Whitespiral

Fixing the Airlines: Reconfigure or Reregulate

Government intervention always and everywhere causes market dislocations. There are far more problems caused by the fact that governments do not allow airlines to fail, then there are by allowing them to "overcompete". There are far more problems caused by governments now allowing airlines to price freely, then there are by the price of jet fuel today.

Dr.Cook's insight into capital/customer markets is profound, but I disagree with the suggestion to re-regulate airlines, or impose top-down solutions on them.

Airlines are faced with the reality of very elastic and very finely divisible demand, while their supply is mostly inelastic, and with very little ability to adjust to short-term or medium-term demand.

As such, they are a very low margin business, even in good cases. However, what almost nobody realizes is that airlines have very high asset turns and due to the capital intensity of the industry, are almost in all cases very heavily leveraged.

This creates a recipe for very high returns on equity, even with 5-6% margins, but only if you can control or successfully adjust to one variable: uncertainty.

Uncertainty in this case is manifested in the cyclical nature of the industry, which in turn is generated by the cyclical nature of the economy. The whole industry is usually coupled by a factor of 2 with the broader economy.

So now, where lies the root cause of business cycles? In one domain, and one domain alone. Fractional Reserve Banking, Fiat Currencies and Central Banking. (Yes, all that's just one).

But even if you were to leave this deeply nonsensical and dangerous system intact, airlines could still make money, if you really let them compete freely. In my book, open competition means the ability to do just about anything Anti-Trust regulators say you can't do, because their HHI and other models tell them you can't.

What do you think would happen if airlines were allowed to consolidate, collude, collaborate, and undercut any competitors freely and globally? Some would thrive, and some would not. (As opposed to all dying a slow death). And what if they overdid any of the above? Well then they'd pay the price by signaling "excess profits" to potential new competitors, making alternative modes of travel more competitive, and all those funny things that free markets do.

Monopolies are a mirage. The only true monopolies are government monopolies.

Airlines, are just a supercharged version of what happens when governments intervene. Almost all the troubles they face can be traced back to government interventions producing dislocations. And no I don't mean stuff you must adjust to like fuel.

It's all politics in the end. Because it is certain that fares would rise as a result of complete and true laissez-fairs, politicians prefer to keep this sick system in place because they've used the airlines so much to subsidize peoples' travel, that by now they're totally spoiled.

Having private ownership of airlines is a good start because you can't have markets operate without private property. But markets can only function and allocate resources effectively when there is an healthy price system in place.

A healthy price system is a free price system.