On Saving Dinosaurs
The recent request of Pan American World Airways for a massive government subsidy serves to illustrate much about the role of government in today's economy.
To fully appreciate the situation, consider first the magnitude of the subsidy Pan Am has requested from the CAB. As bureaucracies go, the CAB is a relative piker. Its annual operating budget is $17 million and it dispenses, in addition, some $63 million in subsidies to local service carriers (Frontier, Piedmont, etc.). What Pan Am wants is a lump sum payment of $194 million and an indefinite subsidy of $10.2 million per month, retroactive to last April. In other words, if the subsidy were to begin this November, Pan Am would get an initial payment of $265.4 million (over four times the CAB's current subsidy budget), plus $122.4 million per year!
Depending on the government is nothing new for Pan Am, though. From its inception, founder Juan Terry Trippe saw Pan Am as a government-protected monopoly and lobbied successfully in the 1930's and 1940's to maintain that status. Pan Am, modeled after Europe's State-owned airlines, was to be the U.S. "flag carrier," the "chosen instrument" of U.S. overseas aviation policy. In exchange for protected monopoly status, Pan Am would show the U.S. flag in Asian and African backwaters where frequent air service was uneconomical, making up losses from its profits on lucrative routes like the North Atlantic, and would also forego competing with other U.S. airlines for domestic routes.
This policy worked fine for Pan Am until the explosive growth of air travel in the 1950's. Then TWA managed to breach the "chosen instrument" policy to become the second U.S. flag carrier and Pan Am's principal overseas competitor. Service in the prime North Atlantic market multiplied to include 45 other airlines, 21 of which (like Pan Am and TWA) joined the government-endorsed price-fixing cartel, the International Air Transport Association (IATA). The IATA members are nearly all government-owned flag carriers, many of them subsidized as a matter of national prestige. The non-IATA carriers are mostly nonscheduled charter airlines, which fly only when they book a full load, and at fares 30 to 50 percent less November 1974 than IATA coach fares.
Pan Am (and to a lesser extent TWA) claims it needs subsidy because (1) there is "overcapacity" in the North Atlantic market, (2) fuel prices have nearly doubled, and (3) its chief competitors (except TWA) are subsidized by their governments. Thus, claims Pan Am, it is impossible for it to continue to operate profitably and must be subsidized to remain in existence. Pan Am's argument raises two basic questions: could Pan Am conceivably be a profitable operation without subsidy, and should U.S. taxpayers be forced to keep it in business at a loss?
In fact, it is quite possible for a private, nonsubsidized airline business to make money in the "overcrowded" North Atlantic market. The nonscheduled charter operators are making money, by offering a type of service that allows them to fill their planes, rather than flying them half empty. And two non-IATA airlines offer frequent, scheduled service with modern equipment: Icelandic which has been flying from New York and Chicago to Luxembourg since 1958, and International Air Bahama which flies from Nassau to Luxembourg. As non-IATA airlines, both compete on price and service, and generate as much business as they can handle.
Two other companies have been systematically thwarted by the U.S. government in their attempts to provide low-cost, scheduled trans-Atlantic service. Since 1971 Laker Airways, Ltd. has been seeking CAB approval to inaugurate its DC-10 Skytrain service between New York and London. As originally proposed, Skytrain would be similar to Eastern's Air Shuttle: no reservations, tickets sold only at the airport within six hours of departure time, all coach seating, no free meals, and cash only. The price? About $80 one-way compared with the $290 IATA fare! Skytrain was approved by the British government in 1972, but to begin service, Laker must obtain approval of the CAB and the U.S. President. Although the 1946 Bermuda Agreement requires U.S. approval, neither the CAB nor the President has acted, for two full years.
A similar fate befell Air Europe International, a company which planned to provide scheduled DC-10 service between Tijuana and Luxembourg (safely outside CAB jurisdiction), thereby providing West Coast residents with the same type of low-cost service easterners have enjoyed for years on International Air Bahama. Air Europe planned a $419 one-way fare, compared with the $1042 IATA fare. Permission of both Luxembourg and Mexico was obtained last May, but despite the fact that those countries and the U.S. are all signatories of the 1944 International Air Services Transit Agreement which provides for automatic overflight and fuel stop rights (which Air Europe's service required), the CAB has managed to quash the planned September 2 start of service. How? By means of a campaign of news leaks, public disparagement of Air Europe as a "pirate" operation, pressure on the British Embassy (the planes and crews were to be obtained from British Laker Airways), and unattributed threats (including talk about boarding the inaugural flight with U.S. marshals).
The point, simply, is this. It is possible to make money in the international airline business, by doing innovative thinking to provide the types of services people want, at prices they can afford. The creaky old IATA cartel, however, is totally unresponsive to the marketplace, having raised fares 24 percent since last December, with another 10 percent increase going into effect November 1. The naked political power of the State, even to the extent of defying the law, is being used to prop up the cartel and forcibly prevent new competition. Pan Am's management, unused to the perils of the free market, has thrown its lot with the cartel, and therefore with the State. Thus we come to the question: should the taxpayers be forced to subsidize Pan Am? Or, restated, should airline customers (and noncustomers) be forced to preserve a dinosaur that has outlived its usefulness, and thereby help maintain a system that forces them to pay twice what they need to for air service? The question is ludicrous. Those—like Pan Am—that choose to live by the State, should be allowed to die by the Market.
