From: "David B. Shemano" <[EMAIL PROTECTED]>
... Going back to the larger point, bankruptcy is essential to any
well-ordered economic system, because the potential reality acts to
moderate and rationalize the economic participants (or at least most of
them most of the time).
[Meanwhile back on Earth:]
Theres No Free Market
At Americas Airports
By Nicholas von Hoffman
(NYO 9/26/2005 edition)
The statistic that shook up business writers around the country is that more
than half of domestic passenger seats belong to airlines in bankruptcy. The
spate of bankruptcies, on the other hand, is something less than a unique
event.
The only other major industry that has more bankruptcies, on a percentage
basis, is the restaurant business, said Richard Gritta, a professor of
finance at the University of Portland in Oregon whom The New York Times uses
as an expert. In the last 25 years or so, the professor added, two-thirds of
the industry has landed in bankruptcy at least once, and threePan Am,
Eastern and Braniffnever made it out alive.
From the standpoint of airline investors, according to a remark attributed
to Warren Buffett, it would have been a far, far better thing if the Wright
brothers had crashed and burned at Kitty Hawk. Since the industry was freed
of government supervision in 1978, it has had brilliant executives, stupid
executives, madmen executives, ingenious executives, incompetent executives,
charismatic executives, but never a profitable one. Oh, there have been
brief periods when an airline here or there has made money, but sooner or
later they all go kerplop.
When they do, the stockholders will be wiped out and the employees will take
terrible hits in salary and benefits, even as the taxpayers will be obliged
to put up huge sums to make the whole thing workor kinda-sorta workagain.
The only people who profit from these airline business catastrophes are the
lawyers, accountants and Wall Street investment-banking houses who will pick
up hundreds of millions (literally hundreds of millions) in fees and charges
before this latest airline spasm has run its course. Seldom will so few have
made so much for doing so little.
This disaster is not unprecedented. A hundred years ago, the railroad
industry was in exactly the same shape. More than half of its trackage was
in bankruptcyand for some of the same reasons that have made a ruin of the
airline companies. Both industries had to deal with huge up-front starting
costs. Both industries faced large operating costs and fickle, unpredictable
and highly variable patronage.
In the last quarter of the 19th century, railroad companies besieged by
angry customersmostly farmers furious at the rates they had to pay to move
their products to marketreacted by forming cartels to fix freight tariffs,
but the cartel members would continually double-cross each other, so that
approach didnt work. Another attempt came with the establishment of the
Interstate Commerce Commission, which had the power to fix rates and other
terms of doing business, but the commission became a battleground between
the railroad and the shipping interests, with the result that political
pressures made it impossible to govern the industry for its long-term
health. As a last resort, railroad companies had recourse to buying each
other out to create enough of a monopoly to be able to dictate prices. This
approach failed when even the giants of the era, like J.P. Morgan, ran out
of money trying to pull it off. It didnt help that Morgan had no background
in transportation and thus didnt have a clue what the hell he was doing.
The monopoly route was also stymied by giant shippers like Andrew Carnegie,
who put the railroads on notice that if they tried to hold him up with what
he thought were extortionate rates, hed build his own goddamn railroad.
The airline mess has also been compounded by much malarkey filling the air
about private sector this and free market that. Right-wing egestions
hold that until the coming of closet collectivism, government stayed out of
the private sector, an area of life unsullied by any form of public subsidy
or subvention. Left-wing disgorgements hold that any kind of public help is
corporate welfare. All of this flies in the face of the history of business
in the United States, where subsidies in transportation have been the rule,
not the exception.
The Federal-era stagecoach network was subsidized through the Post Office,
as the airline companies would be two centuries later. Stagecoaches were
useless for hauling freight, especially bulk shipments of grain from the
rapidly developing Midwest. It would have been convenient if the rivers had
run from west to east to facilitate transshipment to the markets of Europe,
but since geography wouldnt cooperate, Americans dug canals, mostly paid
for by state and local governments. The most famous and most wildly
successful was the Erie Canal, and from Albany to Buffalo, nary a complaint
about socialism was to be heard.
The railroad gradually superseded the canals as the primary method of
shipping. They too were the beneficiaries of a variety of federal, state and
local subsidies. Next came the automobile and the truck, whose subsidies in
the form of roads, bridges and tunnels are so much a part of the landscape
that we seldom think of them as subsidies, but as the natural, God-given
responsibility of government. It wasnt so in 1914, when the Wilson
administration put the federal government in the road-building business for
the first time since Andrew Jacksons era, when such activities were
pronounced unconstitutional. Only now, when the costs of road building and
maintenance has gotten to the point that some states are granting toll-road
monopolies to private firms, has it occurred to us that this form of
transportation is highly subsidized, even with the dedicated gas tax.
The airline industry has never drawn an unsubsidized breath. The development
costs for passenger aircraft and their avionics have been paid for, directly
or indirectly, as a national-defense gimmick for a century, and we will not
even venture a guess as to what it would have cost the industry (even if it
had had the money) to build the airports. Given these actualities, when an
outfit like Delta goes down, its less of a private-sector bankruptcy than
another government-program cock-up. To treat the industry as a group of
private-sector enterprises is to feed another of the delusions as to who and
what we are that infect the national public life.
The only time the airline industry had a degree of stability and
profitability was during the years it was run by the Civil Aeronautics
Board, the government agency that set ticket prices and assigned routes to
airlines. The C.A.B. was stodgyit failed to run the industry so that people
of moderate means could afford to fly, and it generally lacked imagination,
flexibility and even a hint of daringso it was pulled down in the late
1970s by people screaming that the free market could do it better.
In some ways, they were right: The market did do it better than the C.A.B.,
but you cant really, really, really have a free market in an industry
dependent on the government. And so, in the end, unrestricted free-marketism
will kill the industry for lack of investors, chaos, customer cruelty and
skies dyed crimson from the red ink. ...
<http://www.observer.com/opinions_vonhoffman.asp>
Carl
