government policies regarding taxes and fees levied on travelers. Today, about one fifth the cost of a single connection round trip within the united states -- more than $60 – goes for taxes and fees. The federal government taxes travel – which is economically important to every person in the United States – more heavily than it does tobacco, alcohol, or guns and ammunition. Does that make any sense???
  • We need to re-consider the policy of asking aviation --- and every other form of transportation in this security-sensitive age --- to shoulder the cost of its own security. The extraordinary burden of fees and taxes I have already mentioned includes billions of dollars of security costs – which should, in my judgment, be financed by all taxpayers, as are other national security costs. To cite a very contemporary case, are we going to levy the costs of border security only on the residents of border states – or on all Americans?? The answer, of course, is that we all benefit, and we should all pay.
  • We need to provide the FAA with the resources it needs to modernize the air traffic control system and enhance the productivity of its employees. Back in 2003, the congress passed a plan to do both, but in the years since, the administration and the congress have failed to provide the needed funding. Moreover, the administration continues to propose ever smaller general fund contributions to FAA operations, which has set in motion a ferocious political struggle between elements of the aviation community as to how future system improvements – if they occur at all – will be financed.
  • We also need, as I said at the outset of these remarks, to work towards better integrating the capabilities of all our transportation capabilities. Let me touch on just a couple of ways in which rail and air could be far better used for everyone’s advantage.

As I suspect all of you know, landings and takeoffs at Laguardia airport are limited and airspace in and around New York is very crowded. Nonetheless, a substantial number of flights still leave Laguardia bound for Washington d. C. And Boston, both places to which railroad track already runs. If I were the King of Spain – that is, if I could do whatever I wanted to do – I’d prohibit flights to either Boston or Washington from Laguardia while simultaneously upgrading the rail system – tracks, equipment, power and whatever else is needed – to assure maximum running speed and minimum elapsed time. By doing so, we would better use the railroad asset and would free airplanes, airspace and airport facilities for flights to places that cannot be conveniently reached by rail. Once that was accomplished, I’d move in the same direction in and around Chicago, thus relieving the pressure on O’Hare and on the west coast, thus relieving pressure at Los Angeles and San Francisco.

While we’re on the subject, I should also mention that I am mystified as to why most European cities can operate high speed trains from their airports to their city centers while we can’t, and equally mystified as to why the Europeans are so much better at linking airports and local rail systems than we are.

In a cynical age, it is widely thought naïve to suppose that past practices can be radically changed --- and specifically, that anyone will be willing to think through and then implement the important policy changes needed to fix not just the aviation system, but the transportation system as a whole. Unless someone does, however, things will only get worse in the years ahead --- and the public’s growing dissatisfaction may well be a ray of hope.

As load factors and fares rise, terminal congestion worsens, flight delays proliferate, available seats grow scarce and frequent flyers seats become more and more unavailable, there is more and more gnashing of teeth, and our politicians – unwilling to provide leadership but always fearful of the publics wrath – have at least begun to propose stop gap measures, however ill conceived. A few weeks ago, even our famously laissez-faire administration got into the act by opening underutilized military air space off the east coast for commercial use during the thanksgiving traffic peak.

But stop-gap measures won’t solve the long term problem -- which won’t go away until the U.S. Department of transportation – with the help and support of the congress – steps up to its responsibilities and creates a comprehensive transportation master plan that integrates solutions for both passenger and freight traffic with optimized use of all our aviation, rail and highway assets.

The thought and effort that has gone into this conference may well make a difference – but no conference or commission will have much real impact until we succeed in persuading the public, and the country’s political leadership, that America cannot sustain its living standards or remain a great power without a first rate, world class transportation infrastructure.

None of what’s needed is rocket science. We know how to do what is required --- all that’s needed is the will and determination to recapture the excellence that was once the hallmark of all things American.

America deserves better – and we should be leading the way towards getting it

Thank you very much.


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