Airlines Again
Fabio mentioned the long string of unprofitable airlines in an earlier post. The Feb. 17, 2002 NYTimes Magazine had a good piece by Rich Lowenstein this. Among others, the following points caught my eye: "One reason the major airlines find themselves in this predicament is that they use huge amounts of *fixed* capital - wide-body jets go for $100 million each and can't be readily liquidated. They also depend on a skilled labor force. The two problems can exacerbate each other. Since airlines cannot afford to let planes sit idle, they can ill suffer strikes. That makes their unions unusually powerful. ... [Comparison with other industries with high fixed costs like steel but replaceable workers or skilled works but little fixed capital as with Microsoft]...Airline pilots (and mechanics too) are not so replaceable. Stringent safety codes strengthen unions further by introducing stickiness into the rules that govern hiring and firing..." An interested related point made later is that "Pilots make good money but lack the free agency of other professionals. If a United pilot moves to Delta or American, he loses his seniority and most of his pay. This makes him utterly dependent on the union - and makes the union a potent force." Alex P.S. A recent piece in Wired (Mar 2002 issue) on the much lower costs of deregulated and de-unionized airlines in Europe is a good companion piece (not online yet but later this month will be available at http://www.wired.com/wired/archive/10.03/). Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED]
RE: Airlines/ Moral Hazard
On a practical matter, when such tragic disasters strike, the federal government *wants* to get involved; at least in part to show how important it is to keep them around. Each and every bailout (Long Term Capital Finance?) increases the moral hazard. I think Chapter 11 should be enough, but politically, now, it isn't. Government money because a) the airlines did not provide enough security themselves, and/or b) the airlines were underinsured, are both terrible, and are sure to lead to pork snort requests from others. Government money to support the weakest competitors, and avoid too much concentration, is a much better reason, but may still be insufficient--SouthWest Airlines proves that the long term barriers to entry are not TOO high in the air industry. Is airline security a government (fed or otherwise) function? Possibly some. If so, then gov't money due to gov't mistakes is clearly reasonable. However, the moral hazard issue remains. Dear John, does Cato (or anybody) have any policy recommendations about "conditionality" of bailout aid to reduce moral hazard? In the IMF and World Bank development debates, conditionality seems a reasonable, athough controversial subject. I would suggest (some of) the following: a) offer the aid as a "package" to individual airlines, which can take it or leave it. b) include pay reductions, especially for top executives, as part of the conditions (eg 5% of income > $25k/year [approx US avg], 10% of income > $100k/yr) c) "give" the aid as a special loan, to be repaid: 1) at a minimum, 5% of total revenue, to go to pay the loan (optionally more) 2) give 50% tax credits, carry-forwardable, on such repayments 3) put a commercial rate on the loan (previous year's avg rate for all credit?) (prime rate + 3%?) (fed rate + 5%?) Such an emergency aid package would likely reduce the desire of other porkers to ask for it--the above is, in some sense, a standard-semi Chapter 11 workout, based on a fast emergency government loan at commercial rates. I suggest this due to my thought that most requests for government money are requests for "other people's money", while the tax credit element and loan element above start to change this package to "one's one money, with time delays". So, in order to avoid my more boring money grubbing work, I'd be interested in hearing about recommendations that allow the government to "offer" to do something, but reduce what they actually do to things that, in theory, the market could do. As I write this, I can imagine a higher interest rate, that would then allow the gov't to offload the financing onto private banks. Thanks, Tom Grey -Original Message- From: jsamples [mailto:[EMAIL PROTECTED]] Sent: Wednesday, September 26, 2001 8:38 PM To: [EMAIL PROTECTED] Subject: RE: Airlines As I understand it, the government intervened to provide insurance for the airlines. Prior to September 11, each plane was insured for $1.5 billion. After September 11, insurance companies were willing to offer only about one-third of that sum for each plane. The market for risk would have shut down the airlines had the government not provided the insurance. Some part of the $15 billion bailout is that insurance (which the government is still providing for next couple of weeks or so). The insurance companies now say annual premiums for airlines will go up in the range of $1.5 to 3 billion. Leaders of some of the companies are now arguing that the federal government should pay part of those premiums. Just after September 11, airline executives estimated that the government shutdown of airports cost them $300 million each day for four days. They initially requested $24 billion in public assistance and settled for $15 billion. The National Journal reported that even K Street types were astonished by their chutzpah. John Samples Cato Institute
RE: Airlines
I did forget to mention the loan guarantees. I believe they are in there, Bill, as part of the $15 billion. A lot of what the feds do now is guarantee loans; the aggregate numbers are quite striking. A young scholar in Yale's polisci department wrote a book on this a couple years ago. I need to take a look at that. The airlines case seems pretty tough to me in some ways. A lot of my colleagues here support the feds compensating the airlines for having closed the airports for four days. All other losses would be normal business risk. Yet, I note that most investment banks have departments doing country risk analysis and predicting the risk of events like expropriation and lesser interventions like closing the airports. Should we assume that investors in domestic companies don't take account of that risk? If they do, the share price prior to September 11 reflected that risk and the government subsidy after September 11 is simply a windfall to the owners of the airlines. It's also hard to argue, I think, that the government had a more accurate view of the risk of flying after September 11 than the insurers did for the usual reasons one prefers private choice over collective choice in risk assessment. The clear implication of that,however, is that the airlines should and would have been shut down until some private firm was willing to offer $1.5 billion in insurance for each flight (they did return to the market last week but after the government bailout so we don't know what would have happened without the Congressional action). Another implication of this would be that by intervening and obstensibly reducing the costs of the events of September 11 (bankruptcies, reduced economic activity and so on), the feds have made it marginally more likely that something like September 11 will happen again. John Samples Cato Institute -Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]]On Behalf Of William Dickens Sent: Wednesday, September 26, 2001 3:53 PM To: [EMAIL PROTECTED] Subject: RE: Airlines Hi John, Is this all there was to the bailout? At least at one point there was talk of loan guarantees. Did they not make it into the final package? - - Bill >>> [EMAIL PROTECTED] 09/26/01 02:37PM >>> As I understand it, the government intervened to provide insurance for the airlines. Prior to September 11, each plane was insured for $1.5 billion. After September 11, insurance companies were willing to offer only about one-third of that sum for each plane. The market for risk would have shut down the airlines had the government not provided the insurance. Some part of the $15 billion bailout is that insurance (which the government is still providing for next couple of weeks or so). The insurance companies now say annual premiums for airlines will go up in the range of $1.5 to 3 billion. Leaders of some of the companies are now arguing that the federal government should pay part of those premiums. Just after September 11, airline executives estimated that the government shutdown of airports cost them $300 million each day for four days. They initially requested $24 billion in public assistance and settled for $15 billion. The National Journal reported that even K Street types were astonished by their chutzpah. John Samples Cato Institute
Re: Airlines
On 26 Sep 2001 09:15:16 -0700, Alex Tabarrok wrote: > The President has authorized some 15 billion dollars to bail out the > airlines and now travel agents and a host of others are asking for help > also. Question: Is there any economic defense for this sort of action? The gouvernment has mandated extra security measures that cost money, but do nothing towards reducing the risks and increase hassle to travelers (and thus decrease value). So you could defend that some compensation is justified. But 15 billion? Is this a record in rent seeking by single industry? As to the costs of higher insurance premiums: Airlines in Europe are already passing them on the the travelling public, at around 10$ per flight. I guess it will spell the end for the extremely low budget companies like Easyjet... Krist
RE: Airlines
If the government is responsible for airline defence and thinks "private capital markets" who could "provide the bailouts in terms of loans" are overestimating the risks well... Basically the government is in the best position to know the risks, but can't be trusted to state those risks honestly for political reasons. They can also respond quickly for political reasons. However this is merely an arguement for the government acting as a temporary insurer at what it guesses is a reasonable rate. Smoothing out market risk from a position of knowledge/responsibility. Risky political interference I know but a lot better than cash grant bailouts. You could also assume that the bailouts are a preemptive settlement for damages for government incompetence. If they don't say that though, it looks suspiciously like corporate welfare... Honestly I think it is a case of corporate welfare and lack of faith in the stability of capitalism. Capital risks are assessed by humans who are often known to panic and act with the herd. The problem is none of this is admitted by government, so stabilising is mixed in with welfare for the big boys. -Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]]On Behalf Of William Dickens Sent: Thursday, 27 September 2001 4:03 AM To: [EMAIL PROTECTED] Subject: Re: Airlines The argument would have to be that the problem isn't a permanent but a temporary reduction in demand. That that temporary reduction may make otherwise viable businesses insolvent and lead to their dissolution and that that will result in the inefficient destruction of their fixed assets that will have to be reconstructed once demand rebounds. Such arguments raise the usual questions of why private capital markets can't provide the bailouts in terms of loans or why chapter 11 bankruptcy isn't an adequate solution to the problem of preserving the business' assets. It also raises the question of how to decide when governments should do this sort of thing and when they shouldn't and how to avoid the moral hazard problems involved with bailouts. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens >>> [EMAIL PROTECTED] 09/26/01 12:15PM >>> The President has authorized some 15 billion dollars to bail out the airlines and now travel agents and a host of others are asking for help also. Question: Is there any economic defense for this sort of action? After all, if the demand for air travel has fallen then isn't the optimal response to reallocate resources from the airline and related travel industries into other industries? Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED] _ Do You Yahoo!? Get your free @yahoo.com address at http://mail.yahoo.com
Re: Airlines
Title: Re: Airlines I watched discussion of this on C-Span last night, and I believe the politicians said there would be a deductable. There is also, I would think, something of a moral hazard issue in compensating the airlines following a tragedy that was caused, at least in part, by the failure of their safety policies or lack thereof, is there not? Bryan Caplan <[EMAIL PROTECTED]> wrote: Alex Tabarrok wrote: > > The President has authorized some 15 billion dollars to bail out the > airlines and now travel agents and a host of others are asking for help > also. Question: Is there any economic defense for this sort of action? > After all, if the demand for air travel has fallen then isn't the > optimal response to reallocate resources from the airline and related > travel industries into other industries? Especially when the negative externality of flying has been shown to be far bigger than anyone imagined! -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] "Familiar as the voice of the mind is to each, the highest merit we ascribe to Moses, Plato, and Milton is, that they set at naught books and traditions, and spoke not what men but w! hat *they* thought. A man should learn to detect and watch that gleam of light which flashes across his mind from within, more than the lustre of the firmament of bards and sages." --Ralph Waldo Emerson, "Self-Reliance" Do You Yahoo!? Get email alerts & NEW webcam video instant messaging with Yahoo! Messenger.
Re: Airlines
I would agree with Fabio that airlines are probably necessary for a modern economy. But how many airlines there should be, or the availability of money to airlines, are exactly the kinds of questions that it is unwise for government to judge. According to microeconomics, the optimal number of airlines is the number at which there is neither a consumer who wishes to fly at the effective price but is unable to, nor a producer who wishes to schedule a flight but is unable to book it. This is exactly what will happen under a free market. If demand for air travel has truly decreased permanently, a free market would soon adjust the number of flights -- and the number of airlines -- to compensate. Some airlines will go out of business in the process; this is called capitalism. Subsidies to airlines seem to make sense only if the government's public policy objective is to maintain a number of airlines higher than that at the market equilibrium. This keeps prices low and puts more people in the air, but from an efficiency standpoint it is a decline; with or without subsidies, everyone who wants to fly at the effective price is flying, so the only difference is that taxes increase with subsidies. Yet there is perhaps a final, less obvious reason for the subsidies. Even prior to the World Trade Center disaster, the structure of the airline industry was somewhat oligopolistic. (I do not know the HHI for this industry, unfortunately.) If a free market is allowed to prevail even with decreased demand for air travel, the weakest of the existing airlines would be culled, leaving only a few "titans" who might be able to form a cartel. Perhaps the subsidies are there to support a perfectly competitive market for airlines? (I am not an economist; in fact, I'm a high school student. I would value any feedback any other members of the group would like to offer.) --Brian Auriti
Re: Airlines
>From: Bryan Caplan <[EMAIL PROTECTED]> >Reply-To: [EMAIL PROTECTED] >To: [EMAIL PROTECTED] >Subject: Re: Airlines >Date: Wed, 26 Sep 2001 15:06:00 -0400 > >John A. Viator wrote: > > > > My (non-economist) take on this: > > > > The federal government has an obligation to step in where the > > assumptions of a free market fall short in practice. I think a free > > market model assumes that goods can be transported fairly easily. > >Not at all - transportation costs are just like any other cost. I was just about to step in and say something to that effect, but then I thought, "No, wait, Bryan Caplan's the guy who wrote 'Why I'm Not An Austrian Economist'. He'd probably pick a fight with me if I disagreed." Fortunately, my guess was in error. I think Mr. Viator actually has something here - isn't one of the neo-classical assumptions about perfect competition (a prerequisite to a free market) that there aren't any exploitable transportation bottlenecks (e.g., a mother lode of natural resources that one and only one firm can access)? Or am I making a strawman here? -JP >-- > Prof. Bryan Caplan >Department of Economics George Mason University > http://www.bcaplan.com [EMAIL PROTECTED] > > "Familiar as the voice of the mind is to each, the highest merit we >ascribe to Moses, Plato, and Milton is, that they set at naught >books and traditions, and spoke not what men but what *they* >thought. A man should learn to detect and watch that gleam of >light which flashes across his mind from within, more than the >lustre of the firmament of bards and sages." > --Ralph Waldo Emerson, "Self-Reliance" _ Get your FREE download of MSN Explorer at http://explorer.msn.com/intl.asp
RE: Airlines
Hi John, Is this all there was to the bailout? At least at one point there was talk of loan guarantees. Did they not make it into the final package? - - Bill >>> [EMAIL PROTECTED] 09/26/01 02:37PM >>> As I understand it, the government intervened to provide insurance for the airlines. Prior to September 11, each plane was insured for $1.5 billion. After September 11, insurance companies were willing to offer only about one-third of that sum for each plane. The market for risk would have shut down the airlines had the government not provided the insurance. Some part of the $15 billion bailout is that insurance (which the government is still providing for next couple of weeks or so). The insurance companies now say annual premiums for airlines will go up in the range of $1.5 to 3 billion. Leaders of some of the companies are now arguing that the federal government should pay part of those premiums. Just after September 11, airline executives estimated that the government shutdown of airports cost them $300 million each day for four days. They initially requested $24 billion in public assistance and settled for $15 billion. The National Journal reported that even K Street types were astonished by their chutzpah. John Samples Cato Institute
Re: Airlines
There is also, I would think, something of a moral hazard issue in compensating the airlines following a tragedy that was caused, at least in part, by the failure of their safety policies or lack thereof, is there not? Bryan Caplan <[EMAIL PROTECTED]> wrote: Alex Tabarrok wrote:> > The President has authorized some 15 billion dollars to bail out the> airlines and now travel agents and a host of others are asking for help> also. Question: Is there any economic defense for this sort of action?> After all, if the demand for air travel has fallen then isn't the> optimal response to reallocate resources from the airline and related> travel industries into other industries?Especially when the negative externality of flying has been shown to befar bigger than anyone imagined! -- Prof. Bryan Caplan Department of Economics George Mason Universityhttp://www.bcaplan.com [EMAIL PROTECTED]"Familiar as the voice of the mind is to each, the highest merit we ascribe to Moses, Plato, and Milton is, that they set at naught books and traditions, and spoke not what men but w! hat *they* thought. A man should learn to detect and watch that gleam of light which flashes across his mind from within, more than the lustre of the firmament of bards and sages." --Ralph Waldo Emerson, "Self-Reliance"Do You Yahoo!? Get email alerts & NEW webcam video instant messaging with Yahoo! Messenger.
RE: Airlines
As I understand it, the government intervened to provide insurance for the airlines. Prior to September 11, each plane was insured for $1.5 billion. After September 11, insurance companies were willing to offer only about one-third of that sum for each plane. The market for risk would have shut down the airlines had the government not provided the insurance. Some part of the $15 billion bailout is that insurance (which the government is still providing for next couple of weeks or so). The insurance companies now say annual premiums for airlines will go up in the range of $1.5 to 3 billion. Leaders of some of the companies are now arguing that the federal government should pay part of those premiums. Just after September 11, airline executives estimated that the government shutdown of airports cost them $300 million each day for four days. They initially requested $24 billion in public assistance and settled for $15 billion. The National Journal reported that even K Street types were astonished by their chutzpah. John Samples Cato Institute
Re: Airlines
John A. Viator wrote: > > My (non-economist) take on this: > > The federal government has an obligation to step in where the > assumptions of a free market fall short in practice. I think a free > market model assumes that goods can be transported fairly easily. Not at all - transportation costs are just like any other cost. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] "Familiar as the voice of the mind is to each, the highest merit we ascribe to Moses, Plato, and Milton is, that they set at naught books and traditions, and spoke not what men but what *they* thought. A man should learn to detect and watch that gleam of light which flashes across his mind from within, more than the lustre of the firmament of bards and sages." --Ralph Waldo Emerson, "Self-Reliance"
Re: Airlines
Couldn't one argue that airlines are similar to roads, telephones and other services necessary for a modern economy? Thus, the gov't might be justified in maintaining transportation in order to promote more general well being. You then sacrifice short term optima for long term benefits. Fabio On Wed, 26 Sep 2001, Alex Tabarrok wrote: > The President has authorized some 15 billion dollars to bail out the > airlines and now travel agents and a host of others are asking for help > also. Question: Is there any economic defense for this sort of action? > After all, if the demand for air travel has fallen then isn't the > optimal response to reallocate resources from the airline and related > travel industries into other industries? > > Alex > -- > Dr. Alexander Tabarrok > Vice President and Director of Research > The Independent Institute > 100 Swan Way > Oakland, CA, 94621-1428 > Tel. 510-632-1366, FAX: 510-568-6040 > Email: [EMAIL PROTECTED] >
Re: Airlines
Alex you are right, there is no economic defense, the bailout was an abomination. If the air industry expects a long-term secular decline in air travel, then of course there should be layoffs and consolidation, and nothing should be done to prevent that. If it is merely a question of a short-term liquidity crisis, the airlines should turn to the money markets. Either way, there is no justification for government intervention.
Re: Airlines
The argument would have to be that the problem isn't a permanent but a temporary reduction in demand. That that temporary reduction may make otherwise viable businesses insolvent and lead to their dissolution and that that will result in the inefficient destruction of their fixed assets that will have to be reconstructed once demand rebounds. Such arguments raise the usual questions of why private capital markets can't provide the bailouts in terms of loans or why chapter 11 bankruptcy isn't an adequate solution to the problem of preserving the business' assets. It also raises the question of how to decide when governments should do this sort of thing and when they shouldn't and how to avoid the moral hazard problems involved with bailouts. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens >>> [EMAIL PROTECTED] 09/26/01 12:15PM >>> The President has authorized some 15 billion dollars to bail out the airlines and now travel agents and a host of others are asking for help also. Question: Is there any economic defense for this sort of action? After all, if the demand for air travel has fallen then isn't the optimal response to reallocate resources from the airline and related travel industries into other industries? Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED]
Re: Airlines
Alex Tabarrok wrote: > > The President has authorized some 15 billion dollars to bail out the > airlines and now travel agents and a host of others are asking for help > also. Question: Is there any economic defense for this sort of action? > After all, if the demand for air travel has fallen then isn't the > optimal response to reallocate resources from the airline and related > travel industries into other industries? Especially when the negative externality of flying has been shown to be far bigger than anyone imagined! -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] "Familiar as the voice of the mind is to each, the highest merit we ascribe to Moses, Plato, and Milton is, that they set at naught books and traditions, and spoke not what men but what *they* thought. A man should learn to detect and watch that gleam of light which flashes across his mind from within, more than the lustre of the firmament of bards and sages." --Ralph Waldo Emerson, "Self-Reliance"
Re: Airlines
My (non-economist) take on this: The federal government has an obligation to step in where the assumptions of a free market fall short in practice. I think a free market model assumes that goods can be transported fairly easily. Additionally, air travel benefits information exchange (Fedex, business travel, etc.), which is needed for a simple free market model. Therefore, I believe it is a legitimate function of the federal government to ensure that the airlines remain viable. I'm not so sure about travel agents and others, though. John ps - I was wondering, regarding airline travel, did the demand fall or did the cost increase? If someone usually travels on a short commuter flight from, say, Portland to Santa Clara (about 1.5 hours) for face to face business dealings, that person may think that the benefit of face to face v. teleconferencing or email is worth the inconvenience of air travel, though barely. If an additional factor of fear or uneasiness is added to the cost of travel, the cost is greater than the benefit and, in an aggregate sense, the quantity of airline travel demanded decreases. Is this correct economic thinking? > The President has authorized some 15 billion dollars to bail out the >airlines and now travel agents and a host of others are asking for help >also. Question: Is there any economic defense for this sort of action? >After all, if the demand for air travel has fallen then isn't the >optimal response to reallocate resources from the airline and related >travel industries into other industries? > >Alex >-- >Dr. Alexander Tabarrok >Vice President and Director of Research >The Independent Institute >100 Swan Way >Oakland, CA, 94621-1428 >Tel. 510-632-1366, FAX: 510-568-6040 >Email: [EMAIL PROTECTED] -- John A. Viator, Ph.D. Beckman Laser Institute and Medical Clinic 1002 Health Sciences Road East University of California, Irvine Irvine, CA 92612 Email: [EMAIL PROTECTED] Phone: 949-824-3754 Fax: 949-824-6969
Airlines
The President has authorized some 15 billion dollars to bail out the airlines and now travel agents and a host of others are asking for help also. Question: Is there any economic defense for this sort of action? After all, if the demand for air travel has fallen then isn't the optimal response to reallocate resources from the airline and related travel industries into other industries? Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED]
