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Game theory in the popular press.

Sad reality behind the American (Airlines) way

The Arizona Republic
Jon Talton
April 24, 2003
text is a cache of http://www.azcentral.com/arizonarepublic/business/articles/0424talton24.html

Jonathan Ornstein, the chief executive of commuter airline Mesa Air, knows where to look for the root of the industry's crisis: labor costs.

While costs have been slashed in most sectors of the economy over the past two decades, unions at the major carriers have pushed pay and work rules far beyond what the market will support. But Ornstein sees another party to the troubles: the big airline CEOs.

"It's almost as if they've given up," he said.

Ornstein has something of a tough-guy reputation, but at least employees know where they stand. He slashed his own pay after Sept. 11. Donald Carty, chief executive of American Airlines, tried to sneak huge executive compensation packages past union members while demanding givebacks to stave off a bankruptcy filing.

While demanding that workers accept cuts, Carty was giving retention bonuses to seven executives if they stayed through January 2005. American also made a $41 million pretax payment last October to a trust fund established to protect the pensions of 45 executives in the event of bankruptcy. This in an industry that is steadily eroding the pensions of ordinary employees.

To put a fine point on it, Carty wanted to retain the executive team that presided over American's descent from one of the most successful airlines to a $1.04 billion first-quarter loss, a performance Carty called "truly dreadful."

Oh, Carty's 2001 compensation was $1.3 million, plus nearly $6 million in options.

Now some unions want to vote again on the $1.62 billion in annual concessions. Carty this week apologized to employees and canceled much of the secret compensation deal.

One could excuse employees for giving up. Let the company file for bankruptcy protection. We'll ultimately lose our jobs anyway.

It's too bad Carty couldn't go from an apology to an extended conversation with every worker, shareholder and traveler in America. It would be fascinating if he could articulate why he made this blunder. It might illuminate the abuse of executive pay and the deeper culture that empowers it.

In a twisted way, Carty and his fellows operate like a corrupt union. The members are not only the chief executives, but also the board members, audit committees, accountants, lawyers and investment bankers who perpetuate abusive compensation. Oh, yes, and the politicians who do their bidding in exchange for lavish campaign contributions. Talk about union goons.

The result is worse than lawbreaking. It is trust breaking. It shatters the most important currency in liberal capitalism.

The airline fiasco has another echo, of the savings and loan scandal. Like the thrift industry, the airline industry is heavily subsidized by taxpayers. Airlines received billions of dollars in federal loan guarantees after the terrorist attacks. This produces what economists call moral hazard. Executives realize they are ultimately using other people's money, and their accountability shrinks. The result is an industry in crisis.

A healthy balance between airline management and unions can be found. A bill by Sen. John McCain might move in that direction.

The deeper imbalance can't be so easily corrected. Over time, market forces will "fix" it - that's why the big airlines are in or near Bankruptcy Court. But the pinstriped pilots of that ill-fated flight make out just fine.


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