Shame as a public policy tool

Today I’m reading Grounded: Frank Lorenzo and the Destruction of Eastern Airlines, an on-the-ground account written in 1990 by reporter Aaron Bernstein about the events surrounding Lorenzo’s ill-fated ownership of Eastern in the ’80s. (FYI: Bernstein takes a clear pro-labor angle that should be noted.) In his discussion of military man, former astronaut, and Eastern CEO Frank Borman’s actions preceding the sale, many of those whom Bernstein interviews thought that Borman was too proud to let his airline go into bankruptcy or sell it to corporate suitor Frank Lorenzo. “Borman had no desire to sell the company,” writes Bernstein. “Failure would be a bitter end to what had been a successful climb to the top of the corporate ladder.” But Borman ends up running to Lorenzo instead of buckling to union pressure.

Lorenzo seemed to have no such scruples, which led him to sell off most of Eastern’s most profitable assets, wage a demoralizing battle with the airline’s unions, leading to a disastrous strike and eventual shutdown in 1991. Lorenzo dragged capitalism through the mud, wrote William F. Buckley at the time, but “[t]here is no way a law could be written, to the effect that chief executives ought not to profiteer from the distress of companies they manage.” What remedy is left? “Some general manifestation of disdain for the abusers of capitalism is appropriate,” Buckley writes. That is to say, we should shame corporate officers who behave this way. Shame once might have been an effective tool for penalizing actually corrupt businessmen — which Lorenzo was not — but in the airline world, passengers seem not to care about honorable behavior by executives as long as they get a cheap flight. Rare is the instance in which an executive resigns in disgrace, as American Airlines’ Donald Carty did in 2003 during an attempt to extract concessions from flight attendants while offering top executives cash bonuses. (Carty did not leave the industry; he is currently chairman of Virgin America.)

I’ve written before about the decreasing stigma of bankruptcy. If the law is too heavy a cudgel to ensure upright behavior by airline bosses, and if bankruptcy judges see fit to allow airlines to shred contracts under what Herb Kelleher calls the “health spa” of Chapter 11, then we will have no choice but to shame the executives into doing the right thing. Does the American public have the moral stamina?

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“United — $25 seatbelt rental fee for passengers who didn’t bring their own”

See this and other revenue-generating strategies airlines might employ in this week’s edition of The Onion.

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Don’t kill the short hop

Ryan Avent writes:

I like the comment that short flights congest airports as much as long ones. I’m of the opinion that a carbon pricing scheme would give a boost to rail travel over both driving and short-haul flying. But a potentially more important factor in some regions might be the runway congestion charges under consideration. I suspect that auctioned spots would tend to go toward long-distance flights, for which there are few good substitutes (question to the gallery: what are the high margin flights — where do airlines make their money?). Were that the case, demand for regional rail should significantly increase.

You’ve read a lot in the past few years about airlines “shifting” to “more profitable” overseas routes, but that doesn’t quite express what’s going on. Airlines are maximizing their yields, and business-traveler-oriented long-haul international flights often have better yields than leisure-class runs to Vegas or Orlando. But the long-hauls are not necessarily high-yielding on their own, but because they access feed traffic from lots of smaller markets.

Imagine that there are 100 passengers in Washington, DC, who want to fly to Paris.

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United-US Airways talks break down: report

AP is reporting that merger talks between United and US Airways have broken down. At least one disaster is now averted.

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UK Competition Commission leaning toward breaking up BAA; will Heathrow be set free?

The UK Competition Commission (CC) will likely recommend that BAA Ltd., the commercial owner-operator of London’s three primary airports, be forced to sell at least two of them. The CC signals this strong leaning in its “emerging thinking” document published on April 22. The CC is in the middle of an investigation of whether BAA’s ownership of seven UK airports, including the three largest in the London area and the two largest in Scotland, creates adverse effects on competition. It took up the investigation in spring 2007 based on a referral from the Office of Fair Trading.

First, some background: several British airports were once run by the British Airports Authority. In 1986, as part of the Thatcher government’s privatization program, the agency was spun off as BAA plc (today BAA Ltd.) The government held a “golden share” in the firm until 2003, when the European Union ruled against it; in 2006, BAA was bought by Ferrovial Group, a major European airport infrastructure business. BAA both owns and operates seven British airports: Heathrow, Gatwick, and Stansted near London; Southampton; and Edinburgh, Aberdeen, and Glasgow in Scotland. It’s gotten in trouble lately for a failure to keep up with demand at Heathrow, with needed new terminals and runways decades from completion. BAA was further wounded by the Terminal 5 opening debacle at Heathrow, and it has been slowly bleeding customers–airlines and passengers–to much more up-to-date, larger, and expansible airports on the European continent. BAA’s finances are complicated by the fact that its landing fees are capped by regulation, which is why BAA invests so much in retail and other profitable commercial activity, as you’ll see if you ever wander around a BAA terminal.

BAA’s four airports in the southeast of England (especially Heathrow, Gatwick, and Stansted) account for 91 percent of traffic. In its document, the CC considers the extent to which common ownership affects competition, including its affect on responsiveness to customers, infrastructure investment, substitutability of demand, regulation, and capacity constraints and development.

What follows are the highlights from the CC’s 170-page report, with special reference to the London airports:

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Daily departures, while I was out edition

I’ve spent a long weekend with family out of town, but it’s good to be back. Here’s what I missed:

• American Airlines announced a plan to reduce capacity. The same pundits who inveigh against aviation’s carbon footprint worry about the effect of AA’s move on consumers. Blogger Megan McArdle: “Either we get upset about doing less driving and flying, or we get upset about climate change. We cannot simultaneously fix both problems.” [Asymmetrical Information]
• Silverjet, one of two remaining all-business-class carriers across the Atlantic, has suspended trading as a desperately needed cash infusion fell through. Start the death watch. [ATW Daily News]
• Senator Max Baucus (D-Mont.) tries to throw a regulatory monkey wrench into the Delta-Northwest merger. [BNET Travel Industry]
• Singapore’s renowned Changi Airport may join the consortium proposing to build Lisbon’s new international airport [Forbes]
• The Joint Economic Committee reports that air travel delays cost more than $40 billion. As usual, the Transportation Department is rolling out feel-good but ineffective measures to reduce delays this summer. [AP/MSNBC]
• Berlin’s storied Templehof Airport, the site of the Berlin Airlift, is slated to close soon. [NYT via Towers and Tarmacs]
• How do you build a new airport terminal for less than $10 million? Find out in Benet Wilson’s new podcast series. [Towers and Tarmacs]

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Don’t know much about geography. . .

In only the most marginally aviation-related news, the final round of the twentieth annual National Geographic Bee will be held today. In honor of the occasion, I have an article on American.com about the Bee and the importance of geography education.

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Rethinking small community air service

In a post several months ago, I wrote that the rigid Essential Air Service crowds out better, more flexible ways of funding credible and realistic service to small communities, such as the Small Community Air Service Development (SCASD) program. A year ago, the Government Accountability Office reported that although it could not sufficiently evaluate SCASD because it was such a young program, but based on the completed grants they did evaluate, “SCASD grants show promise and warrant further evaluation.” Of twenty-three grants they evaluated, fourteen saw improvements through the end of the grant period and eleven saw these improvements become self-sustaining after the end of the grant period. This suggests that a lot of these grants are unworkable from the start, but almost half saw the intended improvements. (Whether these were self-sustaining in the face of spiking jet fuel prices is questionable, but all other things being equal, SCASD wasn’t a total failure.)

In April 2007, the GAO called on the Department of Transportation’s inspector general to conduct a further assessment of SCASD. It has, and the full report is available here. (Thanks to Benet Wilson, whose blog alerted me to it.) The DOT’s picture is more pessimistic. Surveying the stated goals of forty grants, it found that 12.5 percent are canceled before even getting underway, 50 percent fail, 7.5 percent see partial success, and only 30 percent see full success. But while that makes for a nice headline, there are some interesting dynamics in the numbers.

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Slot auctions at Newark, JFK? and more

• The Department of Transportation has announced a plan to “introduce market forces” by auctioning off slots at JFK and Newark airports. (This assumes that the FAA owns the slots, not the Port Authority of New York and New Jersey.) This is a weird decision; it’s privatization by the “little bit pregnant” strategy and it may backfire. [AP/Aviaton.com] See commentary at Travel Industry.
• United and US Airways continue to move toward a risky merger. . . . [Today in the Sky]
• . . . But the US Airways pilots, whose seniority list has not been merged yet with America West’s, are opposed. [ATW Daily News]
• Russia’s first modern jetliner in over a decade took flight today — the Sukhoi SuperJet 100. [Things with Wings]

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Quote of the day

Maybe it’s sex appeal, but there’s something about an airline that drives investors crazy.

–Alfred Kahn

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