There’s No Free Market At America’s Airports

The statistic that shook up business writers around the country is that more than half of domestic passenger seats belong

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 three—Pan Am, Eastern and Braniff—never 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 work—or kinda-sorta work—again. 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 bankruptcy—and 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 customers—mostly farmers furious at the rates they had to pay to move their products to market—reacted by forming cartels to fix freight tariffs, but the cartel members would continually double-cross each other, so that approach didn’t 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 didn’t help that Morgan had no background in transportation and thus didn’t 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, he’d 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 wouldn’t 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 wasn’t so in 1914, when the Wilson administration put the federal government in the road-building business for the first time since Andrew Jackson’s 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, it’s 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 stodgy—it 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 daring—so it was pulled down in the late 1970’s 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 can’t 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., what’s needed is the creation of a public body to oversee, in a general way, all forms of public transportation, air, rail and bus. This isn’t 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 it’s 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 Devil’s Dictionary of Business, just published by Nation Books.

There’s No Free Market At America’s Airports