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by James Kwak

New York Times headline: “U.S. Limits Tarmac Waits for Passengers to 3 Hours.” Just imagine …

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Representatives of industry associations reacted negatively to the government action, warning that over-regulation would stifle innovation and harm the competitiveness of U.S. firms. “Requiring each plane to stock up on 0.5-ounce bags of pretzels and peanuts will only hurt passengers,” said Sam Tapscott of the Airline Roundtable. “Airlines will have no choice but to pass the higher costs on to consumers, who will see the price of excessive government intervention in every ticket they buy.”

More worryingly, some industry analysts warned of dire consequences for the U.S. economy. “Forcing airplanes to return to the terminal after three hours will reduce the efficiency of the entire air travel system,” said David Dell’amore, professor of flight operations at Harvard University. “Modern flight management algorithms minimize aggregate wait times and ensure the perfect balance of customer comfort and economic value-added.”

The problem, experts say, is that the government rushed to create new regulations without considering how market forces could solve the problem. “Clearly, if consumers placed a value on a maximum runway wait time, they would have negotiated it with their airlines already,” said Petra Waterman of the American Enterprise Institute. “Since no airline offers such a contract term, we can assume that consumers place no value on it. Besides, if consumers were not happy with the service they receive from airlines, then a new airline would have already entered the market offering shorter wait times.”

Ella Ringding of the U.S. Airlines Association agreed that extended tarmac wait times are a problem, but said that the solution should be left to the industry. “The U.S. Airlines Association takes very seriously any issues that reduce the satisfaction of our customers,” she said. “We have drafted a model code of conduct for all of our members to address this problem. According to the model code, airlines should notify passengers whenever they happen to be on a flight that has been waiting on the tarmac for more than three hours, and should repeat that notification every hour. We believe that by providing sufficient disclosure to our customers, they will be able to make the air travel choices that best suit their individual needs.”

The airlines have succeeded in convincing major non-airline companies to take their side. Buddy Banker, a managing director in Citigroup’s investment banking division, opposed additional government regulation in recent testimony before Congress. “Efficient air travel is the foundation on which the health of the U.S. economy rests,” he said. “If American companies cannot rely on an air transport system that is free of meddling from the government, we will be at a competitive disadvantage relative to companies in Europe, where airlines are free to strand their passengers for over three hours. We can just wave millions of jobs good-bye, and soon we’ll all be speaking Chinese.”

Muffy McDonnell, Senate minority leader, promised a bitter fight in Congress. “This is just the latest step by the jackbooted thugs in the Obama Administration in their plan to bring socialism to the United States, and we’re not going to take it lying down,” she said at a press conference. “The next thing you know, people won’t be able to bring guns onto planes.”

However, not everyone is upset with the new regulation. One Goldman Sachs derivatives trader, who asked to remain anonymous because he is not authorized to speak about company strategy, said that the firm is planning to create a market for derivatives that airlines can use to hedge against the risk of having to return planes to the terminal or having to pay fines to the FAA. Goldman is thinking of creating “collateralized delay obligations,” or CDOs, which will diversify wait-time risk by including flights from across the entire country.

Source: If Wall Street Ran the Airlines...