http://www.observer.com/opinions_vonhoffman.asp
Theres No Free Market
At Americas Airports
By: Nicholas von Hoffman
Date: 9/26/2005
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.
If proof be needed as to how hard it is to regulate an industry
successfully, the C.A.B. provides it. Can it be done well? What lessons are
to be learned from the C.A.B.? Once learned, are they applicable to
creating some new kind of entity? The mere possibility of discussing such a
thing will send that group of growling stand-patters in joints like the
American Enterprise Institution clawing at the walls, but enabling these
airlines, at great public expense, to drag themselves out of bankruptcy
only to fail again is idiocy. Worse than idiocy, it offers the traveling
public the promise of more uncomfortable, more unpleasant trips for as far
as the eye can see or the jet can fly.
Instead of a C.A.B., whats needed is the creation of a public body to
oversee, in a general way, all forms of public transportation, air, rail
and bus. This isnt the destruction of private-sector, free-market
companies, because none of these private-sector operations would last to
the end of the month if their government subventions were withdrawn. In
putting a new public body over all of them, the government would be running
what its already paying for. There is no private sector here.
Can a new agency (or agencies) with the power to plan, integrate and
regulate transportation succeed? Its two predecessors, the Interstate
Commerce Commission and the C.A.B., fell miles short of unqualified
success. Do we have the skills to do it right, and do we have the politics
to allow it? Is three the charm, or just another, larger mess-up? And is
the risk of a new kind of mess worse than being in and out of bankruptcy,
Groundhog Day forever?
Nicholas von Hoffman is the author of A Devils Dictionary of Business,
just published by Nation Books.
--
www.marxmail.org
