Los Angeles International (LAX) is one of the world's largest and busiest airports. As such, it typifies many of the problems engendered by "public ownership" of a vital service industry. Like other major airports, LAX's problems include (1) severe peak-hour congestion, (2) significant pollution of the surrounding atmosphere, and (3) intense noise pollution of the surrounding communities (El Segundo, Inglewood, and Westchester). In the case of the noise problem alone, some $4 billion in damage claims are pending against the City of Los Angeles, thanks to a 1972 California Supreme Court ruling holding city-owned airports liable.
It was against this background of problems that the Southern California Association of Governments (SCAG) commissioned a study of the need for new airports in southern California. Unfortunately, rather than seeking the causes of the current airport crisis, SCAG chose not to question the conventional model of airports as government-owned "public services." In response to this failing, Professor Michael E. Levine prepared the following article, setting forth an economic analysis of the airport problem, and suggesting a market-oriented solution. This material was originally presented at a combined meeting of the Transportation, and Regional Planning and Development section of Town Hall in Los Angeles. In addition to publishing Levine's article, REASON has included various questions posed to Professor Levine at the Town Hall meeting.
In the present system of airport planning, we project demand, based on the F.A.A.'s figures and trends. Then we ask, "How can we accommodate these future demands? Do we need more runways? Do we need an airport out in Santa Monica Bay? How far will people travel to an airport? Should we have an airport at Palmdale? Should we have certain kinds of restrictions like the peak hour restrictions currently in effect at La Guardia, Kennedy, and O'Hare Airports? Should we administratively allocate the airport space we have? Is it possible to design airports for airplanes with slower approach speeds or steeper approach profiles?"
What these questions ask is, "If demand exceeds present capacity, what technological and administrative changes can we make to deal with this problem?" We subject the potential methods of accommodation to constraints such as community problems, political problems, noise problems, and other environmental problems of various kinds. We then ask, "Which of the possible configurations that are available is acceptable in terms of these constraints?" Finally, we throw in a bit of pseudo economics and ask, "Which is the least-cost solution?" (I call that "pseudo economics" because the costs which are considered in determining the least-cost solution usually exclude a wide variety of demands on resources which an economist would call costs.)
Airports use scarce resources. Airspace is scarce, land for airports is scarce, and peace and quiet is not so pervasive in our society that we find we have all we can use. It follows, then, that the problem of accommodating the demand for air transportation is a problem of allocating scarce resources.
When an economist is faced with demands on a scarce resource he asks, "Who values this resource the most? What configuration of output will produce the maximum amount of satisfaction among the potential users of those resources?" One of the best ways to find out is to use the information provided by the price system. The information is generated as follows: If potential users of a resource bid against each other so that everyone who uses a resource must pay a price at least equal to the value that others would place on those resources in alternative uses, those people who value the resources the most at any particular time will end up with them. (That does not mean that the richest person will end up with all of the resources. Even a rich person may have to choose between corporate jets and Rolls Royces. He will make a choice based on his desires and the relative costs of satisfying them, and bid in the market against other people who want to use those resources.) Thus, an important function of the price system is not just to pay for the output that we produce, but to help us plan that output. It tells us what things we need more of, what things we need less of, and which consumers value particular configurations of resources the most. But in the transportation field, we have used the price system only to a limited extent.
It is true that airline tickets are not free. If you want to go to Chicago you will in effect bid for the right to go against other people who would like to do other things with the manpower and machines that go into transporting you from here to Chicago. But you will not bid against others who wish to use the airspace, the land, and the other elements of the complex of resources that go into providing a place to take off and land. This is because at present we price those systems, if at all, on a "cost-recovery" basis.
We estimate the annual cost of operating the airport (which does involve considering the value of some of the resources to society.) When the anticipated number of thousands of pounds of airplane to be accommodated during the year is calculated, the estimated cost of running the airport is then divided by the expected aircraft weight, and a landing fee is set. This crude method of charging for airport use has several unfortunate effects. It means that a user of the airport does not take into account the simultaneous demands that other people who use the airport place on it. If at five o'clock on a Friday afternoon, five airplanes want to land in the same one minute time slot at LAX, the landing fee system in effect at present does not resolve the conflict. Priority is given on a first-come, first-served basis and other aircraft circle or are vectored around the area, resulting in increased flying time for each unit of output. Unfortunately, this method of resolving the problem ignores the fact that at that hour airport resources in Los Angeles are scarce, and ignores the consequence that we can no longer give them away at prices which do not reflect their scarcity.
In the same way, if we are contemplating the expansion of an airport, we do not consider for which users the airport is being expanded. We say LAX is becoming saturated and therefore we need to buy land either to expand the airport or build an airport somewhere else. We do not ask whether congestion is occurring only at peak hours or because certain aircraft make heavier demands per unit of output on the facilities than other aircraft. No attempt is made to differentiate the demand. We simply say the airport is saturated and we need to find another place where we can give away airport space until it becomes so crowded that we will need still a third location at which to give away resources for airport use. We make no effort to charge users in a way that gives them incentives to economize on airport use.
NO PRICE COMPETITION
The airlines and "general aviation" (private) pilots respond to this situation as rational economic men. A pilot may reason as follows: "Since my airplane is very light, it will cost me very little to land at LAX or at any other airport in the area. I will barely consider time as a constraint. I will schedule my trips at the hours most convenient to me because it will never be brought home to me through the price system that other people regard those hours as equally convenient and might value their trips even more than I value mine." Reasoning the same way, an airline will schedule two half-empty 727's one hour apart when one 727 almost full would do the job. Although they pay the cost of operating the aircraft, they do not pay the costs associated with accommodating the aircraft at peak hours. The result is that when the airline considers whether to add a flight, it considers only the cost of operating its own aircraft and the revenue that flight will attract. It does not consider as a cost the delay that flight causes to other users or the possibility that other users may find that time more valuable than they do. (A long-haul departure may be more valuable to its operator than the nineteenth departure for the day on another airline to a short-haul destination.)
The airlines never have an opportunity to bid among themselves for the use of these resources. As a result the airports rapidly become crowded. The phenomenon is similar to the one you experience on the freeway every day at five o'clock. There is no higher price associated with freeway use at five P.M. than there is at two in the morning. Therefore, people elect to use freeways at five o'clock without considering the fact that large numbers of others also want to use the freeways at that hour. Only the cost of delay to oneself is considered. You think: "This trip will take me 20 minutes instead of 10, but it is still worth it to me." But you did not consider the cost of the additional delay your presence creates for the other people who would like to use the freeway at that hour and, as a result, we experience serious congestion. (I could have entitled this article, "The Freeway Crisis"—the problem is essentially the same.)
Anyone considering taking a trip by air has the following choices: He can go to the most convenient airport, in terms of travel time to the airport, for a departure time which is most convenient to him, to the exact destination he desires. Or, he can accept a substitute for any of these variables. He can fly at a time slightly less convenient, from an airport somewhat less convenient or to a slightly less convenient destination airport. Third, he might not fly at all, but use another mode of transportation instead. Fourth, he might not take the trip at all, but use some technological substitute for travel to accomplish the purpose of the trip somewhat less satisfactorily. That is, he might use the telephone, the mail, or telex. He might ask someone who is going to the same town to place a call for him. There are many substitutes more or less satisfactory according to the particular purpose of the trip. Finally, he might decide that the whole thing isn't worth it, when he considers the cost of the trip or its substitutes and might not take it at all.
Noise charges could be applied either federally or locally. At the federal level airplanes could be charged for their noise characteristics. Locally the noise factor charge could be varied from airport to airport depending on the scarcity of peace and quiet.
Right now he makes a choice whose resource consequences are not made apparent to him and we attempt to accommodate him through airport planning. Under present circumstances, he thinks as follows: "I can drive to Los Angeles International Airport and take a five o'clock flight to San Francisco International. That is better than driving to another airport or flying to another airport, or using another mode, or not taking the trip at all." He does this by considering ticket prices which reflect only the average cost at all times for the use of the airport facilities. At the same time someone like me (I am a pilot) is walking out to his general aviation airplane and saying: "I think I could use some instrument approach practice at a busy airport" or "I think I would like to visit my Aunt Minnie in Blythe and since the airline service to Blythe is not so hot, I think I will take a general aviation airplane," and he taxis out and uses up a takeoff or a landing slot to do so. Neither of us consider that airport use at that hour might be more valuable to others, because the others cannot express their higher valuation through the allocation system now in effect.
Airport planning today involves accommodating the total demand which is experienced at prices which do not inform people that other people want to use those facilities at the same time. The planners ask, "How much demand will there be in the future?" and "What is needed to accommodate all of these people?"—Levine taxing out in his private airplane, the guy who wants to go to San Francisco at 5 P.M., but who might go at 5:30 P.M. or even be convinced to leave from Orange County Airport or some other place, as well as the guy for whom there is no substitute and who absolutely has to get to New York on a multi-million dollar business deal or because his favorite relative is dying and whose trip must take place without delay. Right now all of those people converge on the airport at the same time and make decisions based on the same price, which does not reflect the increased urgency or willingness of some people to pay more to use the airport at certain times.
The present procedure is analogous to giving washing machines away at a nickel apiece. You would find people using them for paperweights or ballast. You might also find them being used for washing clothes, and you might find them being used for washing clothes in situations where washing clothes is terribly important. But there would be a terrible waste of washing machines because the prices of the machines could not reflect the scarcity of the steel, labor, etc. that went into making them. Prices would not promote the highest use of the resources available, but rather the level of the lowest use possible at any given price. That is the situation we are in today with respect to airports.
SHORTAGES VS. WASTE
What has happened is that the world is changing. We could tolerate mistakes in allocation of airport services as long as airports and the air the airplanes fly through were not in short supply. A walk outside today will confirm that air is in fact in short supply, at least in Los Angeles. Right now there are people who demand cleaner air, cleaner water, and freedom from noise but they are not faced with the costs of providing them. Thus, the people who want airports and the people who don't want airports assert their demands in a situation where neither group has to pay for the inconvenience they cause to the other. The choice becomes an oversimplified question for political decision. An environmental group demands, "No more expansion at Los Angeles International Airport." The airline group argues "We've got to do something to accommodate this demand." The traveler says, "I want to go to San Francisco.…" None of these people ask themselves what human activities they are denying to the people who live in the community by insisting that there be no more airport expansion or insisting that the airport be expanded in order to accommodate demand or insisting on going to San Francisco at that hour.
The price system is a way to resolve some of these conflicts, but it has simply been ignored. Resources continue to be used wastefully because people are not bearing the full costs that they impose on others. When we say more airports are needed, what is really being said is we are willing to tolerate a great deal of waste in order to continue to accommodate demand in the face of mounting evidence that waste is less and less acceptable to both the public and the air travelers themselves.
CONGESTION AND DELAY
Examples of the kind of waste I am talking about are quite numerous, but let me give four. We know from what small attempts we have made to institute prices, that the demand for general aviation services at airports is what an economist would call very elastic; i.e., the quantity demanded varies tremendously with the price. At La Guardia, for example, where 40% of the peak hour operations were general aviation, a $25 minimum landing fee reduced them to 15%. That meant that 25% of the peak hour users did not value using La Guardia enough at peak hours to pay a $25 fee. The "solution" usually offered to the problem of general aviation peak-hour use is to get rid of general aviation. But some general aviation users, for example those 15% who are paying the high cost of using La Guardia at peak hours, apparently regard the services they are using as very important. We don't know, if the fee were $500, whether they would continue to use that airport, but one thing that can be done is to raise the fee to find out.
We would also find out, I would suspect, that airlines would schedule their flights a great deal less wastefully. You might find that flights to unpopular destinations or flights that were going out largely empty would be dropped or shifted to off-peak hours—hours when they do not impose such a heavy resource cost on the other users of the airport.
The airlines are apparently unhappy with the larger airplanes they have ordered. At the time they placed their orders, airlines were experiencing high costs associated with airport space and were prepared to incur costs in an effort to obtain equipment which conserved airport space. That is similar to people using less water when a water shortage creates a severe pressure drop. In effect, the airlines were experiencing average costs of delay which were so high that they were prepared to spend money to alleviate it. Now the average costs of delay have dropped to a point where the airlines are less eager to substitute larger equipment which conserves airport space. At the same time they are still imposing costs on other users of airports—what an economist would term the marginal cost of delay. Using larger aircraft now is not a profitable thing to do because airlines are not charged for the space they are using on a peak hour basis. As a result, they do not take the scarcity of airport space into their equation when deciding what kind of equipment to buy and when to buy it. What we need to do is add meters to the system, so that incentives to conservation exist short of the crisis level.
Quiet engines are another example. It has been estimated that all of the existing turbofan engines could be retrofitted with the Rohr quiet nacelle for an added cost of about 1% per ticket. If you do not have to pay for the damage you do to the eardrums of people who live near airports, even a 1% charge seems excessive and you are unwilling to institute it. As a passenger you are unwilling to pay it if you can avoid it, and you will pressure your elected representatives to make sure nothing like it ever occurs. As an airline you don't see a need for it. The reason you don't see a need for it is because no one has brought to bear on your decision that noise costs are very substantial, i.e., that airplanes making noise keep people from doing things they would otherwise like to do, like sitting out in their yards and barbecuing hamburgers. That may seem trivial to you, but we can only know whether it is trivial when we begin to charge airlines for the activities they prevent; e.g., for the number of hamburgers which will not be barbecued in Los Angeles as a result of the airport. If it is trivial the airlines will be perfectly willing to pay it and continue operations and you can expect that the hamburger people will be heard from less often, especially if the money is used to soundproof their homes or for some other method of reducing conflict.
At the present time noise is treated as a technological problem and not as a scarcity problem. Therefore, the incentive for technological improvement is weakened by the fact that the degree of scarcity is not made apparent to the users.
Finally, off-peak and on-peak use is an area in which great improvement can be made. The question is asked, "How can we legislate people into off-peak use?" The answer is, "You don't have to." You "legislate" in the same way you get people to go to matinees at theaters, or to eat the special at lunch which is available only from 11:30 to 12:15. That is, you get people to do it by charging peak hour users' prices that reflect the high demand at their hours. If airline fares reflected this, you would find that many trips could be made at off-peak hours. Delta Airlines has done very nicely, over the past five years especially, as a result of promoting night coach service at a price which reflects the lowered costs due to increased utilization of equipment at off-peak hours.
I am suggesting that we stop sacrificing the information that a pricing system would yield us about overall demand levels and total costs. If we price the scarcity of airports, if we price peak hour use, if we price airport location so that an unused airport with surplus capacity costs an airline less to fly into than an airport without excess capacity we will change the pattern of demand for airports. In the same way, charging different prices at off-peak hours than at peak hours will change patterns of resource use. If we rationalize the pricing of alternative modes so that a potential airline passenger takes into account his other possibilities and the costs they impose (that includes raising the price of automobile travel to reflect the cost it imposes on society and probably raising the cost of some rail travel to reflect the costs it imposes), we might find that that would be a bonanza for the telephone business, two way cable, or for corporations which make machines that transmit documents by telephone. Most of all it would be a bonanza for the public, which would get the output of goods and services that it wants at a total cost lower than at present and without many of the apparent technical problems in airport location and transportation choice.
Some growth in aviation may not be worthwhile and might not take place if prices are charged that reflected the resources cost of the user. The demands which are now projected for airports begin to climb exponentially as people become richer, as the demand for travel increases, and as they continue to fail to take into account the costs they impose: on the taxpayer through airport subsidy, on the local home dweller through tolerance of noise, and on breathers through air pollution and the like.
I'm not suggesting for a moment that aviation growth should be stopped. What I'm suggesting is that we have aviation growth at a level which reflects the preference of people for "aviation" things over "other" things. Right now they do not get to make the choice. We subsidize aviation growth. We in effect tell people that aviation is cheaper than it is, so that when they choose things to do with their leisure time, they get a pilot's license instead of buying a boat, taking up tennis, or something else. If the true cost of resource use associated with general aviation were known and made known through the price system, I suspect many fewer people would elect to become involved in it. In the same way, many fewer people would insist on taking trips at peak-hours in half empty planes to destinations which they don't really need to go to if the costs of accommodating them were made known to them through the price system.
The reason we don't use TV sets and washing machines for paper weights and ballast is because other people who want to use the resources associated with producing TV sets and washing machines, make known their demands and pay the cost associated with keeping other people from using the labor and materials that go into washing machines and TV sets. As a result, TV sets and washing machines go to people who want clean clothes and to watch "All in the Family" rather than to people who have lower-valued uses for them. In this way, some of the resources that might be used to make "less-wanted" TV sets and washing machines end up making automobiles, transistor radios, phonographs, and other things which satisfy people.
In the same way, when we consider airport location and the need for an additional airport, the question we should ask is, "Have people shown that they want all of the capacity that we have now, at the prices associated with producing that capacity?" I think the jury is still out on that question.
Long Beach Airport is an under-utilized airport. It is one of the busiest airports in the country, but the great majority of operators are operators in general aviation training planes. Those operators might well be displaced if you charged prices that reflected the resource cost associated with the existence of the airport.
You may say that Long Beach Airport is very noisy and the local community is very unhappy. The answer is to use quieter airplanes. But, you claim, that is too expensive. The answer is that it will be less expensive to all concerned if we consider all the costs associated with using Long Beach Airport, and we should charge users prices that reflect that fact. Thus, we should charge higher prices to noisy airplanes than to quiet ones, and the airlines will make equipment choices accordingly.
We should not build Palmdale Airport or some other airport until we have established that we are using all existing capacity, that it is cheaper to build Palmdale Airport than to make further improvements in airplanes or in the air-ground interface at existing airports, and that travelers are willing to pay prices for use of Palmdale which will cover the cost of the resources necessary to build and operate it. But we have not begun to estimate true airport demand for Southern California. We know that Los Angeles Airport is nearly saturated in terms of demand for its uses at prices that do not reflect the resource cost of running an airport. We do not know what the demand would be if there were incentives to accommodate it more efficiently through the price structure.
It is said that the communities will not permit more extensive operations at Burbank, at Orange County, or Long Beach, but that assertion is made for airlines using aircraft whose prices do not take into account the cost they impose on the community. Thus the only way the communities can defend themselves is to prevent airline use altogether, or to enact restrictive regulation like the "no flights after eleven P.M." rule at Burbank. If we had a set of prices for airport use that reflected the costs that airports impose on the community, airlines and manufacturers would have a much greater incentive to design aircraft compatible with the local environment, and the traveler might ultimately be faced with a choice like this: He could leave from a convenient nearby airport at a high ticket price that reflected the fact that heavily redesigned aircraft were needed to serve him at that airport, or he could leave at a much less convenient airport in the middle of an industrial area at a ticket price that was lower to reflect the fact that fewer costs were imposed on the community by aircraft operators at that location. Since that airport was less convenient to him he could then make a tradeoff between the more convenient airport at the higher price and the less convenient airport at the lower price.
If we are willing to devote millions of dollars and manhours to figuring out how to accommodate exponential rates of growth in air transportation, we should be willing to spend at least a few man-hours and a few thousand dollars, maybe even a million, to find out whether we need new airports at all or whether existing airports in conjunction with technological and institutional—that is economic and other—changes would accommodate the demand for air transportation.
Professor Levine is Professor of Law at the University of Southern California, and is currently a visiting professor at Duke University Law School. He was recently appointed Luce Professor of Law and Social Change in the Technological Society at California Institute of Technology, and will be teaching jointly at USC and Cal Tech commencing this September. Levine received his law degree from Yale University and was a Law and Economics Fellow at the University of Chicago Law School. He has previously published studies of the airline industry in YALE LAW JOURNAL and JOURNAL OF LAW & ECONOMICS.
Q&A: Michael Levine
Q. What incentive would there be to adopt the measures you are recommending, when many airports already pay their own way under the present price structure and even go out of their way to stimulate their use?
LEVINE: The Los Angeles Department of Airports has a real incentive problem. Unlike business men who are profit maximizers, the Department of Airports cannot keep the money it makes. They derive many of their satisfactions from presiding over a bigger and bigger system of airports.
If you are going to have a political process, one of the things you might do to influence public decision makers is to demand that airports be used more efficiently before imposing costs on other people.
Q. Are you advocating private ownership of the entire airport and airways systems, a pricing system and the elimination of regulation?
LEVINE: In an area like Los Angeles where there are many airports competing with each other I don't have any doubt that private ownership would work quite well.
On a less visionary level, we might expect public authorities to begin behaving more like private maximizers. This can be accomplished in three steps. The first step would be to examine what could be done with the existing airports. The least we could ask is that the Department of Airports ration its capacity so that the people who use it are the ones who value it the most. Step two would be to consider all of the impacts upon the community. An economist would say that we should "internalize" all of the costs associated with airport use. This would entail charging the Department of Airports for the noise problems they cause and requiring them to buy their land on the open market. Third, we should try to find some incentive structure, whether through private ownership or some way of rewarding bureaucrats, that would motivate the owners of airports to respond to price mechanisms and begin behaving like maximizers.
Q. Wouldn't the prices have to be legislated?
LEVINE: Airports are free to set any landing fee schedule they choose. Los Angeles International Airport could start imposing peak hour surcharges or surcharges for instrument operations because the capacity of the airport is reduced in bad weather.
Q. The vice president of the Southern California Edison Company was asked why they didn't raise their prices for peak load hours since the existing demand mandated more plants. He replied that it was impossible since the whole ethos of our civilization is more and more services for less money. Wouldn't a public outcry be required before this kind of a policy could be implemented?
LEVINE: There is no such thing as a free lunch. It is impossible to have simultaneously more and cheaper electric power and a cleaner and cleaner environment.
In the same way if you want everybody to be able to travel by air whenever he wants to, to wherever he wants to, you are going to have to give up peace and quiet, and land used for things other than airports.
The users of electric power or airports should be required to bid against the environmentalists for the air and other resources. If the environmentalists are not willing to pay for clean air then they should not have it. At the same time there is no reason why the mass users of electric power or airports should be able to get part of their input free.
Most people would think it was very strange if a factory owner expected that he was entitled to all the steel he could get free or at a very low price. Somehow when he expresses this point of view about electricity or transportation everyone nods sagely and says, "That's right, that's the kind of society we need." That puzzles me.
Q. The inertia of the voter is a major problem. Wouldn't a politician have to wait until there was an uproar and it became too expensive to live with the status quo before attempting any change?
LEVINE: One of the biggest difficulties in ignoring these problems now, is that a great deal of mindless pressure for change is created. When the dam breaks and the politician has to do something he usually does the wrong thing. I think there will ultimately be a stupid and restrictive response to a great public outcry that will result in a crude restriction of demand.