Can the Airline Industry be Saved?

By Alan Stewart Carl | Related entries in Gas, In The News

To put it mildly, without a dramatic reduction in fuel prices, airlines in America are screwed. They were struggling even before the rise in oil prices and it would hardly be a stretch to call the industry one of the most disliked in America. The only service left to airline passengers is low fares. If those go away, so will the consumers.

Holman W. Jenkins, Jr. of the Wall Street Journal expects a nasty fallout for the airline industry. But he does have two suggestions as to how the government might help ease the troubles.

1) Repeal limits on foreign ownership. Air France was ready to pump $750 million into the Delta-Northwest merger, until the airlines waved Paris off fearing political backlash. British Air would love to buy American. As part of larger global networks, domestic carriers would be supported by a much less volatile financial structure. Says Giovanni Bisignani, head of the International Air Transport Association: “How many car manufacturers do you have in the world — 20 or 30? We have over 1,000 airlines.”

2) Admit our antitrust laws don’t have all the answers. Basic property rights and freedom of contract are necessarily abridged when businesses are forbidden from negotiating with competitors. But in “code-sharing,” airlines have a ready-made way to collude to preserve capacity in a downturn without losing their shirts. Give airlines license to enter and exit these deals at will. Any abusive pricing would surely attract new entrants to compete away excessive profits. Fewer giveaway fares might be available on the Web, but passengers would get more of the services they are genuinely willing to pay for.

Obviously, the airline industry in America will survive in one capacity or another. Removing some of the current regulations on airline ownership and allowing more flexibility in entering and leaving code-sharing agreements could make the transition from today’s market to tomorrow’s market smoother. It’s at least more preferable to another massive bailout financed by taxpayers.


This entry was posted on Wednesday, June 18th, 2008 and is filed under Gas, In The News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

3 Responses to “Can the Airline Industry be Saved?”

  1. Jimmy the Dhimmi Says:

    Neither of those suggestions will come true any time soon, because it looks like the Democrats are going to sweep the House, Senate, and Presidency in November. Congress already blocked opening up domestic routes to foreign airlines this term.

  2. Tim in Wisconsin Says:

    A little-observed death blow to the aviation industry happened in early 2001 when the United States Postal Service switched from using commercial jetliners to transport mail and instead contracted for space on FedEx’s planes. This mail service was a consistent source of revenue for the airlines that helped cover much of the operating costs for a flight. Losing that service meant that more of the costs of operating a flight had to be borne by the passengers. Of course, the switch happened a few months before the terrorist attacks which caused a massive loss of passengers. Federal bailouts helped disguise just how poor the financial condition of the aviation industry was leading up to the terrorist attacks. Then fuel prices started to climb further putting the airlines in a hole.

    The thing is, we’ve seen this exact same thing happen before. While passenger rail service started contracting in the late ’50s, a large number of trains were still operated because the gains from the mail service contracts offset the passenger losses. This ended in 1967 when the Post Office cancelled all rail service and moved towards commerical airliners. Within four years, passenger rail service was nationalized.

    Passenger aviation is unprofitable when all costs are fully taken into account. Even in the mid ’90s, when oil was cheap, security was small, and air company profits were high, the industry’s collected profit was less than that of the government-borne infrastructure costs. Certainly, some of those costs are paid by the users in the form of excise taxes and landing fees, but a lot of the direct costs and just about all of the indirect costs come out of the general fund.

    I believe that solid, reliable, inexpensive transportation is a fundamental need. A robust economy requires an efficient system of moving goods and people around. Because of this, the government has to take some role in shaping the aviation industry. Pure nationalization is not the way to go. Amtrak is a much needed service and since it’s what we have I support it dearly, but it should have been handled differently. That’s a topic for another day, however.

    First and formost, the country needs a rational transportation vision, which we’ve never had. In America, we see the various modes of transportation as competitors rather than different means to accmplish the same ends. As part of this, we’ll have to figure out what flights actually need to exist. Why are there flights between O’Hare and Milwaukee, for exmaple? Or DFW and Waco? That should be handled on the ground. This would require vast sums of money in order to bring existing rail routes up to par, to build new ones, and to actually integrate them into our airports, but it needs to be done. You can’t built a nuclear, solar, hydroelectric, or wind powered airplane, but we already have trains that are powered by those sources of energy. We just call them electric trains.

    Then, once we figure out what flights we actually need (at a guess, everything in excess of 500 miles), the government will have to step in and provide a pre-determined per-passenger mile subsidy for a given route. United and American would stil compete for the O’Hare to Los Angeles route, but they’d be competing on service and amenities in order to attract the greatest number of passengers (and thus a bigger slice of the subsidy pie). Airlines would still be free to run flights on the unsubsidized routes, but they would have to bear the fully allocated costs of doing so.

    That’s how i”d do it, anyway. There’s problems, yes, but I think that ultimately a true public-private partnership is the only way out of here.

  3. BenG Says:

    Tim, Thanks for the info, especially the mention about the RR services, or lack there of, so badly needed in this country.

    Two things come to mind; First, the airlines HAVE passed the fuel costs on to the public by adding surcharges -$150 per ticket that I’ve seen- as well as the added service charges. With every seat filled, i don’t see how this hasn’t offset the added fuel prices.

    Secondly, and Jimmy the D. may want to consider this, when will people finally realize that not all problems, esp. in the public arena, can be answered by the free market, private corporation model. The inflated price of European auto fuel is from TAXES that their Gov’s have used to insure good public trans, infrastructure, as well as promote conservation. It may amount to more Socialized Gov functions, but won’t that add to greater security for their people in these stressful times? Our privatized system took advantage of cheap oil simply by producing large inefficient gas guzzlers w/o any premonition to the future simply b/c they’re not paid to do so. That’s what we pay a Govmnt to do. Instead, all they seem interested in is that same bottom line. Now we all pay!

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