The Case for Letting Companies Fail

Condor Regional Airways, the mid-sized carrier that serves thirty-seven cities across the interior of the country, is asking for a $1.6 billion federal bailout. The airline has been losing money for nine of the past twelve quarters. Its fleet is aging, its route network is contracting, and its cost structure is roughly twenty percent above the industry average. Without public funds, management says, the company will cease operations within six months, stranding passengers in communities that no other carrier is eager to serve. The political pressure to say yes is immense. I want to make the case, as clearly and as sympathetically as I can, for saying no.

The economics of airline bailouts are well studied and almost uniformly discouraging. The airline industry has received more public rescue money over the past half-century than any other sector of the American economy, and yet it remains among the most loss-prone. The reason is not bad luck. It is that bailouts preserve the very structures — bloated cost bases, uncompetitive route networks, management teams insulated from the consequences of their decisions — that caused the distress in the first place. A rescued airline is an airline that has been told, in the most concrete terms possible, that failure will not be allowed. The predictable result is that the behaviours that led to failure continue.

The evidence from Chapter 11 restructurings tells a very different story. Airlines that have gone through bankruptcy — and there have been many — have, more often than not, emerged as leaner, more competitive businesses. The bankruptcy process forces exactly the renegotiations that management was unable or unwilling to pursue outside of court: renegotiated labour contracts, rationalised route networks, fleet modernisation, and in some cases new leadership. The process is painful. It is also, in the aggregate, far more effective at producing viable businesses than handing public money to management teams that have already demonstrated they cannot manage their way to profitability.

The principle extends well beyond airlines. In sector after sector, the pattern is the same: public rescues preserve the status quo, while market-driven restructurings, however messy, tend to produce better outcomes over time. The car manufacturer that was bailed out continued to lose market share for years after the rescue. The financial institutions that were propped up during the last crisis emerged larger and more concentrated, not leaner and more competitive. The common thread is that rescue money flows to the existing organisation, with its existing leadership, its existing culture, and its existing problems. It is a subsidy for inertia.

Joseph Schumpeter called it creative destruction — the process by which failing firms release their capital, their talent, and their market share to be recombined by more capable successors. The process sounds clinical in an economics textbook. In practice, it is anything but. Real people lose real jobs. Communities that depend on a single employer face genuine hardship. Families are disrupted, mortgages are defaulted on, and the human cost of a company's failure falls most heavily on the workers who had the least say in the decisions that caused it. I do not dismiss any of this. It is the strongest objection to letting companies fail, and it deserves to be taken seriously.

But the human objection, properly understood, is an argument not for saving the company but for supporting the people. There is a critical difference between the two, and our policy framework consistently confuses them. When we bail out a company, the money goes to preserve an institution — its brand, its management, its organisational structure. When we instead invest in the people who would be displaced by that company's failure — through portable benefits, retraining programmes, extended unemployment insurance, relocation assistance, and income support during the transition — the money goes directly to the human beings we are actually trying to help, and it does so without propping up a business that the market has judged unviable.

The Nordic countries have demonstrated that this approach works. Their 'flexicurity' model combines relatively easy conditions for companies to hire and fire — and, crucially, to fail — with generous social insurance that supports displaced workers during the transition to new employment. The result is an economy that adapts quickly to changing conditions, reallocating resources from declining sectors to growing ones, while providing a safety net robust enough that the human cost of that reallocation is manageable. It is not a painless system. But it is a system that distinguishes clearly between protecting people and protecting institutions, and it works better than ours.

Condor Regional Airways employs 9,200 people, and if the company fails, most of them will lose their jobs. That is a genuine human tragedy, and the political impulse to prevent it is understandable. But $1.6 billion directed not to the airline's creditors and shareholders and management team but to the 9,200 workers themselves — in the form of extended income support, retraining, relocation assistance, and continued healthcare coverage — would produce better outcomes for the people we claim to care about, at a fraction of the long-term cost, without creating the moral hazard that ensures the next airline, and the one after that, will come asking for the same thing.

Letting companies fail is hard. It offends our instinct to preserve what exists. It requires accepting short-term pain in exchange for long-term health, and democratic politics is poorly suited to that trade-off. But the alternative — a permanent regime of public rescue for private failure — is not compassion. It is the socialisation of losses and the privatisation of the incompetence that caused them. We can do better. We should start by being honest about what bailouts actually are, and who they actually serve.