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Jul152010

« Ramblings on Meddling and the “Public Good” »

The U.S. airline industry has been on a bit of a losing streak in Washington D.C. of late.  Between the tarmac rule, increased compensation for over booking, a new push to have a total cost of trip (fare and fees) made known to the purchaser, the expectation of new and costly rules governing regional carriers, the National Mediation Board, the rejection of the slot swaps between US Airways and Delta and the loss on appeal of the right of airports to implement congestion pricing, 2010 has not gotten off to a good legislative or regulatory start.

The past two weekends, The Philadelphia Inquirer’s Tom Belden has posed serious questions in his “Winging It” column about what is going on in Washington regarding airlines and the airline industry.  While I don’t agree with the conclusions drawn by either of the columns on government interference or the perceived need of more government regulation, one point Belden makes is hard to shake. The airlines brought some of this on themselves.

Yep, between poor handling of several tarmac delays and not “selling” the idea of economic pressures forcing charges for things customers previously got for free, the industry finds itself on the wrong side of the whip.  The industry has substantial issues, but never effectively sold them to the public or Congress. Airlines didn’t come off as poorly as automakers in D.C.’s chambers, but they still reeked of big, bad company. Now, whether those issues are perceived or real, the industry helped to put its own self under the regulatory and legislative microscope.

Belden quotes US Airways' senior vice president C.A. Howlett as saying there is "a feeling in Washington now" that the airlines are more of "a public good than a private industry."  Belden responds, “Most regulation of airlines is in place because the public demanded it in response to the industry's bad behavior. The tough airfield-delay rules are the most glaring example. And if the airlines, like all forms of transportation, aren't operated for the "public good," then what good are they?”

Can commercial entities accountable to their shareholders also operate as a public good?  If so, then all aspects of the public good provided need be considered in any final analysis.

What is “Public Good”?

Randall G. Holcombe, writing for the Review of Austrian Economics, defines public good as “according to economic theory, is a good that, once produced, can be consumed by an additional consumer at no additional cost.  A second characteristic is sometimes added, specifying that consumers cannot be excluded from consuming the public good once it is produced. Goods with these characteristics will be under produced in the private sector, or may not be produced at all, following the conventional wisdom, so economic efficiency requires that the government force people to contribute to the production of public goods, and then allow all citizens to consume them.”

Holcombe continues,  “Simple observation of the real world suggests two problems with the application of public goods theory as a justification for government production. First, many public goods are successfully produced in the private sector, so government production is not necessary. Second, many of the goods government actually does produce do not correspond to the economist's definition of public goods, so the theory does a poor job of explaining the government's actual role in the economy.”

The airline industry does not fit the pure economic definition of a public good.

The Air Service “Public Good”

Belden talks about how airports have largely been built with public monies in order to support economic development.  Then he asks THE question, “But if a city-owned airport builds a new terminal to accommodate airlines, and the carriers later abandon the city because they're not making enough money, guess who's stuck paying the mortgage?”

These are the very economic decisions airlines have to make each and every day.  Should I put a $40 million airplane into market X and a $15 million airplane into market Y? Or vice versa?  Market X and Y are each deriving some economic impact as a result of the service, yet the airline might only break even on the route.  Who pays the mortgage on $60 billion in losses over the past decade?  Not federal, local or state governments. Shareholders, creditors, vendors and labor do. 

Pulitzer Prize winner Daniel Yergen wrote, "Every day, the airline industry propels the economic takeoff of our nation.  It is the great enabler, knitting together all corners of the country, facilitating the movement of people and goods that is the backbone of economic growth. It also firmly embeds us in that awesome process of globalization that is defining the 21st century."  In Washington, this simple and fundamental fact is forgotten in the offices of the political decision makers.

Are the airlines themselves enablers? Or facilitators?  Yergen is right in suggesting a combination of inputs is necessary to create the commercial aviation industry. Each and every day the airline industry is producing a “public good” for all dots on the airline map.

If all politics are local, and local economies depend on airline service, then shouldn’t politicians in local markets explore ways to “buy” the air service they believe is necessary to support the regional economy while also satisfying the expectations of their constituencies on the price of that air service?

Politicians and community leaders boast about the economic benefits of air service and those facing air service reductions are the first to cry foul based on their estimates of sunk economic costs. If politicians and the communities they represent can’t abide higher fares, fees and reductions in service, then the answer should be a simple matter of economics. Have the community pay the difference between the ticket revenue and the cost of maintaining the air service, plus some reasonable profit for the airline to reinvest in its business.

Communities fund sports stadiums to attract teams and tax breaks for large companies to entice them to their area -- all in the name of economic impact. Why shouldn't air service be the same?

Economic activity stemming from commercial aviation service is calculated every day, so it should be a simple investment decision for communities. There is a price to pay for being a node on the global trading map and what type of service best meets the need of a community. But it is not the responsibility of airlines to ensure a dot remains on the map.

Death by a Thousand Paper Cuts

Just how much regulatory oversight, except for safety and security, is necessary?  Low and lower fares are the cry from the legislators, the regulators and consumers.  Each and every day, the airline industry delivers.  But it seems that the industry faces one new regulation after another.  Many of the regulations are presented in the name of consumer protections.  Regulation increases costs.  Yes, there are instances when regulation is necessary - - like preventing bias in computer reservations systems.  Yes, regulation is necessary surrounding the backlash from the Colgan accident – but then again safety should be regulated. 

There is a hue and cry from many governments regarding the explosive growth of the carriers in Gulf region.  While critics claim Emirates, Ethiad and Qatar are state subsidized, the fact remains government leaders of the Gulf States understand full well the importance of commercial aviation to each of their respective economies.  They understand that meddling with commercial decisions is best left to the airlines and that taxation of airlines does not facilitate economic growth.  Economic growth is facilitated by a healthy and prosperous airline industry.

In the U.S., communities of all sizes enjoy the 10.9 million jobs and 1.2 trillion (with a T) dollars in economic impact generated by money-losing U.S. airlines.   Just like the housing bubble, one could say there is an airport bubble.  Yet 450+ airports get served each and every day within the contiguous 48 states

Ask an airport manager how much economic impact is produced by their airport and I guarantee they’ll know the answer.  But who brought the passenger to the community to spend?  Which stakeholder helped create the competitive environment that stimulated demand that uses the airport?  Just how much of that impact ties directly to the airline service received?

The airline industry does not fit the economist definition of a "public good".  But they do bring a lot of good to publics of all sizes.  More taxes, fees and regulation will only ensure that communities will suffer a death by a thousand paper cuts because increased airline costs has to eventually mean fewer airports served.  Political decision makers should take that into account and consider all sides of the airline industry story before increasing its costs in “the public good.”

Reader Comments (7)

I honestly think that the most disturbing element about the entire series of proceedings has to be the complete ignorance with which most politicians speak on the issue. The rhetoric that is thrown around for really no reason. Oberstar and his talk of re-regulation, a man who has been around long enough to have voted for deregulation, now speaks of re-regulating the industry for the good of the passenger. This is especially ironic when the passenger has been and remains the primary beneficiary of de-regulation in the first place. We have always been a country too large in geographic scale to have a single national flag carrier, so unless he is talking about creating several regulated carriers propped up by the federal/state/local governments, which would be incredibly expensive, he is talking about cutting several million jobs and severely cutting access of air travel to the flying public. This idea that an airline, or transportation in general, exists for the good of society is a noble idea, and would be fine if the public were willing to pay for such a service. They are not, at least not on the scale required to service all 450+ airports mentioned above. I would very much like for every one who openly criticizes an industry that has lost 60+ billion dollars since 2000 to take a step back, and realize that contrary to what you may believe, the airlines are not trying to bilk consumers out of their hard earned money, they are in fact trying to find ways to make money, and goodness forbid, to find a way to not only facilitate growth, but to grow themselves. Another good post Mr. Swelbar.

07.16.2010 | Unregistered CommenterBA

Holcombe's definition of "public good" seems to be just fine (and his "on the other hand" comments are consistent with the usual Austrian qualms), but I very much doubt that the USAirways executive had such a well delineated notion in mind when he used the term. I expect he meant something more like "utility" (as in "regulated utility") -- which is consistent with the apparent mood in Congress for re-regulation.

Of course you are quite right that it would be very hard for commercial entities to produce public goods; that's why they are so frequently provided by governments.

So I think there may be some talking at cross purposes going on here.

07.16.2010 | Unregistered CommenterDavid Ballard

If Mr. Belden wants to patronize an airline operated 'for the public good,' I suggest he try Aeroflot. (The Soviet-era Aeroflot.)

07.16.2010 | Unregistered CommenterRNB

Interesting article, especially given the fact that I have just sent CAPA a piece on regulators and their (lack of) vision. In the US, congress has lost sight of its role as the enforcer of a level playing field; insisting that ancillary fees are exposed rather than hidden--period. The imposition of fees and acceptance, even if it is grudging, is a market matter, to be decided by consumers. I don't like the fact that my Breyers Ice Cream half-gallon container is no longer a half gallon but carries the same price. Nonetheless, this is not a matter for congress to consider. Either I buy it or I switch to an alternative. Mr. Oberstar in particular is not defending the consumer but rather a 1990s definition of what a ticket should include. That is not his role. His mandate is to ensure that the changes and new conditions are fully disclosed, making it possible for consumers to make an informed decision amongst products that are currently available--rather than reacting to the laments over change.

07.16.2010 | Unregistered CommenterRon Kuhlmann

I recently took a flight on United/US Airways from Denver to Kahului, Maui with a stopover in Phoenix, and was appalled at the service that both airlines provided. Both charged fees for basic services and customer service was severly lacking. The only consolation was the fact that my flights departed and arrived on time.

07.16.2010 | Unregistered CommenterG. Feliciano

It seems unlikely that more government regulation, especially in the realms of safety and consumer protection, will mean that "communities will suffer death by a thousand paper cuts." Higher airline costs do not necessarily translate into fewer airports served. Until recently airlines were in runaway expansion mode, flying to as many places as they could to the point of bankruptcy for several of them as costs and debt rose out of control.

The answer to calls for more regulation is for airlines to implement changes that will obviate the need for regulation. Airlines that take on some or all of the DOT's proposals for more transparent fares and fees, less misleading advertising and better compensation for canceled flights and bumped passengers--among other things--will score not only public relations coups but competitive advantages. Frequent-flier programs that are hard to cash in, denial of responsibility for many problems associated with canceled flights (aside from weather) and fees that are perceived not as "a la carte" choices but sneaky rip-offs are not winning many fans at the ticket counter or in Washington.

It's time for more customer-centric management that views passengers less as revenue units and more as people who have become more selective about where they spend their business and leisure travel dollars. It's not all about fares and the freedom to charge fees. It's about the responsibility to act in the public interest, as well as your own, even if you're not a public good.

07.17.2010 | Unregistered CommenterAirport Avenger

I have to respectfully disagree with the above supposition that following all of the regulation will lead to a competitive advantage. I agree that in an industry where the product is not a commodity, providing better customer service, etc. can give a corporation a very important competitive advantage. I do not believe that to be the case in the airline industry. Once you have achieved a base level of customer service, you seem to be set. A base level encompasses, relatively on-time flights, a safe flying environment, clean planes, and passable gate employees. Unfortunately the prime example for this is Delta, their frequent flier program is regularly ranked among the worst, and they are consistently near the bottom of the on-time rankings. They have also just achieved their largest quarterly profit ever. It's unfortunate, but for the regular leisure traveler, passable seems to be good enough.

07.19.2010 | Unregistered CommenterBA

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