May 5, 2003

May 5, 2003 | Commentary on Regulation

Airline Bailouts II: This Approach Won't Fly

As U.S troops rushed into Baghdad last month, American politicians rushed toward a very different objective: Bailing out the ailing airline industry.

Hard hit by a quartet of calamities -- recession, terrorism, war and SARS -- airline executives warned of financial catastrophe. Congress quickly responded with aid worth some $3.1 billion, the second airline aid package in two years.

But the money will do little to solve the long-term problems of the airline industry -- and could actually make them worse.

Airline executives' despair was palpable when military action commenced in Iraq. Passenger levels dropped 10 percent as the war began, and thanks to SARS, have yet to recover. A flock of major airlines, led by American, teeter on the edge of bankruptcy.

Even before the first shot was fired, airlines were asking Congress for help, warning of chaos in air transportation, loss of service, and even eventual nationalization of the industry. The argument triggered an almost reflexive political instinct to "do something" for the industry.

Yet merely propping up the status quo is the one thing that certainly would hurt airlines and their consumers. Almost all observers agree this is an industry in need of change -- change in response to the challenges of the post-9/11 era and to competitive challenges that pre-date 9/11. The industry needs to deal with the reality of fewer passengers, and that means cutting excess capacity.

More fundamentally, the old-line carriers must respond to economic challenges from low-cost, innovative competitors such as Southwest and Jet Blue. Such discount lines, once themselves discounted by the experts, have actually prospered over the past two years, eating up market share like the 7th Cavalry ate up desert. The result has been tremendous pressure on the old-line carriers -- independent of Saddam and SARS -- to trim costs, improve systems, and just get better. Policymakers should cheer this process, not try to stop it.

This could mean more airline bankruptcies - even with restructuring, for instance, American isn't yet out of the woods. But bankruptcy isn't an enemy of consumer welfare. The planes don't disappear. Instead, the process helps troubled companies continue operating while they reform (as shown by USAir's re-emergence from bankruptcy), or to liquidate in an orderly manner.

None of this is news to Washington policy-makers, especially after they saw the struggle to dispense funds from the 2001 bailout devolve into an intra-industry food fight. Aware of these criticisms, airlines began emphasizing the government's role in their hardship. Specifically, they targeted the $2.50 per flight segment security fee imposed on passengers to fund the Transportation Security Administration (TSA). Instead of the broad support offered in 2001, the bulk of this year's aid consists of temporary relief from these fees. Why, airlines ask, should they shoulder the cost of security when most businesses receive police protection without charge? The fee, they argue, is simply a tax.

This argument is an appealing one, especially to a Republican Congress more disposed to tax cuts than to subsidies. Yet it too is flawed. Most police costs are supported by the general taxpayer simply because there's no way to attribute the cost. If a policeman is walking a beat in a city, it's impossible to say who will benefit at a particular time. Not so for airline travel. Fair or not (and terrorism is never fair) airline security costs stem from -- and primarily benefit -- airlines and their passengers. Shifting those costs to the general taxpayer would simply hide the real costs of air travel from the consumer, distorting their economic choices.

But, many argue, isn't the cost of security, as administered by the TSA, too high? The agency frequently has been criticized for being wasteful, most recently by the General Accounting Office. Why should airlines pay for this waste? But the answer isn't to shift the burden to the general taxpayer -- it is to reduce the waste and reform the system. Relieving airlines and their passengers of these fees would only make the cost of waste less visible, and reduce prospects for reform.

Despite passage of the aid package last month, these issues are unlikely to go away. The airlines still are troubled, and the long-term status of security fees is still undecided. But rather than another panicked aid package, Congress should act now -- starting with a review of TSA -- on real, sensible reforms in air transportation.


-James L. Gattuso is a research fellow in regulatory policy at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

Distributed nationally on the Knight-Ridder Tribune wire