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The outbreak and rapid spread of the H1N1 swine influenza virus in Mexico and now the United States puts policymakers and business leaders in a difficult position vis-a-vis air travel. Pandemics exploit all the virtues of the air travel boom of the past few decades — a system that transports people and goods for travel, commerce, and economic opportunity suddenly becomes a primary agent of deadly disease. It’s the downside risk of international economic and cultural integration. Such integration still pays handsome benefits, however, and the risks can be mitigated by a multilateral public health infrastructure poised to go into action.

We are now in a critical moment for U.S. and World Health Organization (WHO) policymakers and the international aviation industry. To declare a pandemic right now and impose travel restrictions (as the U.S. and WHO have not done) might overstate the threat from swine flu and excessively impair travel to Mexico and U.S. border regions. But this outbreak appears to be unusually aggressive, with high mortality, suggesting that policymakers should nip it in the bud regardless of the cost to the travel industry. As the first case was reported in Europe, EU authorities issued travel advisories for the United States and Mexico. The danger to the aviation industry from either an over-aggressive response or from a widespread pandemic is high. In April and May 2003, at the height of the SARS epidemic in Southeast Asia and Canada, air traffic in the Asia-Pacific region dropped 45 and 51 percent, respectively. U.S. carriers with extensive routes in Asia — Northwest and United, especially — also suffered. This is an even worse problem in a recession, in which the prospect of future growth after an epidemic-related contraction is limited.

Part of the problem for policymakers is that U.S. citizens are inexperienced with pandemic response procedures. We are used to frequent and easy travel, not only by air but also locally, for work, school, or recreation. With deadly infectious diseases like smallpox and polio eradicated, we have become lazy. Less than half the number of people for whom the annual flu vaccine is recommended get it. Activists play on fear to spread the unproven belief that ingredients of children’s vaccines can cause autism, and their success in misinforming the public is correlated with a spike in pediatric measles infections (Megan McArdle referred to parents who decline to vaccinate their children as “twee BoBo sociopaths“). Our cities are unaccustomed to quarantines. How would you react to an order to stay indoors except for essential business? Would you obey it? The discipline of disease control is honed over time and cannot be immediately adopted with success. Moreover, the scale of the United States is also unsuitable for a concerted public health response. It’s one thing to isolate SARS in a tiny enclave like Hong Kong (which is extremely vigilant, at any rate) or on an island like Taiwan (unconscionably prohibited by Beijing from receiving WHO support during epidemics, by the way).

Whether or not this swine flu outbreak becomes an epidemic or a pandemic, policymakers and airline industry leaders need to be prepared for the dark side of global integration. Preventing the spread of epidemic diseases should be at the top of any government’s list.

Further reading:

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The Wall Street Journal has a fascinating item today (via the WSJ‘s great new Middle Seat Terminal blog) on the vigorous competition emerging between Moscow’s two main international airports. I’d long read of the older, state-owned Sheremetyevo Airport as a hellish transportation hub with limited services, long lines for immigration, and oft-solicited bribes. Then, according to report Daniel Michaels, it was forced to bring its game when the privately owned Domodedovo Airport renovated a terminal in the 1990s, built a rail link to downtown, and began wooing new airlines — and even carriers that had previously served Sheremetyevo.

Moscow’s airport rivalry highlights a paradox of the global aviation industry: Airlines compete fiercely with each other for customers, but they face many monopolist suppliers, such as air-traffic control systems, fuel distributors and airports. Resulting costs and poor services get passed on to travelers.

Regulators world-wide are starting to tackle the issue — and some see Moscow as a paradigm.

Britain’s competition authority, for example, last year considered breaking up BAA, the company that runs London’s three big airports. In testimony before the regulator, officials from the International Air Transport Association, a trade group, cited Moscow as evidence of the benefits that competition could bring London’s airport system. IATA testified that fees at Moscow’s fast-growing, privately owned Domodedovo Airport are as much as 20% lower than at Sheremetyevo, the state-owned hub of flag carrier Aeroflot.

This echoes a point I’ve made before: we have a relatively competitive airline sector and a relatively uncompetitive airport infrastructure sector.

The article also points out that privatization alone will not bring competition. Consolidating ownership in a single firm, either private (BAA) or public (Port Authority of New York and New Jersey), will not engender competition. One sees more competition (and lower published airport use fees) at the three San Francisco Bay Area airports, each of which are publicly owned by different authorities, than at the three New York area airports. And the case of Moscow confirms this.

But can private airports really work here in the United States? Two fascinating items from Brett Snyder illustrate an experiment in this. Branson, Missouri — a totally retro vacation spot not far from my hometown of Memphis — is building a brand-new airport entirely without federal money. The airport will be entirely privately owned and financed. It’s not just a new terminal project: this is an entirely new airport project — 7,000-foot runway, terminal, tower, general aviation facilities — designed to offer competitive service to low-fare airlines.

The owners of the airport have also kept their construction costs down. Writes Snyder: “To flatten the tops of the mountains, build a 7,000 ft runway, erect a terminal, construct a control tower, and create a 2.5 mile access road with 2 bridges has only cost $155 million. That’s $35 million in equity with the balance in debt. As a comparison, Indianapolis spent $1.1 billion on its new (much larger) terminal and control tower.”

We need more experiments in privatization like Branson, Chicago’s Midway airport, and others here in the United States. Competitive privatization may provide the needed funding for upgrading and maintaining our aviation infrastructure.

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Southwest Airlines chairman, president, and CEO Gary Kelly announces new Southwest service to Minneapolis-St. Paul.

Southwest Airlines chairman, president, and CEO Gary Kelly announces new Southwest service to Minneapolis-St. Paul.

DALLAS — Southwest is well-positioned in tricky times for the airline industry and will launch new service to Minneapolis-St. Paul in March 2009, Southwest Airlines chief Gary Kelly said today. The Twin Cities are the first new Southwest market since 2006, and the first planned service will be nonstop to Chicago’s Midway Airport.

The announcement of expansion comes at a time when the airline industry is contracting. Southwest has been on a cautious and slow expansion track, focusing more on filling in gaps between its current cities than opening new markets. The new service comes after one of the most difficult summers for the airline industry. “It is a wild time” for us, Kelly said. “We’ve got to get our revenues per departure up. . . . Our costs have gone up. I don’t see costs going back down.” Even so, he said, “if you take out fuel, our unit costs are way below the legacy carriers.” (more…)

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DALLAS — Chicago’s Midway Airport is the first major airport in the United States to be privatized. Yesterday it was announced that it had been sold to “a consortium consisting of Citi Infrastructure Investors, YVR Airport Services (a joint venture between Vancouver airport and Citi Infrastructure Investors) and John Hancock Life Insurance,” according to the Financial Times. It will be operated by the Vancouver airport owner. The big surprise, according to Southwest Airlines folks I talked to last night, was how competitive the bidding was in a tight economy. The final price was $2.5 billion, and among the bidders were consortiums including the biggest names in airport infrastructure: Germany’s Hochtief, GECAS, Aeroports de Paris, and Australia’s Macquarie Group. (Southwest folks are very pleased with the opportunity to work with a private owner, and as the largest airline at Midway, they’ve been consulted and involved in the process all along.)

The great thing about this purchase is that it gives us an opportunity to test the performance of a privatized airport in the U.S. market, which is almost entirely under public ownership. It is part of the FAA’s Airport Privatization Pilot Program, and the Midway experience may clear the way for more infrastructure privatization in the future.

Chicago Midway in $2.5bn privatisation deal [FT]

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Ronald Reagan Washington National Airport, like LaGuardia in New York, is well-known for its perimeter restrictions. Flights are limited to 1,250 miles from the airport. This restriction, which dates to 1969, is due in part to noise concerns but more to a kind of industrial policy: the desire to drive long-haul traffic from the desirable, close-in National (almost no big-city airport is as convenient) to the then-new Dulles International Airport in what was then the middle of nowhere in Virginia.

Dulles has since come into its own. It is one of the nation’s busiest airports with room to grow, a hub for United, and a link to dozens of intercontinental destinations. Dulles serves widebodies that National cannot. And more importantly, Dulles is no longer in the middle of nowhere. It’s at the junction of booming Fairfax and Loudoun counties and close to major business centers like Tysons Corner.

There is little risk of Dulles disappearing if the perimeter rules at National are removed. That has been one of John McCain’s biggest aviation policy priorities — and one he has had ample opportunity to pursue from his perch on the Senate Commerce Committee. You might find it funny that a powerful senator would care much about a sole airport’s operations, but you see, members of Congress love to interfere in the management of National, whether it’s mandating that the D.C. Metro system change its signs to reflect the “Reagan” name change or intervening to protect a home-state flight. Congress is perfectly parochial: in March, Senators John Ensign (R-Nev.), Barbara Boxer (D-Calif.), and McCain joined to sponsor legislation allowing airlines with slots at National to use them for beyond-perimeter flights (S 2783). Virginia Representative Jim Moran, a Democrat whose district includes the airport, opposes any such loosening, fearing that noise will increase for his constituents.

McCain has sponsored other legislation with respect to the perimeter. He was responsible for language in the 1999 FAA reauthorization act that permitted twelve round-trip flights outside the perimeter. These slots would have (and eventually did) benefit McCain’s hometown airline, America West. Now US Airways, it continues to serve Phoenix thrice daily from National airport.

In July 2005, McCain introduced S 1599, the “Abolishing Aviation Barriers Act of 2005,” which would have abolished perimeter restrictions at National and prevented enforcement of the perimeter at LaGuardia. The legislation, cosponsored by Ensign and Jon Kyl (R-Ariz.), didn’t get out of committee, but it should have. McCain clearly has parochial interests at stake: direct flights to his home state and benefits for his hometown airline.

Even so, the perimeter rule is out of date. Dulles is not Montreal-Mirabel; there’s no need to protect it anymore. A better way to drive flights to Dulles (or the other competitive D.C.-area airport, Baltimore-Washington) would be to place a strict cap on National flights and raise landing fees to an optimal level.

(Side note on National: if you take the footpath from the Metro station to Terminal A, as I do when I travel for Christmas, you’ll notice a parking lot right next to the terminal entrance with license plates from all over the country and congressional placards in the windshields. That’s right, members of Congress get to park for free in super-convenient spaces. Something to think about next time you take the train or park way out in the econo lot.)

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Wide open skies

Last week, the Financial Times carried an editorial on expanding “open skies” between the U.S. and Europe. After heralding the decline of flag carriers (even more marked with the proposed merger of BA and Iberia), the editors write: “Governments . . . must deal with the remaining obstacles to effective global airline consolidation.”

The US once led the way in deregulating air travel. However, the first European Union-US “open skies” agreement, which came into force in March, showed the Europeans are now keener to open up air traffic. The deal gave US carriers the right to operate flights between EU member states — but the US denied European operators access to its domestic market. After a slow start, Europe can reasonably claim it is now the leading advocate for a freer air-travel industry.

The current open skies negotiations’ top issue is whether the U.S. will allow foreigners to own more than 25 percent of voting stock in U.S. airlines, the quota that nearly scuttled Virgin America. According to the FT,

These absurd anachronisms must be abolished as soon as possible. Removing restrictions on cross-border ownership would pave the way for mergers between US and European carriers. Since the US and the EU dominate the airline industry, it would encourage other countries and regions to abolish their restrictions. Consolidating large airlines adds to their networks and allows significant economies of scale. Confining international operators to operating largely from one continent is ridiculous.

Americans discovered in the 1970s that confining airlines to certain regions or routes was also ridiculous. But what are the obstacles today to opening our airlines to foreign investment and our domestic routes to cabotage (i.e., allowing foreign carriers to operate domestically)? First, U.S. airlines fear competition from rivals that may still enjoy state subsidies or are simply better airlines. There’s no reason to shield them from competition; protectionism is both economically and politically retrograde. Second, small communities fear losing service. What incentive, they say, would Lufthansa have to maintain service to Hibbing, Minn.? Well, Northwest doesn’t have much of an incentive either, apart from a subsidy, so that’s a non-issue. Third, some fear that the U.S. will not be able to exercise sufficient safety oversight over foreign airlines. The solution here is to ensure that the parallel safety institutions in open skies partner countries are equal in quality to the FAA and that all parties are subject to ICAO standards. Furthermore, if we already trust an airline to operate at U.S. airports and over U.S. airspace, there is no reason to block it from a domestic flight. The fourth concern is labor. China is preparing to ramp up its pilot training program to meet domestic needs, but what if a U.S. airline could pump in cheap laborers domiciled in, say, China, who commute to the U.S. to work? At the moment, however, that’s not the situation we’re in. China is instead hiring hundreds of pilots from overseas, as are Middle Eastern, African, and other airlines. The U.S. has become a talent pool for airline pilots. In fact, allowing European cabotage might actually increase the U.S. pilot base, should European airlines wish to take advantage of lower relative labor costs.

Should we expect any tectonic shifts at the open skies negotations?

However, despite acute domestic problems, it is the US government that is standing in the way of a new deal on foreign ownership. Banning foreign takeovers may win populist acclaim, but American consumers should not thank their politicians for shielding their airlines from help from abroad.

Borders in the sky [FT]

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Over lunch today with Daniel Hall, we talked about the nation’s chronic underinvestment in infrastructure (and infrastructure maintenance). One of the key problems is what to do in the in-between time between our current system and our hypothetical, complete infrastructure Nirvana. The best way of allocating scarce transportation space — from highways to runways — is to charge users for the negative externalities caused by their presence at a given point in the transportation system. That is, we need to use congestion pricing.

A rule proposed in the winter by the FAA to permit a sort-of congestion pricing mechanism has just become a regulation “intended to provide greater flexibility to operators of congested airports to use landing fees to provide incentives to air carriers to use the airport at less congested times or to use alternate airports to meet regional air service needs.” So let’s look at the text: (more…)

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