tag:theconversation.com,2011:/us/topics/american-airlines-2342/articlesAmerican Airlines – The Conversation2023-07-28T12:20:50Ztag:theconversation.com,2011:article/2104322023-07-28T12:20:50Z2023-07-28T12:20:50ZWhy Dunkin’ and Lego rebrands succeeded – but X missed the mark<figure><img src="https://images.theconversation.com/files/539836/original/file-20230727-78107-9s5n36.jpg?ixlib=rb-1.1.0&rect=177%2C0%2C1833%2C1315&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">So far, Twitter's rebrand = X + why?</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/longexposure-shot-shows-both-old-and-new-version-of-twitter-news-photo/1553537563?adppopup=true">Lorenzo Di Cola/NurPhoto via Getty Images</a></span></figcaption></figure><p>Twitter has swapped the <a href="https://apnews.com/article/twitter-x-logo-blue-bird-musk-0689e9a5c3a217afc2fbefeaf0e6d8a8">fluffy bird that used to symbolize the social media platform</a> for a spindly black X. Ditching the company’s well-known logo and changing its name to a letter often <a href="https://symbolsage.com/x-symbol-meaning-symbolism/">associated with danger, death and the unknown</a> is only the <a href="https://www.cnn.com/2022/12/18/tech/twitter-ban-social-media-links">latest user-aggravating</a> step <a href="https://www.theverge.com/2022/10/30/23431931/twitter-paid-verification-elon-musk-blue-monthly-subscription">CEO Elon Musk has taken</a> since he bought Twitter in <a href="https://apnews.com/article/elon-musk-twitter-deal-live-updates-78d68790fb0b9971d6e65b76d97e3670z">October 2022 for US$44 billion</a>.</p>
<p>But it’s the most visually jarring one.</p>
<p>The <a href="https://www.wsj.com/articles/elon-musks-pivot-to-x-draws-strong-opinions-across-twitter-5bc80833">reaction has mainly been a mix of ambivalence</a>, <a href="https://www.newsweek.com/elon-musks-twitter-x-logo-plan-met-ridicule-jokes-1814750">ridicule</a> and <a href="https://www.cnn.com/2023/07/24/media/twitter-x-reliable-sources/index.html">scorn</a>. For the most part, longtime Twitter users are unhappy at what they perceived as another unnecessary change that’s eroding their enthusiasm for the social media platform. It’s hard to find anybody praising the change so far, except perhaps some of <a href="https://www.facebook.com/elonmuskfanpage/">Elon Musk’s most devoted fans</a>. Twitter co-founder <a href="https://twitter.com/jack/status/1683327575517728769">Jack Dorsey signaled</a> that he was finding the uproar overblown.</p>
<p>I’m paying close attention to this corporate pivot because I’m a scholar of <a href="https://scholar.google.com/citations?user=cXqXHpsAAAAJ&hl=en">design who researches social media and brand campaigns</a>. <a href="https://www.thebrandingjournal.com/2015/10/what-is-branding-definition/">Logos and brand names</a> change all the time and rarely cause this much commotion. But because these changes go deeper than most, I believe the risks of damage to the company are greater.</p>
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<h2>X’s clumsy design</h2>
<p>X might strike you as a weird brand name, and the change may seem to have happened out of the blue, but Musk has long been smitten with the letter.</p>
<p>In 2000, the founders of PayPal <a href="https://www.washingtonpost.com/history/2023/07/25/elon-musk-paypal-twitter-x-rebrand/">ousted him as CEO for trying to change its name</a> to “X,” his Tesla models are <a href="https://www.ndtv.com/world-news/as-twitter-is-named-x-a-look-at-elon-musks-s3xy-naming-strategy-for-cars-4238936">famously named</a> S, 3, X and Y – which displayed together basically spell out the word “SEXY,” and one of <a href="https://www.yahoo.com/entertainment/elon-musk-changed-son-name-204701460.html">his many children is named X on his birth certificate</a>.</p>
<p>I would describe the new logo, <a href="https://www.theguardian.com/technology/2023/jul/24/elon-musk-reveals-the-new-twitter-logo-x">submitted by a Twitter user</a>, as a white-on-black, sans-serif X consisting of two strokes. It’s minimal and modern – and a stark departure from Twitter’s iconic blue-and-white bird. That shade of blue makes you feel <a href="https://www.verywellmind.com/the-color-psychology-of-blue-2795815">calm and serene</a>; black <a href="https://www.oberlo.com/blog/color-psychology-color-meanings">conveys sophistication and mystery</a>.</p>
<p>And yet even people who know nothing about design are <a href="https://twitter.com/elonmuskewl/status/1683121154188247046">poking fun at the logo’s simplicity</a> and <a href="https://twitter.com/PopCrave/status/1683551440416165889">unprofessional execution</a>. To me, the logo looks suitable for a metaverse strip club or a dating app for robots. </p>
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<h2>Facebook’s Meta journey</h2>
<p>Oddball branding is hardly unusual for a big tech company.</p>
<p>When Facebook rebranded itself as Meta in 2021, it was part of a comprehensive, strategic and <a href="https://logo.com/blog/facebooks-new-logo">long-term plan</a>. The transformation signified the company’s aspiration to shift from a social media platform to an enterprise <a href="https://theconversation.com/what-is-the-metaverse-2-media-and-information-experts-explain-165731">focused on the metaverse</a>.</p>
<p>While the goal of a vibrant metaverse <a href="https://blockchainmagazine.net/why-is-metaverse-failing-the-top-10-reasons-for-metaverse-fail/">remains more theoretical than imminent</a>, the rebranding still gave Meta some momentum as it now seeks to <a href="https://qz.com/meta-layoffs-2023-jobs-metaverse-ai-1850196575">shift its focus to artificial intelligence</a>. </p>
<p>Meta’s rebranding highlights the importance of staying relevant and embracing innovation. The company discerned the changing landscape and demonstrated a willingness to adapt in response to shifting consumer needs and preferences. When it realized the metaverse wasn’t materializing, the company focused elsewhere.</p>
<p>Perhaps that openness to trying new things explains why the <a href="https://www.quiverquant.com/threadstracker/">rollout of Threads</a>, Meta’s new competitor for the social media platform formerly known as Twitter, <a href="https://www.forbes.com/sites/rogerdooley/2023/07/05/will-threads-be-a-twitter-killer/">is apparently off to a strong start</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/539648/original/file-20230726-15-7heuat.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A metal t and a metal w are piled up on the ground." src="https://images.theconversation.com/files/539648/original/file-20230726-15-7heuat.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539648/original/file-20230726-15-7heuat.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539648/original/file-20230726-15-7heuat.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539648/original/file-20230726-15-7heuat.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539648/original/file-20230726-15-7heuat.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539648/original/file-20230726-15-7heuat.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539648/original/file-20230726-15-7heuat.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A pile of characters removed from a sign on the Twitter headquarters building seen in San Francisco on July 24, 2023.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TwitterLogo/5a220a8384234fbb86f34740ca413538/photo?Query=twitter&mediaType=photo,video,graphic,audio&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=6881&currentItemNo=6">AP Photo/Godofredo A. Vásquez</a></span>
</figcaption>
</figure>
<h2>From dunking to Dunkin’ and rebuilding Lego’s brand</h2>
<p>When Dunkin’ Donuts trimmed its name to Dunkin’ in 2018, the <a href="https://jkrglobal.com/case-studies/dunkin/">reception was mostly positive</a>. Its customers seemed to get that the company wanted to move away from being closely associated with donuts – a high-calorie pastry with little nutritional value – and toward becoming a “<a href="https://news.dunkindonuts.com/news/releases-20180925">beverage-led, on-the-go brand</a>.”</p>
<p><a href="https://brandsonify.com/case-studies/dunkins-2018-19-rebrand/">That rebrand succeeded</a>, and the company has also stuck with the slogan it adopted a dozen years earlier: “<a href="https://sites.psu.edu/kristenchomosrcl/2019/09/12/america-runs-on-dunkin">America runs on Dunkin’</a>.” </p>
<p><a href="https://www.linkedin.com/pulse/lego-engineered-remarkable-turnaround-its-business-howd-lindstrom/">Lego had another rebranding effort</a> that <a href="https://www.theguardian.com/lifeandstyle/2017/jun/04/how-lego-clicked-the-super-brand-that-reinvented-itself">business school students learn about as a model</a>.</p>
<p>Lego was profitable, popular and beloved for the entire 20th century, but <a href="https://www.lego.com/cdn/cs/aboutus/assets/blte6c97bc4718a1848/Annual_Report_2003_ENG.pdf">around 2003 its sales began to wane</a>. Presumably, kids had too many other toys and digital devices to play with and simply didn’t have the time or patience to assemble small, colorful, plastic blocks anymore.</p>
<p>Undeterred, Lego conducted <a href="https://www.fastcompany.com/3040223/when-it-clicks-it-clicks">extensive market, ethnographic and psychological research</a> to better understand how people in general, and children in particular, play with its wares. The company’s management realized that Lego products can be tied to just about anything.</p>
<p>Lego blocks are used both in original ways – kids make their own creations – and derivative ways, whether it’s recreating a pirate ship or a dinosaur seen in a beloved movie. </p>
<p>So the company began to partner with “Star Wars,” Nintendo, “Jurassic Park” and other brands to market special Lego sets. It also released a movie in 2014 that <a href="https://www.the-numbers.com/movie/LEGO-Movie-The#tab=summary">grossed nearly $500 million</a> – <a href="https://www.bbc.com/news/business-29063790">boosting Lego sales and profits</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/539799/original/file-20230727-15-il508q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The orange Dunkin' logo see on a big brown building." src="https://images.theconversation.com/files/539799/original/file-20230727-15-il508q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539799/original/file-20230727-15-il508q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539799/original/file-20230727-15-il508q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539799/original/file-20230727-15-il508q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539799/original/file-20230727-15-il508q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=457&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539799/original/file-20230727-15-il508q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=457&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539799/original/file-20230727-15-il508q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=457&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Dunkin’ brand name and logo no longer includes the word ‘donuts.’</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/the-corporate-logo-for-dunkin-replacing-the-former-name-of-news-photo/1195087289?adppopup=true">Gary Hershorn/Getty Images</a></span>
</figcaption>
</figure>
<h2>BP rebrand crashed and burned; American Airlines had low altitude</h2>
<p>Many corporate rebrands either don’t work or don’t do much to help their companies.</p>
<p>In 2000, BP changed its branding <a href="https://www.smsusyd.com/post/bp-rebranding-in-2000-marketing-campaign-fails-2#">from British Petroleum to Beyond Petroleum</a>.</p>
<p>Despite efforts to reposition itself as an environmentally responsible company, its actions revealed a contradictory truth. While BP reportedly invested <a href="https://www.theguardian.com/business/2000/jul/25/bp">over $100 million in the rebranding effort</a>, it continued to spend billions more on oil exploration than renewable energy initiatives. BP abandoned the campaign a few years after its massive <a href="https://www.mmc.gov/priority-topics/offshore-energy-development-and-marine-mammals/gulf-of-mexico-deepwater-horizon-oil-spill-and-marine-mammals/">2010 oil spill in the Gulf of Mexico</a>. </p>
<p>After <a href="https://simpleflying.com/american-airlines-us-airways-merger/">merging with US Airways</a> <a href="https://1000logos.net/american-airlines-logo/">in 2013</a>, American Airlines rebranded away from its iconic 1968 logo, which had blue and red letters and an eagle between them symbolizing American power and ingenuity, to a sleek red-and-blue stripe with an abstract eagle beak separating the company’s colors.</p>
<p>The company called the new logo a “<a href="https://www.dezeen.com/2013/01/21/american-airlines-debuts-new-logo-and-livery/">flight symbol</a>.” Some design experts <a href="https://www.businessinsider.com/the-new-american-airlines-logo-is-a-travesty-2014-1">dubbed it a travesty</a>.</p>
<p>Despite the contention, the company <a href="https://urbanjungle.ca/2013/02/american-airlines-what-you-can-learn-from-a-failing-attempt-to-rebrand/">retained the new look</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/539807/original/file-20230727-24380-h4r1mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="An airplane emblazoned with the old American Airlines branding at an airport." src="https://images.theconversation.com/files/539807/original/file-20230727-24380-h4r1mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539807/original/file-20230727-24380-h4r1mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539807/original/file-20230727-24380-h4r1mh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539807/original/file-20230727-24380-h4r1mh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539807/original/file-20230727-24380-h4r1mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=492&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539807/original/file-20230727-24380-h4r1mh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=492&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539807/original/file-20230727-24380-h4r1mh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=492&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">American Airlines adopted a logo in the late 1960s that endured for decades.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/MiamiAirportTravel/073efb53e9d94d1a8aec20677f11f0fa/photo?Query=american%20airlines%20jet&mediaType=photo,video,graphic,audio&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=369&currentItemNo=213">AP Photo/Lynne Sladky</a></span>
</figcaption>
</figure>
<h2>Ultimate fate of X</h2>
<p>I doubt the X rebrand will succeed – and not just because I dislike the new name and logo.</p>
<p>There are some <a href="https://www.cbsnews.com/news/twitter-trademark-x-com-rebrand/">challenging legal issues</a> with naming a major company a letter of the alphabet. The letter X’s use as a brand is already <a href="https://www.thedailybeast.com/elon-musks-twitter-rebrand-as-x-gets-site-blocked-under-indonesia-porn-laws">banned in certain countries</a> because of its prevalence in pornography branding. </p>
<p>And the <a href="https://mashable.com/article/twitter-rebrand-x-brand-identity-crisis-website">rollout has been messy on the company’s own website</a>. Musk reportedly <a href="https://mashable.com/article/elon-musk-twitter-take-x-handle-from-original-user">swiped the @x handle from its original user</a> without offering any compensation. </p>
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<p>What’s more, many users had already left the platform because of <a href="https://www.theguardian.com/technology/2022/dec/13/twitter-lose-users-elon-musk-takeover-hate-speech">technical glitches and increased hate speech</a>; the switch to X could make them less likely to come back and won’t make others more eager to stick around.</p>
<p>In Musk’s quest to create what he says will become an app that “<a href="https://www.cnbc.com/2023/07/24/elon-musk-risks-more-damage-to-twitter-business-after-name-change-to-x.html">does everything</a>,” I believe that his X rebrand took Twitter one more step toward being good for hardly anything.</p><img src="https://counter.theconversation.com/content/210432/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Pittman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A scholar of design who researches brand campaigns critiques the social media platform’s new look.Matthew Pittman, Assistant Professor of Advertising and Public Relations, University of TennesseeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1785162022-03-09T18:09:49Z2022-03-09T18:09:49ZWhy Apple, Disney, IKEA and hundreds of other Western companies are abandoning Russia with barely a shrug<figure><img src="https://images.theconversation.com/files/450817/original/file-20220308-17181-yumwpg.jpg?ixlib=rb-1.1.0&rect=134%2C239%2C3761%2C2354&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Muscovites rushed to buy furniture and other goods from IKEA before it closed its Russian stores.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RussiaWarUkraineEconomy/bfef81caccce40939ef2963011fdafb2/photo?Query=russia%20close%20store&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=10&currentItemNo=7">AP Photo/Vladimir Kondrashov</a></span></figcaption></figure><p>Many companies in the U.S. and elsewhere have been quick to sever ties to Russia – going well beyond applying the <a href="https://www.bloomberg.com/news/articles/2022-02-28/sanctions-imposed-so-far-on-russia-from-the-u-s-eu-and-u-k">sanctions ordered by their governments</a>. </p>
<p>IKEA, Nike and H&M are <a href="https://edition.cnn.com/2022/03/03/business/ikea-h-and-m-russia/index.html">temporarily closing their Russian stores</a>. Disney, Sony and Warner Bros. <a href="https://www.theguardian.com/film/2022/mar/01/disney-and-warner-bros-pause-film-releases-in-russia-over-ukraine-invasion">paused the release of new films</a> in Russia. Apple, Samsung and Microsoft <a href="https://www.cnet.com/news/apple-microsoft-and-other-tech-companies-stop-sales-in-russia/">stopped selling their products there</a>. McKinsey, Ernst & Young and many other top <a href="https://www.wsj.com/articles/big-auditors-to-leave-russia-amid-invasion-of-ukraine-11646666419?mod=djemCFO">accounting</a> and <a href="https://www.ft.com/content/6c412673-d65e-4e75-adbb-08146c42387c">consulting firms</a> said they are leaving the Russian market – possibly for good. </p>
<p>In all, <a href="https://som.yale.edu/story/2022/over-200-companies-have-withdrawn-russia-some-remain">over 300 companies have announced plans</a> to close stores, reassign staff or stop selling products in Russia since the invasion began on Feb. 24, 2022, according to a running tally by Yale management professor Jeffrey Sonnenfeld. Most recently, <a href="https://www.cnn.com/2022/03/08/business/mcdonalds-pepsi-coke-russia/index.html">McDonald’s</a>, <a href="https://www.nytimes.com/live/2022/03/08/business/stocks-economy-inflation-ukraine">Starbucks</a> and Coca-Cola joined the list on March 8, 2022, announcing they would close stores and cease sales.</p>
<p>In some ways, these decisions fit in with a <a href="https://theconversation.com/how-corporate-ceos-found-their-political-voice-83127">recent trend in which companies have increasingly staked out</a> public positions on often controversial social and political issues, such as restrictions on trans rights and ability to vote. As <a href="https://business.rice.edu/person/douglas-schuler">business professors</a> <a href="https://scholar.google.com/citations?user=k7slUggAAAAJ&hl=en&oi=ao">who study why</a> companies engage in activism, we feel the same factors that have driven those decisions to speak out are at work over Ukraine. </p>
<p>But we also believe Ukraine stands out for one important reason: For many of these companies, it may have been one of the easiest stands they’ve ever taken – even if there is a financial cost.</p>
<h2>Taking a stand</h2>
<p><a href="https://www.doi.org/10.1177/0022242920937000">Corporate sociopolitical activism</a> – the technical term we use – entails companies making public declarations or taking actions about significant social or political issues that extend beyond their core business. </p>
<p>Until relatively recently, <a href="https://theconversation.com/how-corporate-ceos-found-their-political-voice-83127">companies rarely took stands</a> on social or political issues. </p>
<p>That didn’t really change until the 2000s, when LBGTQ rights were under attack and major companies such as <a href="https://www.reuters.com/article/us-walmart-arkansas-analysis-idUSKBN0MT13E20150402">Walmart spoke out</a> against bills that would have allowed discrimination.</p>
<p>Since then, there’s been a <a href="https://qz.com/work/1797058/2020-is-the-year-corporate-activism-and-global-political-risk-converge/">surge in companies taking proactive stands</a> on issues ranging from climate activism and racism to abortion and voting rights. </p>
<p>For example, in the wake of the murder of George Floyd by police in Minneapolis in 2020, hundreds of CEOs <a href="https://www.cnbc.com/2020/06/11/ceos-unveil-plans-against-racial-inequality-after-george-floyd-death.html">signed a pledge</a> against racial discrimination and <a href="https://www.ceoaction.com/purpose/">created an organization dedicated</a> to diversity, equity and inclusion. In 2021, the CEOs of Dell, American Airlines, Southwest Airlines and AT&T <a href="https://www.npr.org/2021/04/02/983709091/these-are-the-businesses-speaking-out-against-texass-newly-proposed-election-law">spoke out against a Texas bill</a> aimed at making it more difficult for citizens to vote. </p>
<p>Others have taken more decisive action. <a href="https://www.npr.org/2021/09/08/1035045952/lyft-uber-will-pay-drivers-legal-fees-if-theyre-sued-under-texas-abortion-law">Uber and Lyft</a> said they would pay to defend their drivers if they got sued under a Texas law that allows anyone to sue a person who helps someone get an abortion. And in 2016, <a href="https://www.cnbc.com/2017/03/27/bathroom-bill-to-cost-north-carolina-376-billion.html">PayPal and the NCAA pulled business</a> from North Carolina after the state passed a bill limiting LGBTQ protections.</p>
<p><a href="https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/great-expectations-navigating-challenging-stakeholder-expectations-of-brandsexpectations-of-brands">Surveys show</a> <a href="https://www.ipsos.com/sites/default/files/ct/publication/documents/2021-11/ipsos-global-trends-2021-report.pdf">today’s consumers expect</a> <a href="https://www.5wpr.com/new/wp-content/uploads/pdf/5W_consumer_culture_report_2020final.pdf">companies to live up</a> to the <a href="https://certusinsights.com/wp-content/uploads/2019/10/Markstein-Social-Responsibility-_-Certus-Insights-Research-_.pdf">values they espouse</a> in their press releases, and big corporate groups such as the Business Roundtable even began <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">urging companies</a> to focus on creating value for everyone – not just shareholders. </p>
<figure class="align-center ">
<img alt="a crowd marches in a city street behind a banner that reads justice for George" src="https://images.theconversation.com/files/451007/original/file-20220309-20-12axmhb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451007/original/file-20220309-20-12axmhb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451007/original/file-20220309-20-12axmhb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451007/original/file-20220309-20-12axmhb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451007/original/file-20220309-20-12axmhb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451007/original/file-20220309-20-12axmhb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451007/original/file-20220309-20-12axmhb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Many companies spoke out against racism after George Floyd’s murder inspired months of protests, like this one on the first anniversary of his death.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RacialInjustice-MinnesotaProtests/b9a714aa8e5c4a0d8981cff7ae70176f/photo?Query=George%20Floyd%20protest&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=11555&currentItemNo=113">AP Photo/Christian Monterrosa</a></span>
</figcaption>
</figure>
<h2>Why companies speak out</h2>
<p>More specifically, <a href="https://www.econbiz.de/Record/don-t-mix-business-with-politics-understanding-stakeholder-reactions-to-corporate-political-activism-appels-moritz/10012303252">research</a> has identified <a href="https://www.doi.org/10.5465/amr.2018.0084">three major factors</a> that typically drive a company’s decision to pursue corporate activism: employee beliefs, consumer pressure and the <a href="https://hbr.org/2018/01/the-new-ceo-activists">CEO’s personal involvement</a> or conviction. </p>
<p>It’s not always clear what is driving corporate decisions to suspend operations in Russia, but it seems as if all three factors are at play. </p>
<p>IKEA, for example, <a href="https://about.ikea.com/en/newsroom/2022/03/03/ikea-pauses-operations-in-russia-and-belarus">cited the support and security</a> of its workforce in announcing its “pause” in Russia and a donation of 20 million euros for humanitarian assistance for those displaced by the war. After a #BoycottMcDonald’s <a href="https://www.mashed.com/789748/heres-why-boycott-mcdonalds-is-trending-on-twitter/">began trending on Twitter</a> to protest its presence in Russia, the fast-food chain said it was temporarily closing its stores there. And Tesla CEO Elon Musk <a href="https://www.vox.com/recode/22958373/ukraine-russia-starlink-spacex-elon-musk">agreed to provide Ukraine</a> with free satellite internet after a Ukrainian official requested it on Twitter. </p>
<figure class="align-center ">
<img alt="People stand outside a restaurant-looking building with yellow arches spelling an M as they wait to eat McDonalds for the first time." src="https://images.theconversation.com/files/450993/original/file-20220309-13-1co2myw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450993/original/file-20220309-13-1co2myw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450993/original/file-20220309-13-1co2myw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450993/original/file-20220309-13-1co2myw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450993/original/file-20220309-13-1co2myw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450993/original/file-20220309-13-1co2myw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450993/original/file-20220309-13-1co2myw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">McDonald’s has been in Russia since it opened its first store in Moscow in 1990.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RussianMcDonalds1990/bdb02160f3c742118e8ef29ed8288b48/photo?Query=McDonald%27s%20russia&mediaType=photo&sortBy=arrivaldatetime:asc&dateRange=Anytime&totalCount=159&currentItemNo=3">AP Photo</a></span>
</figcaption>
</figure>
<h2>A corporate no-brainer</h2>
<p>But ultimately, the decision whether or not to sever a relationship with a country – even if temporarily – is very different from taking a stand on an anti-trans measure.</p>
<p>Even so, the speed with which U.S. and other Western companies have abandoned Russia is something we’ve never seen in our lifetimes. And it suggests the decision was likely a no-brainer. </p>
<p>For one thing, Russia’s invasion has been met with widespread revulsion in the West. And even before the war, the public’s perception of Russia in Western countries <a href="https://www.pewresearch.org/fact-tank/2020/02/07/russia-and-putin-receive-low-ratings-globally">was very low</a>. </p>
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<p>One post-invasion poll found that 86% of Americans <a href="https://poll.qu.edu/poll-release?releaseid=3837">saw the invasion as unjustified</a> – with broad bipartisan agreement – and another showed that half of the respondents would <a href="https://www.live5news.com/2022/03/07/poll-finds-majority-want-russian-oil-ban-divided-biden/">compare the actions of Vladimir Putin</a> with those of Adolf Hitler. </p>
<p>And governments including those like <a href="https://www.dw.com/en/german-chancellor-olaf-scholz-announces-paradigm-change-in-response-to-ukraine-invasion/a-60932652">Germany</a> that have close commercial ties to Russia have strongly condemned its actions and joined unprecedented sanctions. About 80% of Germans said they approved of their government’s decision to sanction Russia and export weapons to Ukraine – or said it didn’t go far enough.</p>
<p>Ultimately, the Russian market is just not that big for companies in the U.S, such as <a href="https://appleinsider.com/articles/22/03/04/what-apple-risks-by-stopping-all-sales-operations-in-russia">Apple</a> and <a href="https://deadline.com/2022/03/disney-ukraine-theme-parks-disneyplus-1234973007/">Disney</a>. For others, such as McDonald’s, which has been <a href="https://www.bloomberg.com/news/articles/2022-03-08/mcdonald-s-faces-tough-questions-with-large-exposure-to-russia?sref=Hjm5biAW">in Russia since 1990 and has about 850 locations there</a>, days of pressure finally persuaded company officials they had to pull out. </p>
<p>On many hot-button social issues like <a href="https://news.gallup.com/poll/350174/mixed-views-among-americans-transgender-issues.aspx">trans rights</a> and <a href="https://www.pewresearch.org/fact-tank/2021/09/13/key-facts-about-americans-and-guns/">gun control</a>, the general public is split almost right down the middle, meaning taking a stand could alienate a lot of consumers. </p>
<p>But on the issue of Russia’s invasion of Ukraine, many companies likely were more worried about the <a href="https://www.nbcnews.com/business/consumer/mcdonalds-us-brands-pressure-stop-business-russia-rcna18990">risks to their reputation</a> were they to do nothing. With so many other companies pulling out, it likely seemed better to explain to shareholders and customers back home <a href="https://edition.cnn.com/2022/03/02/business/companies-pulling-back-russia-ukraine-war-intl-hnk/index.html">why they’re leaving</a> than <a href="https://www.bbc.com/news/business-60660006">why they’re staying</a>.</p><img src="https://counter.theconversation.com/content/178516/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Over 300 companies so far have closed stores, reassigned staff or halted sales in Russia in the two weeks since the invasion began.Douglas Schuler, Associate Professor of Business and Public Policy, Rice UniversityLaura Marie Edinger-Schons, Professor of Sustainable Business, University of MannheimLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1542842021-01-29T14:29:14Z2021-01-29T14:29:14ZGameStop: hedge fund attacks have opened up powerful new front against Wall Street<figure><img src="https://images.theconversation.com/files/381360/original/file-20210129-21-18iwj6c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Wall Street under attack. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/new-york-city-ny-oct-11-240264190">Javen</a></span></figcaption></figure><p>In the dying days of 2009, Rage Against the Machine <a href="https://www.rollingstone.com/music/music-news/rage-against-the-machine-win-u-k-christmas-single-battle-187249/">achieved the</a> unlikeliest of Christmas number ones with a re-release of their anti-establishment anthem Killing in the Name. This was driven by an online campaign to give a great festive bloody nose to Simon Cowell, whose latest X-Factor winner was denied their routine annual spot at the top of the charts. </p>
<p><a href="https://journals.equinoxpub.com/PMH/article/view/14455">That protest</a> against a creatively bankrupt mainstream pop media became a case study in the power of an online crowd with a strong narrative. It finds echoes today in a very different arena: the current attack on Wall Street hedge funds by retail traders via the Reddit forum r/WallStreetBets. </p>
<p>When exchanges opened in the New Year, shares in GameStop, a Texas-based chain of computer games stores, were swapping hands at US$19 (£14) each. By the close on Tuesday January 26 they were worth US$347 – an increase of over 1,700%. </p>
<p><strong>GameStop price action</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The GameStop share price chart" src="https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=327&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=327&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=327&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=411&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=411&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=411&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://uk.tradingview.com/chart/?symbol=NYSE%3AGME">TradingView</a></span>
</figcaption>
</figure>
<p>Driven by a David v Goliath <a href="https://www.theguardian.com/commentisfree/2021/jan/28/anarchy-in-jokes-and-trolling-the-gamestop-fiasco-is-4chan-think-in-action">narrative of revenge</a> against previously untouchable Wall Street <a href="https://www.marketwatch.com/story/reddit-moderator-slams-wall-street-fat-cats-as-gamestop-surge-continues-they-hate-that-you-played-by-the-rules-and-still-won-11611600048">“fat cats”</a>, the surge was coordinated by the <a href="https://www.reddit.com/r/wallstreetbets/">almost 5 million members</a> of WallStreetBets, using apps like Robinhood that allow anyone to trade financial securities and derivatives for little or zero commission fees. <a href="https://www.reddit.com/r/wallstreetbets/comments/l7ly4a/people_are_risking_their_lives_to_wage_war/">In the words</a> of one of these traders: </p>
<blockquote>
<p>People are risking their lives to wage war against the suits and it brings tears to my eyes to watch them do it.</p>
</blockquote>
<h2>Beaten at their own game</h2>
<p>This produced <a href="https://www.bloomberg.com/news/articles/2021-01-25/gamestop-short-sellers-reload-bearish-bets-after-6-billion-loss">an estimated US$6 billion</a> in stinging losses for hedge funds and activists “short selling” GameStop shares. <a href="https://theconversation.com/why-gamestop-shares-stopped-trading-5-questions-answered-154255">Short selling</a> is a bet on stock prices going down, and is done by borrowing shares, selling them, and then buying them back later to return to the lender – hopefully at a reduced price. </p>
<p>Critics argue that hedge funds that engage in short selling have an incentive to push down prices in questionable ways, such as spreading negative rumours about the company’s future. The practice was <a href="https://www.ft.com/content/f59fdd00-93b0-11dd-9a63-0000779fd18c">blamed to some extent</a> for major financial institutions going into freefall during the global financial crisis in 2008. </p>
<p>By buying GameStop to hurt those with short positions, retail investors employed a classic Wall Street tactic that hedge funds use against one another. Buying enough shares to cause the price to surge forces short-selling hedge funds to buy back the borrowed shares at a higher price to cover their positions, which in turn pushes the price higher. In Wall Street parlance, it’s the “<a href="https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/short-squeeze/">short squeeze</a>”.</p>
<p>Hedge funds like Melvin Capital had to swallow soaring losses as the share price hit certain levels and triggered “margin calls” where they had to immediately repay their lenders. Melvin only survived thanks to a <a href="https://www.bloomberg.com/news/articles/2021-01-25/citadel-point72-to-invest-275-billion-in-melvin-capital">cash injection</a> of US$2.8 billion from other hedge-fund backers. </p>
<p>In previous years, such an attack would have been quickly swept aside by the larger firepower of hedge funds and established Wall Street institutions. Activist short sellers also kept the lid on things by publishing damning research on targeted firms. <a href="https://www.tandfonline.com/doi/abs/10.1080/1351847X.2017.1288647">Our study from 2017</a> demonstrated that a short-seller thesis can almost instantaneously affect online message board sentiment and send investors fleeing. </p>
<p>The difference now is retail investors’ much better access to the financial markets, swelling their numbers and their ability to collectively move prices. <a href="https://www.businessofapps.com/data/robinhood-statistics/">The number of users</a> on Robinhood has increased from 500,000 in 2014 to 13 million in 2020, and <a href="https://www.cnbc.com/2020/05/21/many-americans-used-part-of-their-coronavirus-stimulus-check-to-trade-stocks.html">trading stocks is</a> the most common use for the US government pandemic stimulus cheques in almost every age bracket. </p>
<h2>The empire strikes back</h2>
<p>Robinhood and other trading platforms <a href="https://techcrunch.com/2021/01/28/robinhood-users-say-its-restricting-trades-after-the-gamestop-brouhaha-shakes-markets/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAKVZoI-2xGukI5bpebZ1sL5B_FiIUxeOfT093ha7bDkyXigvWCgZFHvsERADuQ8cc7S4QJ304tzjWBI63Q1DfRzGaAJ9Rv-pfMNmE7dKWO6kXdJX1lhPnTpZsWtZGG2XPt9IgkC8AWX1InzghEYhXbGNEYDwoXXOjBL19Tdv8oh4">banned trading in GameStop shares</a> around the time they peaked, sparking outrage at a perceived “rigged” game tilted towards the big players. Both <a href="https://twitter.com/tedcruz/status/1354833603943931905">Democratic and Republican senators have condemned</a> this decision to block retail investors while hedge funds can continue to trade. The platforms <a href="https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea565e4">claim they had to</a> impose temporary suspensions to protect their own financial positions from the risk of targeted stocks tumbling and retail traders who have borrowed to maximise their buying power suddenly racking up losses they can’t afford to cover. </p>
<p>The debate over how regulators should respond to this conflict is meanwhile intensifying, raising the prospect of new rules that discriminate against retail investors. That could fatally undermine trust in the regulators, since they would effectively be saying it’s alright for Wall Street to employ short squeezes but not the little guys. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="WallStreetBets on Reddit on a smartphone" src="https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">You betcha.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/wallstreetbets-reddit-group-seen-on-smartphone-1904689579">mundissima</a></span>
</figcaption>
</figure>
<p>Either way, these events have brought issues to the fore that regulators would have needed to address further down the road anyway, since the trading game has clearly changed in the last couple of years. For example, one new danger is an unfriendly foreign country feeding “fake news” into social media to enrage retail investors about perceived unfairnesses, which galvanises them into attacks that prevent the markets from working efficiently. </p>
<p>After all, some would argue that short sellers are unfairly portrayed as villains in this David v Goliath battle. <a href="https://www.sciencedirect.com/science/article/pii/S0304405X01000563?casa_token=u4L2JAt7vZoAAAAA:eCkMlssnABzzZ14XO98rEdW2XQNpll_IN0SURLvhRw2S2amdPR5ougSaq_Z2K8_bcKn98wfx">They help</a> to <a href="https://www.economist.com/leaders/2020/06/24/wirecards-scandal-shows-the-benefits-of-short-sellers">keep markets liquid</a> by making share purchases easier for those who do want to buy a particular stock, and they can put a spotlight on companies that are <a href="https://academic.oup.com/rfs/article-abstract/28/6/1701/1610243">poorly managed</a>, <a href="https://repositories.lib.utexas.edu/handle/2152/74990">dishonest</a>, or <a href="https://journals.sagepub.com/doi/full/10.1177/0148558X17748524?casa_token=ccIf5rD3WD4AAAAA%3AcfVd7JdLyEBBTcoxNQk1ayEKZkU-qZoMoxcmmamMbH3rwIwXiNxKSsqXrMLNSil4XzAWTzpWaPU">engaged in poor corporate governance</a>.</p>
<p>As a <a href="https://www.nytimes.com/2017/06/08/magazine/the-bounty-hunter-of-wall-street.html">New York Times profile</a> of notorious short-seller Andrew Left states, “In a town with a dozing sheriff, vigilantes become the agents of order.” Left’s fund, Citron Capital, <a href="https://markets.businessinsider.com/news/stocks/citron-gamestop-reddit-short-position-covered-loss-reddit-andrew-left-2021-1-1030009872">made a 100% loss</a> on its short position in GameStop. </p>
<p>So how should the regulators play this? They may not want to curb investor discussion in online communities, even if it were possible, or try and set parameters about constitutes “manipulation” and “honest discussion” of a particular stock. One option might be to increase their monitoring capacity, perhaps through some kind of early-warning system based on the volume of online chatter and the sentiment being expressed. They could feed this information to the trading platforms to let them take a view on temporarily limiting trading on those securities. </p>
<h2>I won’t do what you tell me …</h2>
<p>Nobody knows how the present situation will end. The intense activity by retail investors could prompt a wider sell-off by forcing hedge funds with short positions to sell other shares to raise the cash to cover their losses. This could hurt companies and investors that were only spectators in this battle, with potentially far-reaching consequences. </p>
<p>For those worried about the potential for chaos, Rage Against the Machine might offer a crumb of comfort. Since that Christmas number one, numerous attempts to achieve a similar feat have been less successful. The collective action was diluted by the sheer number of copycat campaigns. </p>
<p>Similarly, we have seen campaigns by traders launched against Blackberry and AMC Entertainment, and there are rumours of a similar strategy being employed against American Airlines. Whether they reach similar levels as GameStop remains to be seen. </p>
<p>Either way the crowd will regroup, and regulators will need to learn valuable lessons from this episode. Having shown what a crowd of renegade investors can achieve, this could well have opened up a powerful new front in anti Wall Street activism.</p><img src="https://counter.theconversation.com/content/154284/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The question is if and how the regulators can respond.James Bowden, Lecturer in Financial Technology, University of Strathclyde Edward Thomas Jones, Lecturer in Economics, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1316342020-09-17T11:28:45Z2020-09-17T11:28:45ZPresidential campaigns take flight in the age of the coronavirus<figure><img src="https://images.theconversation.com/files/343620/original/file-20200624-132405-j0pk80.jpg?ixlib=rb-1.1.0&rect=49%2C53%2C2901%2C2196&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A crowd greets Sen. John F. Kennedy at Logan Airport in Boston on July 17, 1960, after he became the Democratic nominee for president.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/sen-john-f-kennedy-exits-the-plane-at-logan-airport-in-news-photo/695691496?adppopup=true">John M. Hurley/The Boston Globe via Getty Images</a></span></figcaption></figure><p>The coronavirus pandemic has reshaped the 2020 U.S. presidential campaign, limiting the number of rallies and in-person appearances of the candidates. </p>
<p>When candidates do venture out, a familiar form of campaign transportation, <a href="https://www.washingtonpost.com/wp-srv/politics/campaigns/wh2000/stories/mccain090299.htm">the campaign bus</a>, is likely to remain grounded, as tight quarters make social distancing nearly impossible.</p>
<p>Until recently, candidates have relied primarily on social media to reach voters. But this medium and campaigning from home – or <a href="https://www.post-gazette.com/opinion/david-shribman/2020/03/29/David-M-Shribman-Return-of-the-front-porch-campaign/stories/202003290024">from your front porch, as Warren Harding did in 1920</a> at the end of another pandemic – cannot sufficiently substitute for in-person contact with voters.</p>
<p>Aircraft have played a role in U.S. presidential campaigns for decades. As an <a href="https://udayton.edu/directory/artssciences/history/bednarek_janet.php">aviation historian</a> attentive to <a href="https://books.google.com/books?hl=en&lr=&id=x0uLSdn_hFUC&oi=fnd&pg=PR9&dq=Janet+Bednarek&ots=oAixWmnHMr&sig=_vXztQ6Gdb6jFD66ohilI6JvIBg#v=onepage&q=Janet%20Bednarek&f=false">the evolution of the general aviation sector</a>, I think the pandemic has increased their importance in 2020, forcing <a href="https://www.cnbc.com/2019/10/17/joe-biden-spent-more-on-private-jets-in-3q-than-2020-democratic-rivals.html">candidates to make more strategic use of aircraft</a> as the quickest and safest way to campaign. </p>
<h2>Campaigns take flight</h2>
<p>The use of airplanes in <a href="https://www.airspacemag.com/daily-planet/the-first-presidential-flight-2901615/">presidential campaigns has evolved from something so daring</a> – even death-defying – that it made headlines, to a convenient, necessary tool. </p>
<p>Today it’s the <a href="https://www.washingtonpost.com/politics/biden-emerges-with-a-low-tech-coronavirus-strategy-masks-and-distancing-but-no-testing/2020/06/07/983ee122-a75a-11ea-bb20-ebf0921f3bbd_story.html">safest way for candidates to travel</a> – not simply because of aviation’s safety record but due to the <a href="https://www.nytimes.com/2020/06/22/us/politics/trump-campaign-coronavirus-tulsa.html">dangers candidates face amid the pandemic</a>.</p>
<p>With the Great Depression hanging over the 1932 presidential election, New York Gov. Franklin D. Roosevelt believed the country would respond to bold leadership. His campaign hatched a plan to break with protocol and <a href="https://fdrlibrary.wordpress.com/tag/democratic-national-convention/">accept the Democratic presidential nomination in person</a> – and in dramatic fashion. </p>
<p>Working with American Airways, Roosevelt’s secretary, Guernsey Cross, arranged to <a href="https://www.faa.gov/about/history/people/media/Ford_Trimotor.pdf">charter a Ford Tri-Motor</a>, a standard commercial aircraft of the early 1930s, to <a href="https://books.google.com/books?id=qtCRa7bCz3oC&pg=PA33&lpg=PA33&dq=roosevelt+flies+Ford+Tri-motor+from+Albany+to+Chicago&source=bl&ots=Wk-aA_SwJd&sig=ACfU3U2qZ5K36Irxc-1ihYkE_K-xc5zyng&hl=en&sa=X&ved=2ahUKEwiAzq-rjpPqAhWCSjABHVdVCP0Q6AEwC3oECAgQAQ#v=onepage&q=roosevelt%20flies%20Ford%20Tri-motor%20from%20Albany%20to%20Chicago&f=false">fly the governor from Albany to Chicago</a>. During a year when only <a href="https://www.centennialofflight.net/essay/Commercial_Aviation/passenger_xperience/Tran2.htm">474,000 Americans traveled via commercial aircraft</a>, the flight captured media attention.</p>
<p>The plane took off at about 8:30 a.m. on July 2, 1932, and after stops in Buffalo and Cleveland arrived in Chicago at 4:30 p.m., two hours behind schedule due to bad weather. Roosevelt used the time to work on his speech. That evening he <a href="https://www.presidency.ucsb.edu/documents/address-accepting-the-presidential-nomination-the-democratic-national-convention-chicago-1">accepted the nomination in person</a> and <a href="https://fdr.blogs.archives.gov/2012/09/06/found-in-the-archives-42/">promised Americans a “new deal.”</a></p>
<p>Roosevelt’s flight, however, did not immediately lead to more presidential air travel. Although First Lady Eleanor Roosevelt would use aircraft extensively, air travel was considered too risky for the president. FDR would not fly as president until 1943, when he used a military aircraft to travel to the Casablanca Conference in Morocco, to attend <a href="https://www.airspacemag.com/daily-planet/the-first-presidential-flight-2901615/">a crucial strategy meeting with Winston Churchill</a>.</p>
<h2>Private planes gain prominence, come under fire</h2>
<p>Presidential air travel was well established when, during the 1960 presidential campaign, John F. Kennedy <a href="https://www.bjtonline.com/business-jet-news/campaigning-by-private-jet">became the first candidate to use his own private aircraft – a Convair CV-240 – to campaign</a>.</p>
<p>It’s probably an exaggeration to argue that the plane – dubbed “Caroline” for his young daughter – provided Kennedy with his margin of victory in the hotly contested race, <a href="https://airandspace.si.edu/collection-objects/convair-240-caroline">as claimed by The Smithsonian</a>.</p>
<p>But it did allow Kennedy to travel <a href="http://sandiegoairandspace.org/collection/item/caroline-jfk-campaign-aircraft-collection">more than 225,000 miles and campaign more efficiently</a>. And since then, presidential candidates have made extensive use of private aircraft during their campaigns. Most campaign aircraft are chartered or owned by the campaign. </p>
<p>There was nothing particularly controversial about campaigning with private aircraft until the 2008 financial crisis. As the nation plunged into the Great Recession, <a href="https://blogs.wsj.com/autoshow/2008/11/19/congress-members-criticize-auto-executives-corporate-jet-travel/">automobile industry CEOs came under fire for using corporate aircraft</a> to fly to Washington, D.C. for congressional hearings focused on the huge bailout packages the industry had received from the government. Intense public backlash led to <a href="https://www.nytimes.com/2008/12/25/business/25jets.html">a drastic market downtown for corporate jets</a>. That backlash might explain <a href="https://thecaucus.blogs.nytimes.com/2008/04/19/obama-take-campaign-to-the-rails-in-pennsylvania/">Sen. Barack Obama’s 2008 Whistle-Stop campaign train tour</a>, where he chose an historic mode of presidential transportation over the newly controversial one.</p>
<p>By 2012, however, memories of the 2008 controversy had faded and candidates again used <a href="https://www.nytimes.com/2011/04/05/business/05road.html">private jets for campaign travel</a>. <a href="https://www.avgeekery.com/eight-notable-presidential-campaign-aircraft-changed-speed-politics/2/">Mitt Romney leased a 1990 MD-83</a>, while his running mate, Paul Ryan, utilized a 1970 DC-9-32. Both aircraft, bearing the slogan “Believe in America,” debuted at <a href="https://politicalticker.blogs.cnn.com/2012/09/01/mitt-romney-flies-u2s-plane-paul-ryans-aircraft-is-as-old-as-he-is/">a campaign rally in Lakeland, Florida</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/343780/original/file-20200624-133013-147h4xd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/343780/original/file-20200624-133013-147h4xd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343780/original/file-20200624-133013-147h4xd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343780/original/file-20200624-133013-147h4xd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343780/original/file-20200624-133013-147h4xd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343780/original/file-20200624-133013-147h4xd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343780/original/file-20200624-133013-147h4xd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343780/original/file-20200624-133013-147h4xd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Supporters cheer as Donald Trump flies away on his plane after a campaign event in Wilmington, Ohio on Nov. 4, 2016.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/supporters-cheer-as-republican-presidential-candidate-news-photo/621188962?adppopup=true">Jabin Botsford/The Washington Post via Getty Images</a></span>
</figcaption>
</figure>
<p>But perhaps the most visible use of a private aircraft in a presidential campaign came with <a href="https://www.businessinsider.com/donald-trump-boeing-757-airliner-trump-force-one-private-jet-2016-11">Donald Trump’s use of his own Boeing 757</a> in the 2016 presidential race. </p>
<p>Trump used the plane, emblazoned with his name, as <a href="https://www.washingtonpost.com/politics/a-there-it-is-moment-trump-wows-fans-by-using-air-force-one-as-a-campaign-prop/2018/11/04/4c36f61e-e043-11e8-b759-3d88a5ce9e19_story.html">a backdrop at campaign rallies</a>. The plane, thus, not only allowed him to travel easily and extensively, but it also helped him promote <a href="https://www.nytimes.com/2016/04/24/us/politics/donald-trumps-aging-air-fleet-gives-his-bid-and-his-brand-a-lift.html">his personal Trump brand</a> at every campaign stop. </p>
<h2>Safety during the pandemic</h2>
<p>Though <a href="https://www.tsa.gov/coronavirus/passenger-throughput">commercial aviation has witnessed a small recovery</a> since the start of the COVID-19 pandemic, private aircraft have reemerged as the safest way to travel. They permit greater control over passengers and make social distancing easier. Both Air Force One and private aircraft have featured prominently in the 2020 presidential election.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>Both candidates are in their <a href="https://theconversation.com/why-are-older-people-more-at-risk-of-coronavirus-133770">seventies and at greater risk from infection</a>. The Secret Service will continue to take <a href="https://www.wral.com/coronavirus/trump-to-take-flight-on-air-force-one-for-first-time-since-march-on-trip-to-arizona/19084997/">precautions to keep President Trump safe on Air Force One</a>. And Biden’s campaign can more easily enforce health guidelines on a private plane, especially protocols on masks and social distancing. Although the Biden campaign has <a href="https://www.businessinsider.com/joe-biden-campaign-plane-history-trump-clinton-obama-2020-8">decided against leasing a dedicated campaign plane</a>, when necessary – <a href="https://madison.com/wsj/news/local/govt-and-politics/photos-scenes-from-joe-bidens-visit-to-kenosha-on-thursday/collection_417c6b5a-8adc-52ae-a750-6578ab7154d7.html#1">such as for his recent trip to Kenosha, Wisconsin</a> – Biden can and undoubtedly will make use of private aircraft.</p>
<p>The 2020 presidential election began amid stay-at-home orders, with President Trump and Joe Biden largely confined during the first few months. As Trump and Biden seek to get their messages out in the final weeks of the campaign, both will use aircraft when necessary and in what they determine to be the best interests of their respective races for the White House.</p><img src="https://counter.theconversation.com/content/131634/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Janet Bednarek does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Though air travel has boosted presidential campaigns for decades, the 2020 pandemic has underlined the importance of aircraft as the quickest and safest way to campaign.Janet Bednarek, Professor of History, University of DaytonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1278002020-02-16T18:57:03Z2020-02-16T18:57:03ZMajor airlines say they’re acting on climate change. Our research reveals how little they’ve achieved<p>If you’re a traveller who cares about reducing your carbon footprint, are some airlines better to fly with than others?</p>
<p>Several of the world’s major airlines have announced plans to become “carbon neutral”, while others are trialling new aviation fuels. But are any of their climate initiatives making much difference?</p>
<p>Those were the questions we set out to answer a year ago, by analysing what the world’s largest 58 airlines – which fly 70% of the total <a href="https://airlinegeeks.com/2015/12/28/airline-metrics-available-seat-kilometers/">available seat-kilometres</a> – are doing to live up to their promises to cut their climate impact.</p>
<p>The good news? Some airlines are taking positive steps. The bad news? When you compare what’s being done against the continued growth in emissions, even the best airlines are not doing anywhere near enough.</p>
<h2>More efficient flights still drive up emissions</h2>
<p><a href="https://amadeus.com/en/insights/white-paper/airline-initiatives-to-reduce-climate-impact">Our research</a> found three-quarters of the world’s biggest airlines showed improvements in carbon efficiency – measured as carbon dioxide per available seat. But that’s not the same as cutting emissions <em>overall</em>.</p>
<p>One good example was the Spanish flag carrier Iberia, which reduced emissions per seat by about 6% in 2017, but increased absolute emissions by 7%.</p>
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<p>For 2018, compared with 2017, the collective impact of all the climate measures being undertaken by the 58 biggest airlines amounted to an improvement of 1%. This falls short of the industry’s goal of achieving a <a href="https://www.iata.org/en/policy/environment/climate-change/">1.5% increase</a> in efficiency. And the improvements were more than wiped out by the industry’s overall 5.2% annual increase in emissions. </p>
<p>This challenge is even clearer when you look slightly further back. <a href="https://www.iata.org/en/iata-repository/pressroom/fact-sheets/fact-sheet---industry-statistics/">Industry figures</a> show global airlines produced 733 million tonnes of CO₂ emissions in 2014. Falling fares and more people around wanting to fly saw airline emissions rise 23% in just five years. </p>
<h2>What are the airlines doing?</h2>
<p>Airlines reported climate initiatives across 22 areas, with the most common involving fleet renewal, engine efficiency, weight reductions and flight path optimisation. Examples in <a href="https://amadeus.com/en/insights/white-paper/airline-initiatives-to-reduce-climate-impact">our paper</a> include:</p>
<ul>
<li>Singapore Airlines modified the Trent 900 engines on their A380 aircraft, saving 26,326 tonnes of CO₂ (equivalent to 0.24% of the airline’s annual emissions);</li>
<li>KLM’s efforts to reduce weight on board led to a CO₂ reduction of 13,500 tonnes (0.05% of KLM’s emissions).</li>
<li>Etihad reports savings of 17,000 tonnes of CO₂ due to flight plan improvements (0.16% of its emissions). </li>
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<p>Nineteen of the 58 large airlines I examined invest in alternative fuels. But the scale of their research and development programs, and use of alternative fuels, remains tiny.</p>
<p>As an example, for Earth Day 2018 <a href="https://aircanada.mediaroom.com/2018-04-19-Air-Canada-to-Save-160-Tonnes-of-Carbon-on-Earth-Day-through-Innovative-Biojet-Fuel-Project-at-Toronto-Pearson-Airport">Air Canada announced</a> a 160-tonne emissions saving from blending 230,000 litres of “biojet” fuel into 22 domestic flights. How much fuel was that? Not even enough to fill the more than 300,000-litre capacity of just one A380 plane.</p>
<h2>Carbon neutral promises</h2>
<p>Some airlines, including Qantas, are aiming to be <a href="https://www.qantasnewsroom.com.au/media-releases/qantas-group-to-slash-carbon-emissions/">carbon neutral by 2050</a>. While that won’t be easy, Qantas is at least starting with better climate reporting; it’s one of only <a href="https://www.fsb-tcfd.org/tcfd-supporters/">eight airlines</a> addressing its carbon risk through the systematic <a href="https://www.fsb-tcfd.org/">Task Force on Climate-related Financial Disclosures</a> process. </p>
<p>About half of the major airlines engage in carbon offsetting, but only 13 provide information on measurable impacts. Theses include Air New Zealand, with its FlyNeutral program to help restore native forest in New Zealand. </p>
<p>That lack of detail means the integrity of many offset schemes is questionable. And even if properly managed, offsets <a href="https://theconversation.com/flying-home-for-christmas-carbon-offsets-are-important-but-they-wont-fix-plane-pollution-89148">still avoid</a> the fact that we can’t make <a href="https://www.sciencedirect.com/science/article/abs/pii/S0969699716302538">deep carbon cuts</a> if we keep flying at current rates.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/flight-shame-wont-fix-airline-emissions-we-need-a-smarter-solution-127257">Flight shame won't fix airline emissions. We need a smarter solution</a>
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<h2>What airlines and governments need to do</h2>
<p>Our research shows major airlines’ climate efforts are achieving nowhere near enough. To decrease aviation emissions, three major changes are urgently needed. </p>
<ol>
<li><p>All airlines need to implement all measures across the 22 categories covered in <a href="https://amadeus.com/en/insights/white-paper/airline-initiatives-to-reduce-climate-impact">our report</a> to reap any possible gain in efficiency.</p></li>
<li><p>Far more research is needed to develop alternative aviation fuels that genuinely cut emissions. Given what we’ve seen so far, these are unlikely to be biofuels. E-fuels – liquid fuels derived from carbon dioxide and hydrogen – may provide such a solution, but there are challenges ahead, including high costs.</p></li>
<li><p>Governments can – and some European countries do – impose carbon taxes and then invest into lower carbon alternatives. They can also provide incentives to develop new fuels and alternative infrastructure, such as rail or electric planes for shorter trips. </p></li>
</ol>
<h2>How you can make a difference</h2>
<p>Our research paper was released late last year, at a World Travel and Tourism Council event linked to the <a href="https://theconversation.com/au/topics/cop25-79570">Madrid climate summit</a>. Activist Greta Thunberg famously sailed around the world to be there, rather than flying.</p>
<p>Higher-income travellers from around the world have had a disproportionately large impact in driving up aviation emissions. </p>
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<p>This means that all of us who are privileged enough to fly, for work or pleasure, have a role to play too, by:</p>
<ol>
<li>reducing our flying (<a href="https://theconversation.com/people-hate-flight-shame-but-not-enough-to-quit-flying-130614">completely</a>, or <a href="https://theconversation.com/flight-shame-flying-less-plays-a-small-but-positive-part-in-tackling-climate-change-125440">flying less</a>)</li>
<li><a href="http://www.offsetguide.org/avoiding-low-quality-offsets/">carbon offsetting</a></li>
<li>for essential trips, only flying with airlines doing more to cut emissions.</li>
</ol>
<p>To really make an impact, far more of us need to do all three.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/climate-explained-how-much-does-flying-contribute-to-climate-change-127707">Climate explained: how much does flying contribute to climate change?</a>
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<img src="https://counter.theconversation.com/content/127800/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Susanne Becken is on the Sustainability Advisory Panel of Air New Zealand. Her report, Airline initiatives to reduce climate impact, was co-written with Paresh Pant. This research paper was done in partnership with travel technology company Amadeus.</span></em></p>We analysed what the world’s top 58 airlines – such as American Airlines, British Airways and Qantas – are doing about climate change. Even the best airlines are not doing anywhere near enough.Susanne Becken, Professor of Sustainable Tourism and Director, Griffith Institute for Tourism, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1230602019-09-12T13:10:03Z2019-09-12T13:10:03ZHow corporate bankruptcy works<p><a href="https://s3.amazonaws.com/abi-org/Newsroom/Bankruptcy_Statistics/Total-Business-Consumer1980-Present.pdf">More than 20,000 companies</a> file for bankruptcy every year. </p>
<p>Although companies follow many different paths to bankruptcy, each one encounters a process that is carefully designed to balance the rights of debtors and creditors. </p>
<p>As I’ve learned from <a href="http://www.law.uga.edu/profile/lindsey-simon">studying and practicing bankruptcy law</a>, the system is not perfect, and sometimes outcomes seem unfair. But bankruptcy is definitely not a “get out of jail free” card for companies deep in debt. </p>
<h2>Making the best of a grim situation</h2>
<p>To most people, bankruptcy <a href="https://hbswk.hbs.edu/item/how-chapter-11-saved-the-us-economy">has a negative image</a>. And for good reason: A filing almost always means there’s not enough money to go around. </p>
<p>But the system makes the best of a grim situation by imposing an orderly and open process that preserves value and encourages negotiation. Bankruptcy reorganizations by well-known brands such as <a href="https://www.reuters.com/article/us-delta-bankruptcy/delta-exits-bankruptcy-after-19-month-restructuring-idUSWNAS850820070430">Delta</a> and <a href="https://ssrn.com/abstract=3252104">General Motors</a> show that it can bring parties together and resurrect struggling companies. </p>
<p>At the most fundamental level, the Bankruptcy Code creates an estate to collect all assets in one place, identify and categorize claims against the debtor in terms of priority and then distribute the assets accordingly. </p>
<p>Exactly how this plays out depends largely on what type of bankruptcy case the debtor files.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Delta went public after emerging from bankruptcy in 2007.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Delta-Stock/18e8c3a4e01748f190d454f514311bf3/8/0">AP Photo/Mark Lennihan</a></span>
</figcaption>
</figure>
<h2>Chapter 7 vs. Chapter 11</h2>
<p>Large business debtors have two bankruptcy options: liquidation or reorganization. </p>
<p><a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics">Chapter 7 cases are designed</a> to liquidate the company, meaning it will no longer exist, and any remaining value is divided up and distributed to creditors. </p>
<p>In contrast, a <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">Chapter 11 reorganization</a> allows a debtor to sell some or all of its assets or propose a reorganization plan that aims to resolve and satisfy enough creditors to re-emerge as a going concern. </p>
<p>For example, airlines United, Delta and American <a href="https://www.vox.com/the-goods/2019/3/11/18259894/bankruptcy-business-chapter-11-close-stores">all filed for Chapter 11</a> protection in the mid-2000s and managed to unload enough debt to stay aloft. More recent filings seeking reorganization include those by <a href="https://www.investopedia.com/news/downfall-of-sears/">Sears</a>, <a href="https://www.reuters.com/article/us-pg-e-us-bankruptcy/pge-bondholders-propose-competing-bankruptcy-plan-worth-up-to-30-billion-idUSKCN1TQ21D">Pacific Gas and Electric Company</a> and <a href="https://www.dailyrepublic.com/all-dr-news/wires/business/toys-r-us-is-back-from-the-dead-but-its-new-stores-are-unrecognizable/">Toys R Us</a>. </p>
<p>Once a Chapter 11 plan of reorganization is finalized and approved, a debtor emerges from bankruptcy and continues operating, usually in a stronger position than before. </p>
<h2>Benefits of bankruptcy for debtors</h2>
<p>Bankruptcy provides at least two valuable benefits to all debtors: time and space. </p>
<p>The moment a debtor files its petition, an automatic stay is imposed on creditors, which operates like a pause button on any collection efforts, litigation or similar actions. Creditors can ask the court to lift the stay under certain circumstances, but the standard for doing so is often difficult to meet.</p>
<p>The bankruptcy court has broad authority to control all matters involving the debtor’s estate, including claims that are distantly related to the main bankruptcy case. The debtor may ask the court to pause other lawsuits outside of the bankruptcy case if they affect the estate. By bringing together all those with a stake in the company’s assets in one place, a debtor can more efficiently deal with all claims against it.</p>
<p>Debtors then evaluate their problems and make the necessary changes to succeed after reorganizing. This includes deciding which contracts they want to carry forward and which to abandon. </p>
<p>To avoid a contested process, savvy debtors seek a global settlement with as many stakeholders as possible and offer “sweeteners” to sway undecided creditors to support their plan.</p>
<h2>Benefits for creditors</h2>
<p>Clearly, bankruptcy provides debtors with significant power to rearrange their business affairs.</p>
<p>What many people misunderstand, however, is that this power is balanced by <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">strong creditor protections</a> For example, the Bankruptcy Code requires a debtor to publicly file information about all of its assets and liabilities, sit for a bankruptcy deposition with creditors and seek the court’s permission before taking many actions outside of the ordinary course of business. </p>
<p>The code provides for additional checks on the debtor, including the unsecured creditors’ committee and the <a href="https://www.justice.gov/ust">U.S. Trustee</a>. Creditors that are concerned about the debtor’s ability to preserve the estate’s value may ask the court to appoint an examiner or trustee to take possession of the estate, and creditors may even move to dismiss the case if they believe the debtor is abusing the bankruptcy process. </p>
<p>These and other features add a degree of fairness to an inherently unjust situation. The debtor may be sitting in the driver’s seat, but numerous other stakeholders have the power to make sure that the company follows the rules of the road. </p>
<p><em>This is a shortened version of an <a href="https://theconversation.com/why-companies-file-for-bankruptcy-and-how-it-protects-both-debtors-and-creditors-113101">article originally published</a> on Aug. 29, 2019.</em></p>
<p>[ <em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/123060/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lindsey Simon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A bankruptcy filing always means there’s not enough money to go around, but the process ensures both debtors and creditors are protected.Lindsey Simon, Assistant Professor of Law, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1131012019-08-29T12:20:40Z2019-08-29T12:20:40ZWhy companies file for bankruptcy – and how it protects both debtors and creditors<figure><img src="https://images.theconversation.com/files/289919/original/file-20190828-184217-85d8hm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Critics have worried Purdue might use bankruptcy to avoid accountability. </span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Opioid-Crisis-Purdue-Bankruptcy/59244806d067425bba37138857b93bc9/62/0">AP Photo/Jessica Hill</a></span></figcaption></figure><p><a href="https://www.nytimes.com/2019/08/27/health/sacklers-purdue-pharma-opioid-settlement.html?action=click&module=Top%20Stories&pgtype=Homepage">Reports have emerged</a> that Purdue Pharma is in settlement talks to resolve thousands of federal and state lawsuits over its role in fueling the <a href="https://theconversation.com/us/topics/opioid-epidemic-26182">opioid epidemic</a>. As part of the reported settlement, the company would file for bankruptcy. </p>
<p>Earlier this year, Insys Therapeutics <a href="https://www.npr.org/2019/06/10/731363225/insys-files-for-chapter-11-days-after-landmark-opioid-settlement-of-225-million">became the first opioid drugmaker</a> to enter bankruptcy following its US$225 million settlement with the Department of Justice. In recent months, <a href="https://www.commondreams.org/news/2019/03/04/when-we-say-pharma-greed-kills-what-we-mean-critics-respond-possible-purdue">there’s been speculation</a> that drugmakers might use bankruptcy as a way to escape accountability and avoid billions of dollars in litigation costs. </p>
<p>Fortunately, that’s not how bankruptcy works. Rather, as <a href="http://www.law.uga.edu/profile/lindsey-simon">I’ve learned in my experience</a> studying and practicing bankruptcy law, the process is designed to not only protect debtors like Insys or Purdue but also creditors such as states and other opioid litigants. </p>
<p>Bankruptcy is not perfect, and sometimes outcomes seem unfair. But it’s definitely not the “get out of jail free” card that many fear. </p>
<h2>Making the best of a grim situation</h2>
<p>To most people, bankruptcy <a href="https://hbswk.hbs.edu/item/how-chapter-11-saved-the-us-economy">has a negative image</a>. And for good reason: A filing almost always means there’s not enough money to go around. </p>
<p>But the system makes the best of a grim situation by imposing an orderly and open process that preserves value and encourages negotiation. Bankruptcy reorganizations by well-known brands such as <a href="https://www.reuters.com/article/us-delta-bankruptcy/delta-exits-bankruptcy-after-19-month-restructuring-idUSWNAS850820070430">Delta</a> and <a href="https://ssrn.com/abstract=3252104">General Motors</a> show that it can bring parties together and resurrect struggling companies. </p>
<p>At the most fundamental level, the Bankruptcy Code creates an estate to collect all of the debtor’s assets into one place, identify and categorize claims against the debtor in terms of priority and then distribute the assets accordingly. </p>
<p>Exactly how those three core tasks play out in a given case will vary depending on what type of bankruptcy case the debtor files and specific facts about the debtor.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/264725/original/file-20190319-60964-f92spd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Delta went public after emerging from bankruptcy in 2007.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Delta-Stock/18e8c3a4e01748f190d454f514311bf3/8/0">AP Photo/Mark Lennihan</a></span>
</figcaption>
</figure>
<h2>Chapter 7 vs. Chapter 11</h2>
<p>Large business debtors have two bankruptcy options: liquidation or reorganization. </p>
<p><a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics">Chapter 7 cases are designed</a> to liquidate the company, meaning it will no longer exist, and any remaining value will be divided up and distributed to creditors. </p>
<p>In contrast, a <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">Chapter 11 reorganization</a> allows a debtor to sell some or all of its assets or propose a reorganization plan that aims to resolve and satisfy enough creditors to re-emerge as a going concern. </p>
<p>For example, airlines United, Delta and American <a href="https://www.vox.com/the-goods/2019/3/11/18259894/bankruptcy-business-chapter-11-close-stores">all filed for Chapter 11</a> protection in the mid-2000s and managed to unload enough debt to stay aloft. More recent filings seeking reorganization include those by <a href="https://www.investopedia.com/news/downfall-of-sears/">Sears</a>, <a href="https://www.reuters.com/article/us-pg-e-us-bankruptcy/pge-bondholders-propose-competing-bankruptcy-plan-worth-up-to-30-billion-idUSKCN1TQ21D">Pacific Gas and Electric Company</a> and <a href="https://www.dailyrepublic.com/all-dr-news/wires/business/toys-r-us-is-back-from-the-dead-but-its-new-stores-are-unrecognizable/">Toys R Us</a>. </p>
<p>Companies sometimes initially file under Chapter 11 to reorganize but later decide to shut down after they fail to confirm a plan or find a suitor. Recent examples of this include <a href="https://money.cnn.com/2018/04/19/news/companies/bon-ton-liquidation/index.html">Bon-Ton Stores</a>, <a href="http://www.nbcnews.com/id/28691963/ns/business-us_business/t/circuit-city-liquidate-remaining-us-stores/#.XPWBgS2ZNTY">Circuit City</a> and <a href="https://dealbook.nytimes.com/2011/02/16/borders-files-for-bankruptcy/">Borders</a>.</p>
<p>For companies looking to survive, the <a href="https://uscode.house.gov/view.xhtml?path=/prelim@title11&edition=prelim">Bankruptcy Code</a> requires either creditor support or payment in full. If even one class of impaired creditors votes against a plan, the company must go through a demanding “cramdown” process for court approval to proceed.</p>
<p>Once a Chapter 11 plan of reorganization is finalized and approved, a debtor emerges from bankruptcy and continues operating, usually in a stronger position than before. </p>
<h2>Benefits of bankruptcy for debtors</h2>
<p>Bankruptcy provides at least two valuable benefits to all debtors: time and space. </p>
<p>The moment a debtor files its petition, an automatic stay is imposed on creditors, which operates like a pause button on any collection efforts, litigation or similar actions. Creditors can ask the court to lift the stay under certain circumstances, but the standard for doing so is often difficult to meet.</p>
<p>The bankruptcy court has broad authority to control all matters involving the debtor’s estate, including claims that are distantly related to the main bankruptcy case. The debtor may ask the court to pause other lawsuits outside of the bankruptcy case if they affect the estate. By bringing together all those with a stake in the company’s assets in one place, a debtor can more efficiently deal with all claims against it.</p>
<p>While the stay is in place, debtors use the bankruptcy process to evaluate their problems and make the necessary changes to succeed after reorganizing. This includes deciding which contracts they want to carry forward and which to abandon. </p>
<p>To avoid a contested process, savvy debtors seek a global settlement with as many stakeholders as possible – which is what <a href="https://www.cnbc.com/2019/08/27/purdue-pharma-offers-10-12-billion-to-settle-opioid-claims.html">Purdue is likely trying to do</a> – and include “sweeteners” to sway undecided creditors in favor of the plan.</p>
<h2>Benefits for creditors</h2>
<p>Clearly, bankruptcy provides debtors with significant power to rearrange their business affairs.</p>
<p>What many people misunderstand, however, is that this power is balanced by <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">strong creditor protections</a>. The Bankruptcy Code requires debtors to disclose significant information about their operations and imposes strict checks on debtor actions. </p>
<p>For example, the debtor must publicly file information about all of its assets and liabilities, sit for a bankruptcy deposition with creditors and seek the court’s permission before taking many actions outside of the ordinary course of business. </p>
<p>Under Chapter 11, the debtor is allowed to remain in possession of its estate and continue operating. Creditors that are concerned about the debtor’s ability to preserve the estate’s value may ask the court to appoint an examiner or <a href="https://www.justice.gov/ust">trustee</a> to take control. Creditors may even move to dismiss the case if they believe the debtor is abusing the bankruptcy process. </p>
<p>The Bankruptcy Code creates a committee of unsecured creditors – those without assets backing their claims – to advocate on behalf of claimants who are likely not involved in the case. The court may also form a special committee representing tort claimants in cases where debtors face litigation or future claimants whose injuries are not yet known. The court overseeing the bankruptcy of Imerys, for example, <a href="https://www.law.com/delbizcourt/2019/03/07/11-lawyers-named-to-tort-claims-committee-in-talc-suppliers-bankruptcy/">appointed plaintiffs</a> to represent cancer victims with <a href="https://www.bloomberg.com/news/articles/2019-02-13/imerys-sa-unit-seeks-bankruptcy-protection-over-talc-lawsuits">claims against the talc supplier</a>. </p>
<p>These and other features add a degree of fairness to an inherently unjust situation. The debtor may be sitting in the driver’s seat, but numerous other stakeholders have the power to make sure that the company follows the rules of the road.</p>
<p>With such protections in place, creditors and the general public need not fear the worst if bankruptcy plays a bigger role in the unfolding opioid saga.</p><img src="https://counter.theconversation.com/content/113101/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lindsey Simon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While critics accuse companies facing lots of lawsuits of using bankruptcy as a sort of ‘get of jail free card,’ the reality of the legal procedure is more complicated.Lindsey Simon, Assistant Professor of Law, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/986842018-06-21T10:27:15Z2018-06-21T10:27:15ZCorporate CEOs’ political voice growing louder as they criticize Trump policies like separating migrant children<figure><img src="https://images.theconversation.com/files/224135/original/file-20180621-137741-1d0kkco.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Children wait at a private charity after being released by Customs and Border Protection.</span> <span class="attribution"><span class="source">AP Photo/Eric Gay</span></span></figcaption></figure><p>America’s CEOs have become increasingly active on political issues that they would have shunned in prior years.</p>
<p>The <a href="https://www.bloomberg.com/news/articles/2018-06-20/american-asks-u-s-not-to-put-detained-children-on-its-flights">latest example</a> came in response to the Trump administration’s “zero tolerance” border enforcement policy that led to the <a href="https://theconversation.com/breaking-up-families-america-looks-like-a-dickens-novel-98660">forced separation</a> of several thousand immigrant children from their <a href="https://theconversation.com/forced-migration-from-central-america-5-essential-reads-98600">detained parents</a>. United Continental CEO Oscar Munoz called the policy “in deep conflict with our company’s values.” </p>
<p>United and fellow airlines <a href="http://news.aa.com/news/news-details/2018/Statement-on-Recent-Reports-of-Separated-Families/default.aspx">American</a>, Southwest and <a href="https://twitter.com/FlyFrontier/status/1009488027985596416">Frontier</a> each indicated they didn’t want the government to use their planes to fly separated children. President Donald Trump hoped to quell the furor over the issue by signing an executive order <a href="https://www.nytimes.com/2018/06/20/us/politics/trump-immigration-children-executive-order.html">ending the separations</a>.</p>
<p>It’s certainly not the first time corporate CEOs took a stand against a Trump policy or his words. After the president’s <a href="https://www.nytimes.com/2017/08/15/us/politics/trump-press-conference-charlottesville.html">contentious response</a> to violent clashes in Charlottesville, Virginia, CEO resignations and <a href="http://fortune.com/2017/08/17/ceos-trump-charlottesville-criticized">denunciations</a> led to the <a href="https://www.washingtonpost.com/news/on-leadership/wp/2017/08/16/after-wave-of-ceo-departures-trump-ends-business-and-manufacturing-councils/">dissolution</a> of two White House advisory councils.</p>
<p>While Trump’s actions likely sparked this increase in political activism by corporate CEOs, its roots run deeper and will survive beyond the end of the current administration.</p>
<h2>From custom abiders to bullies</h2>
<p>When I first began studying the interactions between social movements and corporations in the 1990s, it was rare to see business take a public stand on social issues. Yet today we see organizations ranging from General Electric to the NCAA <a href="http://www.nbcnews.com/feature/nbc-out/major-corporations-join-fight-against-north-carolina-s-bathroom-bill-n605976">weighing in</a> on, for example, transgender rights, something hard to imagine even a decade ago.</p>
<p>Traditionally, corporations aimed to be scrupulously neutral on social issues. No one doubted that corporations exercised power, but it was over bread-and-butter economic issues like trade and taxes, not social issues. There seemed little to be gained by activism on potentially divisive issues, particularly for consumer brands. </p>
<p>A watershed of the civil rights movement, for example, was the <a href="http://www.jstor.org/stable/2095077">1960 sit-in protest by students that began at a segregated lunch counter</a> in a Woolworth store in Greensboro, North Carolina, and spread across the South. Woolworth’s corporate policy had been to “abide by local custom” and keep black and white patrons separated. By supporting the status quo, Woolworth and others like it stood in the way of progress.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/139327/original/image-20160926-31842-15nz195.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139327/original/image-20160926-31842-15nz195.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=469&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139327/original/image-20160926-31842-15nz195.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=469&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139327/original/image-20160926-31842-15nz195.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=469&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139327/original/image-20160926-31842-15nz195.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=590&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139327/original/image-20160926-31842-15nz195.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=590&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139327/original/image-20160926-31842-15nz195.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=590&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">When the Greensboro Four launched their sit-in protest, companies tended to stay neutral on social issues.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:A%26T_four_statue_2000.jpg">Cewatkin via Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>But negative publicity led to substantial lost business, and Woolworth eventually relented. In July, four months after the protest started – and after the students had gone home for the summer – the manager of the <a href="http://www.history.com/topics/black-history/the-greensboro-sit-in">Greensboro store</a> quietly integrated his lunch counter.</p>
<p>In general, companies were more worried about the costs of taking a more liberal stand on such issues, a point basketball legend and Nike pitchman Michael Jordan made succinctly in 1990. Asked to support Democrat Harvey Gantt’s campaign to replace segregationist incumbent Jesse Helms as a North Carolina senator, Jordan declined, reportedly saying “<a href="http://www.slate.com/articles/sports/sports_nut/2016/07/did_michael_jordan_really_say_republicans_buy_sneakers_too.html">Republicans buy sneakers, too</a>.”</p>
<p>And companies presumed that taking controversial positions would lead to boycotts by those on the other side. That’s what happened to Walt Disney in 1996 as a result of its early support for gay rights, such as <a href="https://en.wikipedia.org/wiki/Gay_Days_at_Walt_Disney_World">“Gay Day”</a> at its theme parks. Its stand prompted groups including America’s largest Protestant denomination, the Southern Baptists, to <a href="http://www.cnn.com/US/9706/18/baptists.disney/">launch a boycott</a>, calling Disney’s support for gay rights an “anti-Christian and anti-family direction.” The <a href="http://www.nbcnews.com/id/8318263/ns/us_news/t/southern-baptists-end--year-disney-boycott/">eight-year boycott</a>, however, was notably ineffective at changing Disney policy. It turns out that too few parents had the heart to deny their children Disney products to make a boycott effective. </p>
<p>Since then, some of the biggest U.S. companies have taken similar stands, in spite of the reaction from conservatives. For example, when the Arkansas legislature passed a bill in March 2015 that would have enabled LGBT discrimination on the grounds of “religious freedom,” <a href="http://www.reuters.com/article/us-walmart-arkansas-analysis-idUSKBN0MT13E20150402">the CEO of Walmart urged the governor to veto the bill</a>. </p>
<p>Not surprisingly, given Walmart’s status in the state and the corporate backlash that accompanied a similar law in Indiana, the <a href="http://www.usatoday.com/story/news/politics/2015/04/01/govt-and-business-leaders-object-to-ark-religion-bill/70757942/">governor obliged</a> and eventually signed a <a href="http://www.cnn.com/2015/03/31/politics/arkansas-religious-freedom-anti-lgbt-bill/">modified bill</a>. That didn’t sit well with former Louisiana Governor Bobby Jindal, however, who <a href="http://www.nytimes.com/2015/04/23/opinion/bobby-jindal-im-holding-firm-against-gay-marriage.html">argued in The New York Times</a> that companies in those states were joining “left-wing activists to bully elected officials into backing away from strong protections for religious liberty.” He warned companies against “bullying” Louisiana.</p>
<p>Why have corporations shifted from “abiding local custom” around segregation and other divisive social issues to “bullying elected officials” to support LGBT rights?</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/183830/original/file-20170829-6653-za65f9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/183830/original/file-20170829-6653-za65f9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/183830/original/file-20170829-6653-za65f9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/183830/original/file-20170829-6653-za65f9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/183830/original/file-20170829-6653-za65f9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/183830/original/file-20170829-6653-za65f9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/183830/original/file-20170829-6653-za65f9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Merck CEO Ken Frazier, seated next to Trump, was the first to resign from a manufacturing council after Charlottesville.</span>
<span class="attribution"><span class="source">AP Photo/Evan Vucci</span></span>
</figcaption>
</figure>
<h2>Changing environment</h2>
<p>In my view, there are two broad changes responsible for this increased corporate social activism.</p>
<p>First, <a href="https://www.amazon.com/Changing-Your-Company-Inside-Intrapreneurs/dp/1422185095/ref=asap_bc">social media and the web have changed the environment for business</a> by making it cheaper and easier for activists to join together to voice their opinions and by making corporate activities more transparent. </p>
<p>The rapid spread of the Occupy movement in the fall of 2011, from Zuccotti Park in New York to encampments across the country, <a href="http://www.huffingtonpost.com/2011/10/06/occupy-wall-street-social-media_n_999178.html">illustrates</a> how social media can enable groups with a compelling message to scale up quickly. Sometimes even online-only movements can be highly effective.</p>
<p>When the Susan G. Komen Foundation cut off funds to Planned Parenthood that were aimed at supporting breast cancer screenings for low-income women, a pop-up social movement arose: Facebook and Twitter exploded with <a href="http://www.nytimes.com/2012/02/03/us/komen-foundation-urged-to-restore-planned-parenthood-funds.html">millions of posts and tweets voicing opposition</a>. Within days the policy was walked back.</p>
<p><a href="http://blogs.hbr.org/2014/04/what-matters-about-mozilla-employees-led-the-coup/">Mozilla’s appointment of a new CEO</a> who had supported a California ballot proposal banning same-sex marriage also generated outrage online, both inside and outside the organization. He was gone within two weeks. </p>
<p>In each case, social media allowed like-minded “clicktivists” to draw attention to an issue and demonstrate their support for change, quickly and at very little cost. It’s never been cheaper to assemble a virtual protest group, and sometimes (as in the massive <a href="https://www.nytimes.com/2017/01/21/us/womens-march.html?mcubz=1&_r=0">Women’s March</a> that took place in cities around the world the day after Trump’s inauguration) online tools enable real-world protest. As such, activism is likely to be a constant for corporations in the future.</p>
<h2>Millennials don’t like puffery</h2>
<p>A second change is that millennials, as consumers and workers, <a href="http://ssir.org/articles/entry/the_new_face_of_corporate_activism">are highly attuned</a> to a company’s “social value proposition.” </p>
<p>Companies targeting the sensibilities of the young often tout their social missions. <a href="http://www.toms.com/improving-lives">Tom’s Shoes</a> and <a href="https://www.warbyparker.com/buy-a-pair-give-a-pair">Warby Parker</a> both have “buy a pair, give a pair” programs. Chipotle highlights its <a href="https://chipotle.com/food-with-integrity">sustainability efforts</a>. And Starbucks has promoted fair trade coffee, marriage equality and racial justice <a href="https://www.fastcompany.com/3046890/the-inside-story-of-starbuckss-race-together-campaign-no-foam">more or less successfully</a>. In each case, transparency about corporate practices serves as a check on puffery. </p>
<p>Social mission is even more important when it comes to recruiting. At business school recruiting events, it is almost obligatory that <a href="http://ssir.org/articles/entry/the_new_face_of_corporate_activism">companies describe</a> their LEED-certified workplaces, LGBT-friendly human resource practices and community outreach efforts. </p>
<p>Moreover, our employer signals something about our identity. Value alignment is part of why people stay at their job, and among many millennials, socially progressive values – particularly around LGBT issues – are almost a given.</p>
<p>In this situation, corporate activism may be the sensible course of action, at least when it comes to LGBT issues. According to the <a href="http://www.pewforum.org/2016/05/12/changing-attitudes-on-gay-marriage/">Pew Research Center</a>, for example, support for same-sex marriage has doubled from 31 percent in 2004 to 62 percent in 2017, and there is little reason to expect a reversal. </p>
<h2>Red and blue companies?</h2>
<p>While prominent companies like Starbucks and Target have taken stances associated with liberal causes, some businesses have gone the other direction. </p>
<p><a href="http://www.latimes.com/business/la-fi-mo-chick-fil-a-gay-20120718-story.html">Chick-fil-A aimed to implement</a> “biblical values” and supported anti-gay groups in the 2000s. Those groups returned the favor by encouraging like-minded people to dine there on “<a href="https://www.theguardian.com/lifeandstyle/us-news-blog/2012/aug/01/chick-fil-a-appreciation-day">Chick-fil-A appreciation day</a>.”</p>
<p>Hobby Lobby <a href="http://www.usnews.com/news/articles/2015/07/10/after-hobby-lobby-ruling-hhs-announces-birth-control-workaround">famously sought to abstain</a> from providing funding for birth control for employees on religious grounds. Koch Industries, overseen by the famous Koch brothers, <a href="http://www.dailykos.com/story/2014/4/1/1288957/-Sign-the-pledge-Don-t-buy-these-Koch-products">has long been a lightning rod</a> for boycotts due to the right-wing proclivities of its dominant owners. And small businesses across the country are not always shy in advertising their conservative political orientations. </p>
<p>As <a href="http://press.princeton.edu/titles/9030.html">states have seemingly divided</a> into red (for conservative) and blue (for liberal), might we expect the same thing from corporations, as consumers and employees drift toward the brands that best represent their views – red companies and blue companies? </p>
<p><a href="https://www.opensecrets.org/orgs/list.php">It is already easy to look up</a> political contributions by companies and their employees. For example, Bloomberg, Alphabet and the Pritzker Group lean Democratic; Oracle, Chevron and AT&T tend Republican. </p>
<p>In the current electoral climate, it is not hard to imagine this continuing. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/when-did-che-guevara-become-ceo-the-roots-of-the-new-corporate-activism-64203">article originally published</a> on Sept. 27, 2016.</em></p><img src="https://counter.theconversation.com/content/98684/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jerry Davis does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>United’s CEO called the Trump policy ‘in deep conflict’ with his company’s values, the latest example of a corporate leader speaking out on a political issue, something almost unheard of a few decades ago.Jerry Davis, Professor of Management and Sociology, Ross School of Business, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/450862015-08-05T09:50:45Z2015-08-05T09:50:45ZPrix fixe: is airline consolidation to blame for sky-high airfares?<figure><img src="https://images.theconversation.com/files/90783/original/image-20150804-11996-v4qjvv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">After a wave of mergers, few large US airlines remain.</span> <span class="attribution"><span class="source">Delta planes via www.shutterstock.com</span></span></figcaption></figure><p><a href="http://www.bbc.co.uk/news/business-33353360">News</a> last month that the Department of Justice is investigating the biggest three US airlines for possible price-fixing again raises the question of whether the recent wave of mergers has left the market with too few competitors. </p>
<p>A case in point is the sharp drop in oil prices over the past year, which should lead to a decline in airfares. While I was cautiously optimistic that this might happen, I <a href="https://theconversation.com/oil-prices-have-nosedived-why-arent-airfares-doing-the-same-35630">suggested</a> in December that the lack of industry competition would likely prevent fares from following crude prices lower. </p>
<p>Air travelers are probably well aware that this is exactly what happened. </p>
<p>The most recent Department of Transportation data show inflation-adjusted airfares in the fourth quarter were 2% higher than a year earlier, even though the price of jet fuel was down 25% over the same period. </p>
<p>Fuel makes up about 30% of an airline’s total expenses, so a 25% decline in jet fuel prices implies a 7.5% decrease in costs, all else being equal. So is reduced competition to blame for airlines not passing on these savings to passengers in the form of lower fares? And are airlines colluding on price? </p>
<p>The answer to those questions is not as simple as it looks, in part because competition is more than just a question of numbers (10 airlines versus three) and some collusion is actually legal. </p>
<p>Let’s begin by looking at how the US airline industry has <a href="http://www.forbes.com/sites/greatspeculations/2015/07/09/dojs-investigation-will-not-have-long-term-impact-on-the-us-airlines/">consolidated</a> in recent years. </p>
<h2>Consolidation and competition</h2>
<p>Over the last 15 years or so, the airline industry experienced six large mergers (most notably Delta-Northwest, United-Continental and American-US Airways), the disappearance of several smaller carriers (Aloha, ATA, National) and two successful entries (JetBlue and Virgin America). </p>
<p>That has left us with three large carriers (American, United and Delta) that run hub-and-spoke networks featuring multiple hubs, several airlines that rely more on point-to-point traffic (Southwest, JetBlue, Virgin America) and a few smaller hub-and-spoke players, such as Frontier and Alaska Airlines. </p>
<p>This is part of a global trend, with carriers in both <a href="http://www.worldfinance.com/home/is-european-airline-consolidation-ready-for-takeoff">Europe</a> and China, for example, consolidating toward a similar structure. Transatlantic routes are <a href="http://www.flightglobal.com/news/articles/analysis-north-atlantic-joint-ventures-continue-to-389676/">dominated</a> by three joint ventures that together control more than 75% of all passenger capacity.</p>
<p>Of course, the total number of carriers alone does not necessarily correlate with the extent of competition. We might have 10 carriers in the US market but no competition because they don’t compete directly on any routes. On the other hand, we could have just three airlines competing on every route in the country. </p>
<p>Indeed, looking at average market concentration in the US over the past 25 years or so, we see that most nonstop routes are <a href="http://www.anna.aero/2010/04/20/almost-80-of-us-domestic-routes-are-a-monopoly-either-of-uniteds-possible-mergers-would-have-little-effect-on-domestic-competition/">monopolies</a>, a constant that exists regardless of how many total airlines operate across the country. </p>
<p>For example, if you live in Atlanta, the airline most likely to serve any given destination with a nonstop flight will be Delta.</p>
<p>Certainly, “thick” markets such as Los Angeles to New York have attracted a lot of carriers, but “thin” routes such as Atlanta to Albuquerque might only be able to sustain nonstop service of a single carrier, with many passengers connecting at Atlanta to other Delta flights. </p>
<p>In fact, city pairs where only one-stop services are feasible have historically been less concentrated markets as compared with those where nonstop flights are offered. When I lived in Orange County, California, I usually flew from the local John Wayne Airport, connecting to East Coast destinations and beyond via Chicago, Atlanta, Salt Lake City, Denver, Houston or Dallas, depending on the airline. </p>
<p>A passenger living in Orange County now has the same choice of hub airports to connect through as before, but fewer airlines providing such a connection. In a paper I <a href="http://www.sciencedirect.com/science/article/pii/S0965856413002371">published</a> recently with Paulos Lakew, we demonstrated how airline mergers can disproportionately <a href="http://lancasteronline.com/business/local_business/study-airline-mergers-cut-of-flights-from-hia-th-most/article_4bd83d80-31fb-11e5-9187-17bceaf70680.html">hurt smaller communities</a> via a reduction is such one-stop competition.</p>
<h2>Concentration versus conduct</h2>
<p>A rule of competition is that how fiercely companies will end up competing is determined by how easily customers can switch between their products or services. For instance, an airline offering a flight at a time convenient for business travelers may be able to command a higher price than a carrier with a flight to the same destination at a less convenient time, since business passengers may not view the two services as comparable. </p>
<p>So even when multiple airlines offer the same nonstop route, passengers may not view them as interchangeable: one appeals to business travelers, the other to leisure fliers. A 1997 academic study <a href="http://faculty.haas.berkeley.edu/borenste/download/IJIO99Bunch.pdf">demonstrated</a> that airlines do seem to schedule their flights at different times to avoid price competition. </p>
<p>Another way the appearance of competition may fail to put pressure on prices is through frequent flier programs. Passengers vested into an airline’s <a href="https://theconversation.com/frequent-flying-is-getting-a-lot-more-rewarding-for-those-at-the-very-top-34458">loyalty program</a> are often willing to pay a premium for trips with the preferred carrier.</p>
<h2>Tacit collusion and soft competition</h2>
<p>The key to understanding competition in the airline industry is to realize that several airlines compete year after year and on many markets in what economists call a <a href="http://lexicon.ft.com/term?term=multi_market-competition">multi-market contact</a>. </p>
<p>This typically leads to what is known as tacit collusion, in which competition is minimized without any explicit agreement among the market participants. The fewer the number of companies in the market, the more likely there’ll be tacit collusion. </p>
<p>In the airline industry, it means carriers don’t compete aggressively (they keep fares higher and frequency of service relatively lower) in anticipation that competitors will respond in kind. On the flip side, an airline would punish a rival that does not hold up its end of the implicit deal by competing very aggressively. </p>
<p>While explicit collusion in which competitors agree on prices is <a href="https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/dealings-competitors/price-fixing">illegal</a>, and is in fact what the DOJ is investigating some airlines for doing, the tacit kind is perfectly legal. </p>
<p>And the more multi-market contact there is, the more likely you’ll have this tacit collusion and softer competition. In other words, imagine two companies that compete on a wide variety of markets. In some, company A is stronger, in others, company B is dominant. The companies thus have an incentive not to compete too aggressively where they are stronger because it might invite retaliation in markets where they are weaker. </p>
<p>The DOJ itself helped foster this environment in recent decades. It approved each merger after reviewing the overlap of the partner airlines’ network, finding little. Thus, it would appear that competition wouldn’t be hurt if they tied up. But at the same time, all these mergers created more multi-market contact throughout the industry, making tacit collusion more likely. </p>
<p>Let’s say, for the sake of example, a decade ago American Airlines competed with Northwest in 100 markets and with Delta in 70 separate markets. After Delta and Northwest merged in 2008, American would now be competing against the combined airline on 170 markets. </p>
<p>The actual amount of multi-market contact is <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1657728">much higher</a>. According to my calculations, American and Delta are both present on over 1,000 airport-pair routes, if we consider both nonstop and one-stop markets. </p>
<p>We are yet to understand the extent to which these increases in multi-market contact might have softened the competition on the US airline market.</p>
<h2>So is there enough competition left?</h2>
<p>In the end, airline consolidation is a mixed bag. It has led to the disappearance of a number of carriers (in particular, three large network carriers have left the industry through mergers in the last decade), which means less competition and a greater potential for tacit collusion on prices, but also increased efficiency and <a href="http://marketrealist.com/2014/07/must-know-merger-synergies-in-the-us-airline-industry/">lower costs</a> (for the airlines), which are sometimes passed along to consumers. </p>
<p>The DOJ is right in paying increased attention to the airline industry – preventing abuse of market power is, after all, its job. But the environment in the industry appears ripe for softer competition to emerge even without explicit price agreements between the carriers. The absence of lower fares in response to substantially lower jet fuel prices is clearly not a good sign.</p>
<p>Unfortunately, there is not much more that the DOJ can or should do. It would be very difficult to make a convincing case for breaking up any of the large network carriers, and price regulation is clearly not an option in the US. </p>
<p>In the longer term, market forces will prevail. If the airlines <a href="http://www.reuters.com/article/2015/06/08/us-airlines-iata-forecast-idUSKBN0OO1E120150608">continue to profit</a> (US carriers are forecast to make US$15.7 billion this year), that may lure new entrants onto the market, creating a more competitive environment.</p>
<p>That may be consumers’ only hope for more price competition.</p><img src="https://counter.theconversation.com/content/45086/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Volodymyr Bilotkach does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Justice Department is investigating whether airlines are colluding over airfares, but high prices may simply be a consequence of industry consolidation.Volodymyr Bilotkach, Senior Lecturer in Economics, Newcastle UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/54352012-02-19T19:38:25Z2012-02-19T19:38:25ZQantas cuts jobs, Air Australia collapses: how can we save our airlines?<figure><img src="https://images.theconversation.com/files/7797/original/jx39c67x-1329635352.jpg?ixlib=rb-1.1.0&rect=79%2C63%2C2682%2C1848&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Stranded international passengers struggle to get home as Air Australia collapses.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>As stranded Air Australia customers continued to scramble to get home over the weekend, many may well be asking themselves: who’d run an airline? </p>
<p>On Friday, just a day after Qantas announced 500 job cuts, news broke that the Brisbane-based budget airline, had entered into <a href="http://www.kordamentha.com/creditor-information/australia/97">voluntary administration </a> after just four months of operation. </p>
<p>Administrator Mark Korda has suspended Air Australia’s ticket sales and called for immediate expressions of interest in the sale of the business.</p>
<p>He said it was “too early to predict the ultimate position of Air Australia or to be precise about the reasons for the Group’s problems”. </p>
<p>But there have been suggestions that Air Australia may have suffered some self-inflicted losses, with <a href="http://www.couriermail.com.au/business/egos-come-crashing-down-after-high-life/story-fn7kjcme-1226274279610">media reports </a> suggesting the airline spent large on sporting endorsements and lavish parties. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/7795/original/j2q57b43-1329635323.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/7795/original/j2q57b43-1329635323.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=358&fit=crop&dpr=1 600w, https://images.theconversation.com/files/7795/original/j2q57b43-1329635323.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=358&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/7795/original/j2q57b43-1329635323.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=358&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/7795/original/j2q57b43-1329635323.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=450&fit=crop&dpr=1 754w, https://images.theconversation.com/files/7795/original/j2q57b43-1329635323.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=450&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/7795/original/j2q57b43-1329635323.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=450&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The party’s over: Air Australia will be sold, according to its Administrators.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>Previously known as Air Charter Logistics, Air Australia at first specialised in oversize cargo and charters back in the 1990s. It then turned its operations to Defence Force contracts before launching its commercial airline arm in 2009, Strategic Airlines - which would then become Air Australia. </p>
<p>Management spent large, with offices in Melbourne, London and Paris. It built its brand associating itself with the 2009 Australian Masters Golf, the Brisbane Broncos, and a few racing events, as well as large celebrity-studded parties and trips to Bali and Hawaii. </p>
<p><a href="http://www.abc.net.au/news/2012-02-18/air-australia-passengers-left-in-limbo/3837814">Reports are now emerging</a> that people in the industry knew the company wasn’t going to survive.</p>
<p>In the same week, Qantas chief executive Alan Joyce announced Qantas would a review of its catering and maintenance operations, amid a staggering 83% fall in profits in first-half net profit.</p>
<p>Qantas announced losses of $194 million over the year-long industrial battle, including $70 million lost over the well-documented debacle when it grounded its entire fleet.</p>
<p>But Australian airlines are hardly the only ones facing challenges around the world. The recent collapses of long-established carriers such as the 66-year old Hungarian carrier <a href="http://www.guardian.co.uk/business/2012/feb/03/hungary-malev-bankruptcy-airline-grounded">Malev</a>, the 24-year old Spain’s <a href="http://edition.cnn.com/2012/01/28/world/europe/spain-airline-spanair/index.html">Spanair</a>, and venerable, 78-year old <a href="http://www.reuters.com/article/2011/11/30/us-americanairlines-idUSTRE7AS0T220111130">American Airlines</a> underscore the grim financial reality the industry faces. </p>
<p>In India, Kingfisher Airlines (India’s third-largest airline) <a href="http://online.wsj.com/article/SB10001424052970204792404577228401080817464.html">has not been profitable</a> for a single quarter since it started operations in 2005, reporting a $90 million loss in the December 2011 quarter.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/7799/original/r3brkfch-1329636626.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/7799/original/r3brkfch-1329636626.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/7799/original/r3brkfch-1329636626.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/7799/original/r3brkfch-1329636626.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/7799/original/r3brkfch-1329636626.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/7799/original/r3brkfch-1329636626.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/7799/original/r3brkfch-1329636626.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Spanair employees protest the the closure of the 24 year-old Spanish airline.</span>
<span class="attribution"><span class="source">AAP</span></span>
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<h2>Are airlines a lousy investment?</h2>
<p>The aviation industry is notoriously difficult with large capital and operating costs, high fuel costs and faces increasing competition at a global scale. In Australia, it is also particularly exposed to the rising dollar, despite having the <a href="http://www.ausbt.com.au/sydney-melbourne-is-world-s-fourth-busiest-air-route">world’s fourth busiest air route </a>(Sydney-Melbourne). </p>
<p>Yet, there seems to be no conventional explanation for an industry that seems to perpetually lose money. </p>
<p>According the International Air Transport Association (IATA), the global aviation industry has <a href="http://www.bangkokpost.com/learning/learning-from-news/279650/global-airline-industry-unprofitable">finished in the red</a> for six of the past nine years. Following the GFC and record-high oil prices in 2008, it showed a return of -4.6%. </p>
<p>Given the weak global economy, IATA is forecasting a return of -1.4% for 2012. In the United States, passenger airlines reported <a href="http://www.ausbt.com.au/sydney-melbourne-is-world-s-fourth-busiest-air-route">aggregate net losses</a> of $14 billion in 2008-09. </p>
<p>To sum it up, in the past nine years, airlines as a whole suffered an aggregate loss of US$47.9 billion.</p>
<p>Berkeley economist and commercial aviation expert <a href="http://faculty.haas.berkeley.edu/borenste/">Severin Borenstein</a> points out in a paper released last year that high taxes and fuel costs play a minor role in airline operations. </p>
<p>The major drivers are actually related to fluctuations in demand and the large cost differential between what he refers to as “legacy airlines” (old, well established airlines) and new low-cost carriers (LCCs). </p>
<p>LCCs have been gradually chipping away market share from legacy carriers that have much higher costs. Legacy carriers responded with mergers and alliances in an effort to expand their network and services. However, unless legacy carriers find a way to close the gap, it is likely they will have difficulty earning consistent profits over the long term. </p>
<p>Qantas has positioned itself in the LCC market by creating Jetstar in Australia and <a href="http://www.theaustralian.com.au/business/aviation/jetstar-japan-cleared-for-early-take-off/story-e6frg95x-1226266133725">Japan</a> to capitalise on the growing Asian airline market, but it may not be enough to rescue its bottom line.</p>
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<img alt="" src="https://images.theconversation.com/files/7798/original/s2yt6z4x-1329635369.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/7798/original/s2yt6z4x-1329635369.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=324&fit=crop&dpr=1 600w, https://images.theconversation.com/files/7798/original/s2yt6z4x-1329635369.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=324&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/7798/original/s2yt6z4x-1329635369.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=324&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/7798/original/s2yt6z4x-1329635369.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=407&fit=crop&dpr=1 754w, https://images.theconversation.com/files/7798/original/s2yt6z4x-1329635369.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=407&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/7798/original/s2yt6z4x-1329635369.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=407&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A model of success: Dubai airport is on track to be the world’s largest, with UAE airlines enjoying staggering success.</span>
<span class="attribution"><span class="source">AAP</span></span>
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<h2>The Middle Eastern success model</h2>
<p>Despite the worrying numbers worldwide, Middle Eastern airlines seem to have found the winning formula. They have experienced unprecedented growth at an annual rate of nearly 20% over the past few years. Dubai airport is rapidly closing the gap on London’s Heathrow in its <a href="http://media.economist.com/images/images-magazine/2010/23/bb/201023bbc564.gif">number of passengers </a>and its new airport, planned to open in the early 2020s, will make Dubai <a href="http://www.smh.com.au/travel/travel-news/dubai-opens-new-airport-set-to-become-worlds-largest-20100628-zd2u.html">the biggest airport in the world</a>.</p>
<p>The success of UAE airlines is simply staggering.
Since its second year of operation, Emirates (wholly owned by Dubai’s sovereign-wealth fund) has made a profit every year while doubling in size every three to four years. It recently placed a <a href="http://finance.yahoo.com/news/emirates-airline-orders-50-more-114953099.html">huge order</a> for 50 Boeing 777 jets. </p>
<p>Etihad (the Abu Dhabi airline set up by royal decree in 2003) has shown its first sign of <a href="http://www.flightglobal.com/news/articles/etihad-posts-first-ever-full-year-profit-368001/">profit this year</a>, growing its revenue by 36% in the past 12-month period. Last December, it put <a href="http://www.reuters.com/article/2011/12/12/uk-etihad-idUSLNE7BB01F20111212">an order for 12 Boeing jets</a> with options for 25 787 Dreamliner aircrafts. </p>
<p>By contrast, Air France-KLM’s <a href="http://online.wsj.com/article/SB10001424052970203806504577182293516238790.html">net debt widened to €6.5 billion</a> last year and <a href="http://www.bbc.co.uk/news/business-10813680">British Airways</a> report a £164m loss in 2010.</p>
<p>The success of airlines from the Gulf is partly due to their geographical location, becoming a hub between West and East. However, it’s not the only reason. Emirates (which basically provides the blueprint for Qatar Airways and Etihad) had early support from Dubai which encouraged other countries to open routes to the Gulf. </p>
<p>It reviewed its immigration laws making it easier for visitors to pass through. Its pilots and engineers are paid at globally competitive rates but most cabin crew and other staff are recruited on low pay. </p>
<p>The airlines also cashes in on a highly profitable cargo market with revenue strongly helping the airlines’ bottom line. The success of Etihad is also partly due to <a href="http://www.theaustralian.com.au/business/aviation/etihad-chief-james-hogan-lands-maiden-net-profit/story-e6frg95x-1226267085066">Australian James Hogan</a> who worked at a British Airline and Gulf Air before being hired by Abu Dhabi’s government to run Etihad. </p>
<p>Surprisingly airlines from the Gulf actually <a href="http://www.economist.com/node/16271573">pay more for fuel</a> at their home base due to the lack of refining capacity in the region. Their employees do not pay tax but those savings are largely offset through staff programs providing schools, health care and accommodation. </p>
<p>The Gulf airlines have certainly been blessed with an ideal geographical location but they remain well-oiled and highly efficient businesses defying the overall trend of the industry.</p>
<h2>Should the government get more involved?</h2>
<p>In <a href="http://faculty.haas.berkeley.edu/borenste/airreg08o.pdf">a 2008 report</a>, Borenstein points out that government policy has had a greater influence than market forces on airline operations in almost all markets over the past six decades. </p>
<p>Following World War I, strong national air carriers were promoted across the world through government subsidies. Deregulation of the airline industry began in the mid-1970s and led to privatisation of state-owned domestic “flag carriers”. </p>
<p>Most countries still consider domestic airline operations as part of the national identity and governments implemented restrictive bilateral agreements limiting foreign ownership of domestic airlines as well as mergers across borders.</p>
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<img alt="" src="https://images.theconversation.com/files/7796/original/ncd2p2tc-1329635336.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/7796/original/ncd2p2tc-1329635336.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=351&fit=crop&dpr=1 600w, https://images.theconversation.com/files/7796/original/ncd2p2tc-1329635336.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=351&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/7796/original/ncd2p2tc-1329635336.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=351&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/7796/original/ncd2p2tc-1329635336.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=441&fit=crop&dpr=1 754w, https://images.theconversation.com/files/7796/original/ncd2p2tc-1329635336.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=441&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/7796/original/ncd2p2tc-1329635336.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=441&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A bad week for Australian aviation as Qantas announces job cuts.</span>
<span class="attribution"><span class="source">AAP</span></span>
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<p>The Qantas shutdown last year showed us that many Australians hold a strong emotional bond to what they consider to be their “national carrier”. This raises questions about whether the Federal Government should be more involved in businesses strongly associated with national identity. Unions involved with Qantas argue that the company has a corporate responsibility as the national carrier to not offshore jobs. </p>
<p>With only a handful of airlines operating in Australia, large distances between capital cities, and Qantas still holding monopoly of a number of routes, the flying kangaroo is essentially part of the backbone of the economy – with the power to literally <a href="http://www.theage.com.au/travel/travel-news/airline-that-stops-a-nation-20111029-1mpgc.html">stop a nation</a>.</p>
<p>In a similar vein, The Economist recently discussed the emerging trend of “state capitalism” whereby the state is heavily involved in the operations of some parts of its business sector. </p>
<p>For instance, state-backed companies account for <a href="http://www.economist.com/node/21543160">80% of the value of China’s stock market</a> and 62% of Russia’s. In the airline industry, variants of this model can be found with Singapore Airlines and in the Gulf airlines previously discussed (Emirates, Etihad and Qatar Airways). </p>
<p>President Barack Obama <a href="http://www.washingtonpost.com/national/at-boeing-plant-obama-to-urge-congress-to-keep-supporting-agency-that-promotes-us-exports/2012/02/17/gIQAPvfyIR_story.html">acknowledges</a> the unfair advantage that some companies do get through government support and similarly, Western politicians are starting to complain that state-capitalist powers rig the system in favour of their own companies. </p>
<p>However, as The Economist <a href="http://www.economist.com/node/21542926">rightly points out</a>, when government favours one lot of companies, the others suffer - which makes it an unsustainable model over the long term as it asphyxiates innovation and competition.</p>
<h2>What now?</h2>
<p>Despite the grim outlook of the industry, demand to use airways has been steadily <a href="http://media.economist.com/sites/default/files/imagecache/original-size/20110924_WOC639.gif">increasing</a> since the 1970s. The rapid growth in Asia will translate to an anticipated need of around <a href="http://atwonline.com/airline-finance-data/news/airbus-asiapacific-leads-demand-new-aircraft-0216">9,370 new aircraft</a> over the next 20 years, according to Airbus forecast. </p>
<p>Boeing just took the <a href="http://www.forbes.com/sites/greatspeculations/2012/02/16/boeing-bags-biggest-commercial-aviation-order-in-its-history-from-lion-air/">biggest commercial aviation order</a> in its history with a delivery of 230 planes (worth a combined $22.4 billion) to Indonesian carrier Lion Air. Boeing also believes that demand in the Asia-Pacific region will grow more than in any other part of the world over the next two decades. </p>
<p>In terms of airline performance, Borenstein argues that much of the instability in carriers comes from experimentation with flight scheduling, pricing, loyalty programs and so on. Lessons are bound to be learned and new strategies emerge.</p>
<p>Some sectors of the Australian economy are going through some rough changes at the moment, especially in automotive and aerospace. Jobs may be lost but valuable skills remain and can potentially be transferred to other industries. </p>
<p>Australia has to stop itself from <a href="http://newsfeed.time.com/2011/01/04/poll-the-french-are-the-worlds-most-pessimistic-people/">going “French”</a> as it becomes <a href="http://news.ninemsn.com.au/national/8421067/carbon-tax-a-factor-in-job-fears-abbott">increasingly pessimistic</a> about its future despite the fact that all the signs lead to economic expansion and growth in the long term. </p><img src="https://counter.theconversation.com/content/5435/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hamza Bendemra does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As stranded Air Australia customers continued to scramble to get home over the weekend, many may well be asking themselves: who’d run an airline? On Friday, just a day after Qantas announced 500 job cuts…Hamza Bendemra, Doctoral Candidate, Engineering, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.