High Jacking the Taxpayer

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Many opponents of SST subsidies characterize the program as a vast boondoggle to benefit a small minority of jet-setters at the expense of everybody else. They are right. But what many of them fail to realize is that the entire commercial aviation industry is just such a creature of the state—a vast empire which mouths the slogans of capitalism and free enterprise, while it is being lavishly supported and protected by the state—with your money.

Although only the short-to-medium haul airlines (like Frontier, Air West, and Ozark) receive direct cash subsidies, all airlines receive millions of dollars worth of indirect subsidies each year in the form of services paid for by the taxpayer: air traffic controllers, electronic navigation aids, radar, weather reports, etc. The scheduled airlines are granted monopolies or oligopolies on the routes they hold and engage in massive price-fixing via the Civil Aeronautics Board (CAB), the government agency officially charged with "promoting" the air transport industry.

Conservatives often claim that the airlines are the victims of massive government regulation foisted upon them by New Deal socialists. In reality, federal regulation of aviation was first enacted at the instigation of Herbert Hoover, who was then Coolidge's Secretary of Commerce. Shortly thereafter, a new lobbying group arose—the Air Transport Association (ATA)—dedicated to making sure that the "public interest" was defined as the use of taxpayers' money to promote the interests of the airlines. The years since then have demonstrated that the established airlines, far from being victims of government intervention, are its beneficiaries, at the expense of the majority of American taxpayers.

The recent airline highjackings serve as one illustration of the truth of this contention. Two consequences of the highjackings are especially revealing—the insurance situation and the placement of guards on airliners. The airlines, like most businesses, have always protected themselves against risks by buying insurance—"hull" insurance—on their planes. Most policies written by U.S. insurance companies are called all-risk policies; but, despite this, they specifically exclude risks due to war. For this reason, the airlines buy special war-risk hull insurance from companies, like Lloyd's of London, which specialize in very risky ventures (and, of course, charge accordingly).

When the huge Boeing 747 went into service last year, however, a problem arose. The London insurers—realizing that paying off $24 million on a 747 would be a strain on their resources—asked an especially high price for 747 war-risk hull insurance. Thereupon, the airlines fell back upon—you guessed it—the U.S. government (i.e., the taxpayers). Under a 1951 law (promoted by the ATA), the government may provide war-risk coverage to airlines when commercial insurance is not available "at reasonable rates and conditions"—in other words, whenever the real cost of providing such insurance is more than the airlines feel like paying. That is how the 747's entered service with the government providing 40 percent of the war-risk insurance. And that is how the Pan American 747 blown up in Cairo on September 7th cost you and we $9,763,815.

But the story doesn't end there. After the Pan Am incident, the London insurers started computing what the loss of a few more 747's might do to their earnings and raised their war-risk rates even higher. Note that this was not mere greed. The only way an insurer can remain in business is to have his rates more than offset the losses on which he makes good. When the actual costs of providing insurance, as determined by the probability of losses, go up markedly, so must the price of the premium. This is economic law, which no amount of wishing—or government edicts—can change. Nevertheless, the increased rate announcements were greeted by the airlines with howls of anguish and a descent on Washington, where the government promptly "saved the day" once again, by announcing that it would provide full war-risk coverage, including guerrilla highjacking coverage (I), at rates far below the market rate. Within days, most of the major U.S. International airlines had signed up—to the tune of $3.3 billion.

What does it mean for the government to offer insurance at below market rates? As Aviation Week put it, "there is no certainty the premiums will cover losses in any one period. If they do not, Congress will have to be asked to pay the losses from general funds." Again, the taxpayer gets stuck with the bill. Even a Transportation Department official admitted, "We are not sure the premiums will pay the losses. We set the premiums at what we decided was the highest reasonable rate." "Reasonable to whom?" one might inquire.

Even more ludicrous than the insurance situation was the issue of armed guards on airliners. For months the airlines, through the ATA, have been imploring the government to "do something" about the highjackers. Even though it was their passengers and their planes that were being endangered, the airlines still considered it the government's responsibility to come up with a solution. And so the government, at last, decided to place armed guards on all international flights. The Transportation Department proposed a 0.5 percent increase in the ticket tax to finance the guard program, since as D.O.T. Secretary Volpe explained, "the armed guard is being provided for the direct benefit of the air carriers and their passengers."

The ATA, however, didn't see it that way. One ATA official was quoted as saying, "We regard this as an international foreign policy matter, and we do not really feel that airline passengers should be expected to pay for it" Aviation Week reported that "airlines vehemently opposed the increased user tax plan in the House Ways and Means Committee hearings." And Stuart G. Tipton, president of the ATA stated, "The United States never has levied special exactions on its citizens as a price for protection of their lives and property and never should. (How does he think police and fire departments are financed?) This tax proposal should be rejected out of hand." Finally, the chairman of the CAB—that horrible "regulator" of the industry and "protector" of the public—summed up the case when he stated that "the cost (of the guards) should be borne by the whole public, and the air traveller and shipper alone should not be burdened with the cost."

Thus, the wheels of "state capitalism"—our home-grown brand of fascism—grind on, robbing the average taxpaying citizen of his income for the benefit of the manipulators of state power. Where have all the free enterprisers gone? Where are the men with the courage to run a business with no help from the state? It's time to put a stop to highjacking in the skies—it's time the airlines stopped robbing the taxpayers and started flying on their own fuel.

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