The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By John Darsie and Scott Redler
NEW YORK (
is a sad example of the type of over-regulation that is strangling the U.S. economy. Tuesday, the airline's parent company,
, voluntarily filed for Chapter 11 bankruptcy. AA had fallen from its perch as the world's largest airline to number three in the U.S. after the cost gap became too great to overcome. U.S. states and European countries need to learn from this example, and get ahead of the game to avoid ending up like American Airlines.
The reason American Airlines' cost structure became unsustainable was because it tried to fight the inevitable. Air travel fell dramatically following the 9/11 terrorist attacks, and all major airlines, except AA, used bankruptcy protection to restructure pension plans and debt. The weight of massive retirement plans made profits impossible, so naturally there was only one solution.
American Airlines, long resistant to the idea of bankruptcy, is the last of the U.S. "legacy airlines" to go through the Chapter 11 bankruptcy process to bust up unions and renegotiate labor deals. AMR has been in negotiations with unions since 2006 as it sought to trim the estimated $800 million cost difference between its competitors. Workers refused to make small concessions, now they will have to make large ones.
and become a fan on
"It became increasingly clear that the cost gap between us and our biggest competitors was untenable," new CEO Tom Horton said on a conference call. "The economic climate has been most uncertain, oil prices remain high and volatile, and all of that taken together led to the conclusion that now is the right time to take this step and put the company back on the path to long-term success."
Isn't that refreshing to hear?
It became clear to the airline industry that bankruptcy was a painful, but necessary step as the system became unsustainable. While they may have experienced some short-term pain, hitting the reset button allowed them to restructure the system and protect their future. Why can't the rest of the world understand that concept?
Mirror for the World
The world economy continues to kick the can down the road. The excessively low interest rates, unsustainable growth and massive leveraging over the last 30 years created a ticking time bomb that was set off in 2008 by the bundling and 30-to-1 leveraging of most worthless subprime mortgages. Newton's third law of physics states that for every action there is an equal and opposite reaction; policymakers are trying to engineer voodoo science to prevent that snap-back.
Wall Street is not entirely to blame for the economic crisis. Many Americans, especially in the public sector, never got the memo that there is no such thing as a free lunch. You can't guarantee healthy returns on pension funds when the stock market has been flat for the past decade.
Americans aren't the only ones who have gotten used to an unsustainable status quo. Greek citizens have rioted violently over the past two years because they will now be forced to actually work proportionate to the money they receive in retirement, rather than retire at age 55 with a cushy pension plan. The American Airlines situation has demonstrated the inevitability of default, and Europe is not far behind, in my opinion.
Most respected analysts acknowledge that some type of orderly default
happen in countries like Greece, Spain, Italy, Ireland and Portugal (at least) for the long-term future of the European and World economies to remain intact. If that leads to the end of the euro currency, so be it. Countries cannot keep using a new credit card to pay off the last one, especially when borrowing costs spiral out of control. Germany seems to be the only voice of reason, and I believe they will at some stage put their foot down and say "enough is enough."
Next Up, U.S. States
Closer to home, state budget and debt crises have yet to really rear their ugly heads. The U.S. Congress "super-committee" cannot even agree on how to trim a mere $1.2 trillion from the U.S. deficit over the next 10 years, and soon Washington will likely be faced with tough decisions regarding state bailouts. States like California and Illinois have unsustainably high levels of debt, and are another ticking time bomb.
The problems facing the states mirror the issues faced by the airline industry after 9/11: declining revenues and rising costs, largely due to bloated pension systems and other unfunded liabilities. While those states are trying to slash their way back to black, the inevitability of their bankruptcy matches that of their airline counterparts.
American Airlines fell behind its competitors because management stubbornly fought the fate it had long since sewn for itself. How long will states fight the inevitable before they default and force unions to renegotiate? The answer will likely determine how deep a hole we dig for ourselves.
I hope U.S. states and European countries take a lesson from the airline industry and learn from the sad story of American Airlines. The longer we kick the can down the road, the worse the eventual pain will be.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.