Russ Nelson's blog

Time Magazine reports that the Air Transport Association is suggesting that the airlines might have to be nationalized.

Without having read the report, I can state without fear that nationalizing anything is a bad idea. First, what are the costs that airlines face?

• Landing fees at airports. Before there's any talk of nationalizing, how about dropping landing fees? That wouldn't work very well, because landing fees pay for the operation of the airport, and the airport is typically municipally funded.
• Fuel costs. Well, fuel costs what fuel costs. If fuel is too expensive, and the cost gets carried through into higher ticket prices, and people aren't flying, well, maybe it's because people prefer not to fly.
• Transportation Security Administration. Oops. That's not paid-for by the airlines. It's a cost, but the airlines aren't paying it. You are, even if you don't fly.
• Amortization of airplanes. They had to pay for the airplanes in the first place. That cost, although paid up-front, is accounted for by reducing the value of the airplanes.
• Staff. Staff are pretty highly paid. Hard to use fewer of them, though. They're unionized, but unions are a paper tiger in the face of bankruptcy. "Wanna keep your jobs? Take less money."

Maybe the airlines can trim some costs, maybe not. If they go bankrupt, though, it's because people don't want to fly. They're not going to go bankrupt at the same rate. Some will go bankrupt before others, and stop operating. Other companies may be able to pick up their passengers, and avoid bankruptcy. Nationalizing the whole industry assumes that passengers want every flight to continue -- an assumption based on a price-preference of zero

Another effect that nationalization will have is to reduce the pressure for profitablility. Profitability is price - costs. An airline tries to keep its costs down, because its profits are based on the difference between price of a ticket, and the cost to fly the passenger.

Airlines can be interesting to run because every flight has a large fixed cost. The incremental cost of flying one passenger is very low -- lower now that fewer flights have food. This leads to all sorts of price discrimination as airlines try to over their fixed cost while still giving everyone a price they can afford and are willing to pay. Still, that problem goesn't go away with nationalization.

The problem with nationalization and profitability is that profitability goes out the window. Nobody expects a nationalized business to make money. You lose control over the costs. If every airline has been nationalized, then you lose competition. Without competition, you have no reasonable way to set the price of the tickets.

Nationalization is a major lose, and while airlines and their stockholders would benefit, the flying passengers would lose, and taxpayers would lose more.

posted at: 22:45 | path: /economics | permanent link to this entry