Is Optimization too Late?

Not only has Delta declared bankruptcy, but along with them, US Airways says they may liquidate by February. They are concerned many of their investors will pull funding, including Air Transportation Stabilization Board (ATSB), which has financed US Airways and kept them functioning since March 2003 while in bankruptcy. However, funding in set to expire the 15th of October 2004.

In an effort to save themselves, they are making serious pay cuts to stewards and pilots, cutting salaries below other airlines' averages. They are also making reductions to retirement and pension plans. US Airways was one of the largest airlines, so what happened? Just as an airplane may set its course slightly off and end up miles from the expected destination, so has US Airways. I can't help but wonder if they had only tried to optimize sooner if they would not be having these difficulties. Obviously, they failed to maximize their profits, minimize costs, make their shareholders and stakeholders happy-- ATSB, current employees, retired employees, and cutomers. US Airways is a perfect example of why optimization is so important within a business. Without optimizing, a business can end up miles off course from its expectations and goals.

1 comment:

Dr. Tufte said...

Economics is (partially) about applying the principle of optimization even in cases where it doesn't seem to fit (like this one).

Just because Delta is doing badly doesn't mean that their managers were not optimizing. They may have been doing the best they can subject to unfavorable constraints.

The pilots may have been acting optimally too. It seems odd that this would entail not agreeing to concessions, but on the other hand they do have a contract. Sticking to that contract will be important in any reorganization involving bankruptcy. There is also the issue that other airlines' pilots have offered concessions, and then still had the airline go out of business.

And ... labor management negotiations can be characterized as a prisoner's dilemna. In that game there are two equilibria that result from optimal behavior - one good and one bad. Perhaps this is just an example of the bad one.

N.B. I don't think Delta declared bankruptcy yet ... but it is still expected any day.