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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Pension protection debate holds up FAA bill

The House’s version of the FAA reauthorization bill has been on the Senate floor for the past few weeks, but it’s currently stalled (although scheduled for a cloture vote today, May 6, which if passed would move it forward for consideration by the full Senate without more amendments or if lost would hold up the bill further). The major hangup in the legislation was an amendment offered by Senators Dick Durbin (D-Ill.) and Kay Bailey Hutchison (R-Tex.).

Here’s the procedural history: on April 29, Senator Jay Rockefeller (D-W.Va.) proposed a set of amendments to the House bill. Section 808, which affected required funding a new accruals under airline pension plans, was a sticking point. Current law calls for airlines to fund their defined-benefit pension plans under the assumption of 8.25 percent growth; the amendment adds to the 8.25 percent rate the requirement to fully fund their pension obligations each year.

On April 30, Durbin and Hutchison introduced an amendment to eliminate Section 808. They argued that it would have disadvantaged their home-state airlines American and Continental, which continue to offer defined-benefit plans as obligated by their contracts. (This is absolutely the right thing to do. A defined-benefit pension is nothing more than deferred compensation. To shred it in bankruptcy is like asking an employee to give back part of his paycheck.) (N.B.: All airlines offer a small defined benefit to pilots, the “b-fund,” because pilots have until now been forced to retire at sixty.) Durbin says that this new, stricter requirement in Section 808 disincentivizes airlines from offering pension benefits and that it especially rewards Delta and Northwest, who slipped out of their pension obligations in bankruptcy and handed off the liability to you and me. “It seems to me instead we encouraged companies to freeze their benefit plans,” said Durbin in remarks on the Senate floor.

Last year, Durbin said,

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Airline regulation revisionists face the wrath of Kahn

Alfred Kahn, the eminent economist and chairman of the Civil Aeronautics Board who oversaw airline deregulation in the 1970s, has published a fascinating new working paper on the AEI Reg-Markets Center site. He addresses the difference between “liberal” and “progressive” views on economic policy and regulation, and he argues that “progressivism” as defined by those who claim its mantle today is not truly progressive — in fact, that it runs against the mainstream liberalism of the mid-twentieth century and its signature economic reforms, such as airline deregulation.

What does Kahn hold up as liberalism? (He is himself a proud liberal, appointed to the CAB by Jimmy Carter and later serving as Carter’s inflation adviser.) “Liberals . . . have historically advocated an open market—private, free enterprise, free trade—economy, with consumers best served by competition among producers and sellers, both internationally and domestically,” he writes. Thus, liberalism in the nineteenth and early twentieth centuries consisted of fighting Republican tariffs, using antitrust laws to break apart monopolies, and supporting free public education and other social services designed to break down heightened income inequality. If this sounds suspiciously like the “progressive” movement of the late nineteenth and early twentieth centuries, you’re not wrong. Kahn argues that liberalism is progressive but that the label “progressive” has been hijacked by radical populists:

As I will argue, partly on the basis of my own experience as a regulator, deregulator, and advisor on inflation to a liberal President, there is nothing either “progressive,” “liberal” or desirable about—successively—populist protectionism, xenophobia, competition-suppressing regulatory cartelization, repression of energy prices, recourse to price controls as a remedy or preventive of inflation or a rush to rein in or hamper the dynamic market processes of technological change—the major areas in which authentic liberals will continue to clash with latter-day “Progressives”.

How does this apply to aviation policy?

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The more things change. . . .

In 1929, Juan Trippe, president of Pan American Airways, was competing for the lucrative airmail contract for Puerto Rico. (At that time, holding an airmail contract was virtually the only way for a U.S. airline to stay in business.) His competitor, West Indian Aerial Express, was already operating on the line and competing for the contract as well. Trippe’s cozy relationship with the postmaster general resulted in him winning the route, and West Indian closed down soon thereafter. “While we were developing an airline in the West Indies,” its owner said, “our competitors had been busy on the much more important job of developing a lobby in Washington.”

It’s still the same old story.

Source: T. A. Heppenheimer, Turbulent Skies: The History of Commercial Aviation (New York: John Wiley, 1995).

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The toxic tango of United and US Airways

Now that Continental has turned down suitor United, the latter is weighing a desperation move: merging with US Airways to create the world’s new largest airline (surpassing Delta-Northwest, assuming that goes through). The airlines may announce a tie-up within the next fortnight. Therefore, it’s time for another Merger Mania 2008 antitrust evaluation.

As you’ll remember from several months ago, there are a few key criteria by which the Justice Department will assess this merger:

• Would a merger result in a significantly more concentrated market?
• Would a merger raises concern about potential adverse competitive effects?
• Would competitors be likely to enter concentrated markets in a timely manner and sufficiently to deter or to counteract the competitive effects of concern?
• What efficiency gains does a merger offer?
• But for a merger, will either party to the transaction would be likely to fail?

United and US Airways are unlike Delta-Northwest and United-Continental in that they are both concentrated in similar parts of the country: the West, the Northeast, and the South. Look at the map below:

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FAAilure of leadership

As I’ve written before, the failure of the FAA in the Southwest Airlines case and elsewhere seems to stem from a personnel problem. The safety inspection chain of command at the agency ignored and abetted an inspector who was consistently neglecting policies and procedures. This is not an indictment of the FAA’s collaborative approach to maintenance inspection. But at the hearing last week, Jim Oberstar and many others (GOP and Dem) criticized the “cozy” relationship between the airlines and the FAA and called for a return to the adversarial approach to regulation. Stung by congressional criticism, the FAA responded by swinging wildly toward austerity, the biggest example of which is this week’s American Airlines fiasco.

A WSJ editorial today pins the blame for the AA cancellations on Oberstar, whom it says the FAA is kowtowing to: “An industry-wide ‘audit’ commenced, and FAA inspectors set about finding something – anything – awry with an aircraft to show Mr. Oberstar and other Congressional overseers that the agency was up to the job of enforcing federal maintenance requirements to the letter.”

The editorial continues:

Mr. Oberstar and other Democrats in Congress would just as soon do to the Food and Drug Administration and the Consumer Product and Safety Commission and other “consumer protection” agencies exactly what they’ve managed to do to the FAA inside of a month’s time. . . .

The FAA fiasco gives us a glimpse of what the world would look like under this reregulatory assault. It would mean that every business misstep, no matter how rare, could potentially result in industry-wide repercussions. Congress would call for more rules and greater enforcement, in the name of “safety.” And regulatory agencies would respond with overkill. The cost of doing business would rise, and consumers would pay for it in higher prices, less convenience or both.

Whether any of this would in fact produce safer toys or food or medicines is beside the point for lawmakers like Mr. Oberstar, whose real goal is to augment Washington’s power vis-a-vis industry. But it’s worth noting that in the case of air travel, safety gains have accompanied less regulation, not more.

We don’t need to change the way the FAA inspects aircraft. We need to change its circle-the-wagons culture and to root out personnel problems. A single Douglas Gawadzinski, left unchallenged, erodes institutional effectiveness. He and his supervisors should be dealt with, all the way up to top safety honcho Nick Sabatini. At the House hearing, Sabatini took “responsibility” for the FAA’s safety lapses. If he means that, he should probably resign. His successor should work not on public appeasement gestures (after this week of cancellations, I suspect the flying public has had it up to here with “safety”) but on sound personnel management.

Flying the Oberstar Skies [WSJ]

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Merger myths busted

Over at Things with Wings, Hubert Horan has a list of merger myths being floated by those with a narrow financial interest in consolidation.

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Between now and not yet in air traffic control

From the comments on this post: there’s a vigorous debate going on about whether some form of congestion would really reduce delays, given that flight schedules (for business travelers at rush or for international flights connecting to overseas hub banks at planned times) are not easily adjusted. But there’s another point I want to bring up: the airline lobby has decried the FAA’s proposed regulation, arguing that congestion pricing “does nothing to fix the primary cause of delays – our nation’s increasingly antiquated air traffic control system.” Molly Feltner at SmarterTravel.com editorializes further: “The government is basically buying time so it can delay the daunting and hugely expensive task of implementing a new air traffic control system.”

Both responses to the regulation proposal are disingenuous. We all know that thanks to the FAA’s incompetence/underfunding/”rebenchmarking” (or whatever else you think of the FAA), the full implementation of the NextGen slate of technologies is years off. (Not that NextGen will be panacea, but it will help.) Neither the ATA for Feltner acknowledge what we’re going to do in the mean time–between now and not yet. Demand for air travel continues to increase, and we want to avoid summer delays like we saw this year. There has got to be an interim strategy. If you think congestion pricing isn’t the answer, you need to offer viable alternatives. We’re waiting.

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Politicians trying to get a piece of the merger action

Ben Mutzabaugh reports that politicians are wasting no time trying to horn in on the merger discussions currently underway at major airlines. The man from my former congressional district, Steve Cohen (pictured at right), has called for join Transportation Committee and Judiciary Committee meetings to address a potential Delta-Northwest tie-up. What Congress really wants to do, of course, is gang up on the airline execs for any number of slight issues. This time last year, the Senate Commerce Committee held a hearing on industry consolidation at which they peppered Delta and US Airways’ CEOs with ill-informed criticisms. Remember, these are the same folks who think it’s a good idea to subsidize flights to Show Low, Arizona. The Senate hearing included these gems:

• “As much as I believe that regulating the airline industry again is necessary, I recognize that we are not going back. . . . However, I am becoming increasingly convinced that some regulation may become an option to make sure small communities are not harmed by consolidation.” —Senator Jay Rockefeller
• “All travelers should expect high-quality service when they buy a ticket and get on an air plane.” —Senator Frank Lautenberg

Last summer, I attended a House subcommittee hearing on flight delays. There was far more hectoring by the members than there was testimony by the witnesses. Should mergers go forward, these hearings will be trials for airline execs and C-SPAN-worthy for the congressmen.

As for the aviation journalists, wonks, and bloggers? I expect these hearings to be great fun.

Politicians try to get out ahead of airline mergers [Today in the Sky]

Photo credit: Office of Congressman Steve Cohen

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Bold ’08 predictions from Mike Boyd

Mike Boyd of the Boyd Group has released his 2008 airline industry predictions. Key among them: $100 oil will drive regional jets (RJs) to the desert graveyards sooner than expected; desperate “low-cost carriers” will need to cut capacity somehow; and “comprehensive network carriers” will need to improve their management of every minute. Boyd’s weekly commentaries, archived here, are always must reading for its boldness and contravention of conventional wisdom. If you recognize his name, it’s because he’s quoted in newspapers all the time. An industry consultant, he openly acknowledges who he’s consulted for when relevant (for example, he’s very bullish on Embraer’s E-Jets, for which his firm consulted). He’s also a spicy writer:

• “The point is that it’s dumb and useless for some Steve Cute in a studio in New York to tell the world that an airport across the continent has ’30 minute delays.'”
• “No question, Senator, that when it comes to the FAA, the Bush Administration is on an intellectual vacation to the Outer Rim.”
• “We’re referring, of course, to Ted, where United got the brilliant idea to simply re-paint some A-320s, make ’em all economy class, put them right back in service, and, poof!, try to convince the public that it was now a ‘low cost’ and ‘low fare’ airline. The assumption, apparently, was that the entire naive flying public had fallen off a turnip truck.”
• “The DOT criticizing airlines for flight delays is like Willie Sutton writing a nasty letter to banks complaining about robberies.”
• “Leslie Neilson beware: Bush is auditioning for your part in the next Scary Movie sequel.”

Boyd was given a blogging gig for the New York Times‘s Jet Lagged in December, which is (sadly) closed. Hopefully, it won’t disappear forever. In the meantime, I’m sure readers will find Boyd’s predictions worthy of discussion.

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