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Free Money! Woo-Hoo!

From a Wall Street Journal story today on American Airlines' near-miss with bankruptcy:

President Bush's signing Wednesday of a war spending bill that included $2.9 billion in aid to airlines offers a boost to American. The carrier's share of the second federal airline-industry bailout bill in two years is estimated at $410 million in cash, likely to be paid within 30 days.
Writing as someone who has been flying American for 15 years now, and who would certainly like to see them continue on in some fashion -- otherwise my saved frequent flyer miles and lifetime elite status could disappear -- I nevertheless find this offensive.

Has the war been tough on airlines? Sure it has. Has it been tough on other industries? Sure it has. Are Congress and the Bush administration prepared to give handouts to every industry that has been negatively impacted by recent geopolitics? And if they're rewarding industries that "lost" in the war, are they prepared to punish industries that have "won," like defense contracting?

At this point, no airline shareholder should attempt to profess surprise that the airline industry is highly cyclical. The fact that the US was attacked by terrorists, or that the US invaded Iraq, and that the economy was correspondingly affected, doesn't make it the responsibility of the US taxpayer to bail out the airlines. It's the nature of their business. Besides, Southwest and JetBlue seem to be making money even in current conditions.

$2.9 billion works out to nearly $10 for every person in America. That means my three kids and I were just forced to donate almost $40 to the airlines because they can't run their businesses properly. I can think of far, far better uses for that money.

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Comments

I'm mostly a free market kinda guy, so I'm not going to disagree with your main points, but have a few comments anyway.

I don't like him very much, but while Bush signed the bill, when he submitted it to congress it did not contain the bailout and he specifically asked congress to not add any spending.

Additionally, there is a difference between a major airline and most other companies. It is an important (possibly even strategic) part of the infrastructure that makes a country run. There is a reason airlines, like post offices, automotive companies, roads, telecommunications and health care are frequently government owned or heavily regulated in many countries (whether or not it is a good idea).

Bruce, I think Bush could have made a more forceful case not to add spending on the airlines... but still, your point is valid. It was Congress that added the spending. Bush has little choice but to sign the bill.

Are airlines strategic components of a nation's essential infrastructure? Quite possibly. Would air travel go away if more airlines were allowed to fail? Not at all. People need to fly; the resources (aircraft, personnel, airports, etc.) exist to make it possible; so private industry will step in to fill that need. In fact, airline consolidation could well make the industry far healthier, thus improving our infrastructure.

As for the comment about why certain industries are heavily regulated in many countries, I disagree with you about the motivations. Why did most European nations control their telecommunications through PTT-type entities? Profit, pure and simple. Governments were able to make vast sums of money from consumers without technically raising taxes, and unions were able to negotiate generous contracts for their members unsupportable in private industry. This is why so many European governments resisted telecommunications privatization for so long.

As for post offices and roads, the issue there has been the fact that they are considered essential services that are inherently unattractive to private industry, with certain exceptions (overnight delivery, private toll highways, etc.). Removing the government from its role could result in drastic cuts in service. You aren't saying that applies to the airline industry, are you?

Did I mention that I'm a free market kinda guy? One of my big problems with Bush is that he's a protectionist.

I don't even remotely mind if a few airlines go down the tubes. I think it would be good for the industry and consumers as well. Discount carriers have a better business model and probably should drive at least a few full service carriers out of business. But I do think air travel is becoming more akin to post offices and roads than ever before.

Many cities are already experiencing decreased service. Every one of the top six US airlines is having significant financial difficulties. Carriers are cutting back flights to smaller markets, charging more for such flights and even leaving such airports altogether.

Discount airlines are taking more and more seats in major markets. But there isn't enough profit elsewhere for them to rush in to fill the gaps as the big six pull out.

It is not just the quantity of service that suffers, but quality as well. I fly Southwest for almost every flight I take, but there are reasons besides price preventing it from being called a full service airline.

If I move to a town small enough that it is unable to support a profitable airline presence, is it them the responsibility of the other citizens of my state or my nation to pay to subsidize such a presence, either directly (through tax-supported grants) or indirectly (by forcing airlines to serve my town, thereby causing them to raise fares in other locations)?

I'm generally against subsidies and tariffs, be it for steel, agriculture or airlines. I never said it was a bad thing that less government involvement might result in drastic cuts in service. In case it isn't clear, I'm against the airline aid package.

It is however the same thing as happens now with postage, roads, energy and telecommunications. On a per capita basis, it does cost more to provide all of these things to less populated areas. In some cases these costs are not recoverable. In most cases, they are still provided at a reasonable cost and heavily subsidized by consumers/citizens in areas where providing such services costs less.

My point is simply that there are some industries a country cannot allow to fail without significant negative consequences. The airlines qualify. And, it is becoming less and less attractive for private industry, excepting certain routes between major cities, to provide these services.

Hmmm... so you're against the airline aid package, but you feel that airlines qualify as an industry that we "cannot allow to fail without significant negative consequences." So what do you think should be done?

I did say the airline industry could not be allowed to fail, but I also said I don't even remotely mind if a few airlines go down the tubes. The loss of Pan Am and TWA didn't kill us.

I wouldn't give the major airlines any subsidies now. I'd let them file for bankruptcy, consolidate and restructure to be more competitive with the likes of Southwest and JetBlue. I'd let American executives stew in the fact that deceiving their employees will probably cost them $10 billion in hard won concessions from flight attendants and drive them into bankruptcy.

Subsidies are bad. The last round caused Midway to resurrect itself from the dead for the sole purpose of grabbing its fair share. But I still say airlines are a special case (although the most important company in the equation, Boeing, isn't an airline). There does come a point when intervention becomes necessary, we just aren't there yet.

Maybe we should discuss this in more detail at the next RTP Bloggers lunch? Although I'm hoping it won't get in the way of talking more about Emergent Democracy.

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