Tuesday, May 06, 2008

Regulation Rage



I sense that the subject of airline regulation will be all the rage this summer. As you all know, this is an incredibly complex subject -- one that doesn’t lend itself to explanation in 800 words or less. Be that as it may, that is how much of this battle will be fought -- in short newspaper and magazine articles.

Under the title of “You have to start somewhere”, let me start with a blog post from Evan Spark’s Aviation Policy Blog. He has a entry today about a paper from none other than Alfred Khan -- the “father” of airline deregulation.

Airline regulation revisionists face the wrath of Kahn

There are literally dozens of paths that we could wander down in this piece but I will pick out two. Quoting Khan:

”That release of price competition produced annual benefits to consumers that Clifford Winston and Stephen Morrison, the foremost academic students of this experience, have estimated at $20 billion a year. And it did this without in any way interrupting the long-term decline in accident rates,... “

Sharp-eyed readers will recognize Mr. Winston’s name from a Wall Street Journal editorial I blasted last month. Resisting the temptation of that path...let’s stick with the money. $20 billion. That is certainly nothing to sneeze at. Whose money is it ? The consumers. That’s all well and good but let’s look at another large figure.

In the United States alone, the industry posted cumulative net losses of over $40 billion from 2001 to 2005, and only in 2006 was it able to return to the black with a total net profit of just over $3 billion “

Here it is, 2008, and two airlines that want to merge lost over $10 billion in one quarter. Whose money was that ? Before you say “the investors” you’d better think about 9/11 bailouts and the Pension Benefit Guarantee Corporation. It’s hard to figure out who is Peter and who is Paul but I’m pretty sure somebody is getting robbed.

I think that will pretty much cover the money angle. What about safety ? I’m not going to let that portion of the quote, “...without in any way interrupting the long-term decline in accident rates,... “ slide. I will kill two birds with one stone though. Read this editorial from John Stossel in the Union-Leader (if you must.)

John Stossel: The FAA doesn't make the skies friendly

I’ve got one call sign that will handle both Mr. Kahn and Mr. Stossel -- Critter 592.

Better known as Valujet Airlines Flight 592.

As my mother used to say, “Stick that in your pipe and smoke it.” See how your “long-term decline” and your “where are the bodies?” taste. There is no better case study to show how deregulation failed. In that the anniversary of its crash into the Everglades is only a few days away (May 11th) I’m pretty sure somebody is going to make that case. “The market” didn’t regulate Valujet (not to mention Frank Lorenzo.) Valujet was a one-airline-safety record wrecker. The Federal government finally regulated them out of business -- but only after the public was outraged and 110 people were dead. “The market” would have happily kept making money on an unsafe airline.

I’ll mention one other thought that has been gnawing at me, in closing. I was once talking to a financial advisor and he was reminiscing about making money in the stock market. He exclaimed, “Give me another Valujet !” He didn’t realize what he was saying and never dreamed that his context (making money) was totally lost on me. He and his clients had made a killing by buying Valujet stock early (and then selling.) When did airlines become financial instruments ? When did the emphasis shift from providing a viable, safe transportation system to making a killing ? I think it was on October 24, 1978.

And I think we’ve lost our way.

Don Brown
May 5, 2006

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