Government Aid to Airlines Is Just Excess Baggage for Taxpayers

Some commentators are arguing that the airline industry is uniquely incapable of operating profitably and therefore needs government assistance. Yet losses and shakeouts happen periodically in nearly all capital-intensive industries. More subsidies would just divert federal revenue without helping passengers.

In the early 1990s, memory chips were expensive, and chip producers were getting rich. Consequently, many chip makers built new billion-dollar production facilities.

When the expected growth in demand didn’t materialize, producers suffered immense losses, and many entered Chapter 11 bankruptcy. Yet you could still buy memory chips for your PC. Given the firms’ capital investments, the companies were worth more operating than shut down.

Fast-forward five or six years to the U.S. airline industry: Big profits in the mid-to late-1990s led to huge new investments in capital (airplanes and ground facilities), which were followed by a decline in demand (even before, but accelerated by, Sept. 11) that trashed the value of their capital investments.

Companies found themselves on the financial ropes. US Airways is in bankruptcy, United is teetering and others aren’t far behind.

Just as with the chip industry, nearly all these companies are still worth more alive than dead.

Some will have to reorganize under bankruptcy, which is a nice way of saying that shareholders will lose everything and creditors will not get paid all they are owed. One or two airlines may even close their doors, though many airlines have entered Chapter 11 and emerged a year or two later without ever missing a day of operations. Continental has done it twice.

In any case, the U.S. airline industry is not going to shut down. Fewer flights will--and should--operate because demand has declined, but more people are flying now than in any year before 1999, so service cutbacks won’t be large. If some carriers close down, others will move into their profitable routes.

Last September, the industry wrangled a $5-billion cash subsidy from the federal government, arguing that air travel is a backbone of the economy. Indeed it is, but profitable flights would have continued with or without the bailout, whether or not carriers had to file Chapter 11.

The subsidy was essentially a $5-billion gift from taxpayers to airline shareholders.

The money wasn’t for workers or anyone near the Sept. 11 disaster sites. And of all the people affected by Sept. 11, airline shareholders don’t seem to be among the most deserving of government aid. Investors can reduce risk by diversifying their portfolios. Workers, however, can’t diversify their employment.

And airline workers, particularly pilots and mechanics, will be big losers. Since deregulation, they have become virtual (or actual) co-owners of the companies, and their compensation has followed industry profits. (Not the flight attendants, though, because they have so little bargaining power that they earn McDonald’s-level wages in good times and bad.)

A somewhat smaller industry also means some layoffs. But the industry isn’t going to shrink massively.

Employment will shift among carriers. Layoffs by the least-efficient carriers--read US Airways--make front-page news. But hiring by the most efficient--read Southwest--goes unreported.

For travelers, the industry turmoil means downward price pressure because of excess capacity. Just as the plethora of unused fiber optic lines has led to 4-cent-per-minute long-distance rates, those surplus aircraft parked in the Mojave Desert mean discounts for air travelers.

The news for consumers isn’t all good, though.

Airlines are now more likely to give up on thinner routes that they were hoping would turn profitable. You’ll still be able to get from X to Y, but it may not be as convenient.

And, finally, the question on every traveler’s mind: Yes, your frequent-flier miles are safe. Carriers in bankruptcy continue to honor them, and if they get bought by bigger airlines, the miles can become more valuable. Ask anyone who had TWA miles before it was folded into American.

So unless you’re an airline pilot, mechanic or shareholder, cheer up. This isn’t the prettiest part of capitalism, but the industry is going to get through this fine, and there are going to be some great fares along the way.

Of course, if you are a taxpayer, you might wonder why we had to pay $5 billion to get to this point.