Airline Competition: It Works

Price competition is proving to be healthy for the airline industry and is starting to dispel some old myths. Not only has Freddie Laker's Skytrain service between New York and London turned a nice profit for itself (nearly $870,000 in just the first 11 weeks), but Laker's competitors—Pan Am, TWA, and British Airways—who reluctantly matched Laker's prices, are enjoying larger profits on the route. A TWA spokesman has confessed that airline fears that competition would merely spread existing business thinner have proved unfounded.

Skytrain has proved so successful that Laker has now petitioned to serve the Los Angeles to London route for $455 round trip, less than half the existing off-season economy fare. In response, Pan Am announced that it will offer budget fares starting this spring and will continue them whether or not Laker wins approval. Laker hopes to get the OK in time to start the new service on the first anniversary of Skytrain, September 26. (It required six years to obtain permission for Skytrain.) Laker's other proposals include advance booking charter fares of about $233 roundtrip between London and the west coast and $161 roundtrip between London and New York.

Other airlines are finding that cutting fares can be good business, too. Pan Am has proposed a special budget fare for flights between the United States and Asia, which will reduce rates by 50 percent. Pan Am is also talking about leaving the International Air Transport Association, the cartel which has set international air fares for nearly all the world's airlines.

In an effort to raise the average load factor on its Los Angeles to Albuquerque run from a dismal 30 percent, Texas International cut the fare from $76 to $38 and saw the load factor climb to 90 percent. And TWA, innovator of the Super Coach fare between Chicago and Los Angeles, has nearly doubled the passenger growth rate and turned a perennial money loser into a profitable route.

The airline industry is slowly learning that old-fashioned price competition can be the solution to a stagnant market.

• "Laker Skytrain Service Shows Profit," Aviation Week, Nov. 21, 1977, p. 23.
• "LA-London Round Trip Would Be About $455," Los Angeles Times, Dec. 13, 1977.
• "Cutting Fares Is Healthy, Major Airlines Discover," Ibid., Nov. 6, 1977.
• "Pan Am May Quit Fare-Sharing Group." Ibid., Oct. 25, 1977.
• "Low Fares Kindle Chicago-LA Market," Aviation Week, Nov. 14, 1977, p. 26.

Protectionism Stunts Growth

A study conducted by two Geneva-based economists, Jan Tumlir and Richard Blackhurst, states that economic expansion in the West has been slowed by a revival of protectionist trade policies. The 90-page report released by the General Agreement on Tariffs and Trade (GATT) argues that the rise in protectionism reflects a refusal to adjust to changing patterns of supply and demand.

Tumlir traces the trend to the growing affluence of the 1960's, where increased wealth coincided with an increased desire for stability. "As societies become richer, they start to trade off growth for convenience, and efficiency for stability," he says. "This is an illusion. You can make the trade-off in the short run but not in the long run. It catches up."

The report predicts that the present increase in protectionism will eventually lead to a "vicious" downward spiral in the economy, with protectionism leading to decreased growth and thus to cries for more protectionism.

The GATT economists argue that the liberalization of trade would lead to increases in domestic consumption and production, and also result in more competitive domestic industries and stabilized prices, as a direct result of import competition. While free trade will result in a more efficient economy, Blackhurst and Tumlir concede that it is going to be a difficult task to convince people of this fact. "The problem is that the guy who is threatened in shoes is vocal, but we never have the name and address of the guy who is going to get the new job in machinery." In other words we see only where the money is now going but not where it will be going without protectionism.

The report further states that "Protectionist developments have in common a refusal to adjust to change.…While initiated by private interest groups, this resistance to change has been made effective through the support of governments which have introduced protective measures…which in turn has inhibited economic growth."

While most conventional economists reject the approach that such structural causes are behind today's lack of growth, and still look toward monetary and fiscal stimuli as the solution, the GATT analysis is starting to win converts.

• "Why Industrial Nations Aren't Growing," Business Week, Nov. 21, 1977, p. 138.
• "GATT Study Warns Against the Growth of Protectionism," Wall Street Journal, Nov. 29, 1977.

Deregulation Rolls Along

William Cassels, chairman of the American Trucking Associations, recently stated with alarm, "There is pressure from more areas [for deregulation] than ever.…" Examples of this pressure are easy to find.

Item: Over the protests of regulated truckers, a Senate subcommittee headed by Sen. Edward Kennedy—the same committee whose deliberations three years ago kicked off airline deregulation—held the first hearings in years late last year on trucking industry rate-making procedures.

Item: Using the Kennedy hearings as a focal point, the Carter administration announced that it favors substantial reductions of the limits on entry to the industry and giving truckers general freedom to set their own rates.

Item: The Antitrust Division of the Justice Department joined the advocates of deregulation when Assistant Attorney General John H. Shenefield, chief of the Antitrust Division, testified before the Kennedy subcommittee.

Item: Upon completion of a commissioned study of the effects of truck deregulation on small communities, the Senate Commerce Committee, under Chairman Warren Magnuson, will begin holding hearings sometime this spring.

The Interstate Commerce Commission limits entry into the trucking industry, controls the routes trucks are allowed to take, and has the final say-so on industry pricing. Academic sources estimate that abolition of ICC regulations would lower trucking rates about 20 percent, resulting in savings to the public of about $3 billion a year.

ICC Chairman Daniel O'Neal is fighting deregulation, arguing that it would eventually result in monopolies within the industry. But Antitrust's Shenefield thinks there is no fundamental difference between trucking and any other industry to justify entry protection and pricing restrictions. As far as monopolies go, he says that virtually no economies of scale exist in trucking. Testifying before Kennedy's subcommittee, Shenefield added, "What would be a felony in most American industries is not only condoned but affirmatively encouraged in the trucking business."

• "Red Tape Ties Up the Truckers," F. Andy Messing, Jr., Los Angeles Times, Nov. 30, 1977.
• "Trucking Deregulation Rolling," Business Week, Dec. 5, 1977, p. 100.

Voters Versus Taxes

Gathering 90,000 signatures, far more than the 56,000 required, an organization called Citizens for Limited Taxation has placed a tax limit proposal on the 1980 Massachusetts ballot. The plan would limit state spending to about nine percent of personal income, the average the state took in taxes during the past three years. The initiative, which is backed by Milton Friedman and the National Tax Limitation Committee, would require the legislature to adjust individual appropriations so that their total would fit under the ceiling.

While similar moves are afoot in Tennessee, Colorado, and Michigan, many observers see Massachusetts as a bellwether state. If voters in such a liberal state are finally fed up with the level of taxation, it is conceivable that politicians in Washington and elsewhere will get the message. The state has rightly earned the nickname "Taxachusetts," for while it ranks 10th in gross income received by its citizens, it is 48th in terms of after-tax disposable income.

California voters meanwhile seem to have reached a breaking point over the issue of property taxes. Some 1.2 million of them have signed petitions to place a property tax limitation amendment on the June ballot. (Only 500,000 signatures were required.) The proposed constitutional amendment would (1) limit property taxes to one percent of assessed value, (2) roll back assessments to 1975 levels, and (3) require a two-thirds vote of the legislature to increase other taxes.

Maine voters have also spoken out against property taxes. In December they repealed the unpopular uniform statewide property tax by nearly a two to one margin. The four-year-old measure was intended to equalize school spending throughout the state.

• "Will Massachusetts Be the First State to Set Tax Limits?" Wall Street Journal, Dec. 19, 1977.
• "Property Tax Initiative Qualifies," AP (Los Angeles), Dec. 28, 1977.
• "Maine Voters Repeal Uniform Property Tax," AP (Portland, ME), Dec. 6, 1977.

Nationalization Loses

A new study of nationalized firms in Western Europe reports that inherent problems make those firms poor economic performers. The reason, say Professors Kenneth Walters and Joseph Monsen of the University of Washington Business School, is plain old politics.

Walters and Monsen examined Western Europe's 23 nationalized firms on Fortune's list of the top 500 non-US industrials. Their data show that in 1975, while 10 of the firms lost money, 12 made a profit, and one broke even, the total losses for the group were more than double the total profits.

After conducting extensive interviews with political leaders active in the nationalization effort, business leaders, economists who studied nationalized firms, and the managers of those firms, the authors isolated two major reasons for their poor performance. First, firms are nationalized for political reasons. Often, nationalization occurs to preserve jobs in firms with a history of poor economic performance. Second, once a firm is nationalized, political and social goals are substituted for economic ones. The major complaint of the managers interviewed was that the government required that they achieve political and economic goals that are often diametrically opposed. Such conflicts occur in decisions concerning plant location, product lines, pricing policy, purchasing decisions, and industrial relations. In the latter area, the study found that labor conflicts had not been alleviated but merely shifted to the political arena.

The attention this study has received since its publication in the Columbia Journal of World Business is encouraging. It may well help de-glamorize nationalization as a solution to industrial problems.

• "Nationalization: It's a Program for Losers," Earl F. Cheit, Los Angeles Times, Nov. 27, 1977.


OSHA Cut-back. The Department of Labor has proposed the elimination of over 1000 OSHA job safety standards which the department has decided have little effect on safety or health, and which employers have found burdensome. OSHA also plans to loosen enforcement procedures for those regulations the agency decides are trivial. Included in the proposed rule reductions are standards requiring open-front toilet seats and fire extinguishers mounted an exact number of inches from the floor. If adopted, the proposals would go into effect in May. (Source: Wall Street Journal, Dec. 6, 1977.)

Equality in Combat. Reversing past policy, the Army is opening up combat support positions to women. The decision removes the long-standing barrier that women could not be sent any farther forward than the rear of a brigade deployed for combat. It will allow women to be assigned to supportive roles in the front line of fighting. Pentagon planners believe the move is necessary if the Army is to meet the requirement that it bring the total number of enlisted Army women to 90,000 over the next five years. (Source: AP (Washington), Dec. 22, 1977.)

• Landlord Rights. An apartment owner may legally enforce an adults-only contract with tenants. So ruled a municipal judge in Culver City, CA in a case brought by a couple living in an adult apartment building. When they had a baby, they first looked for another apartment, but on not finding one they liked, decided to remain where they were, in violation of the contract. When the owner attempted to evict them, they filed suit alleging discrimination against people with children. Judge Harold I. Cherness ruled that there is no California or federal provision "placing the defendants in any protected class as parents of children." (Source: Los Angeles Times, Oct. 22, 1977.)

• Charging Waterway Users. The free ride for US barge owners may finally come to an end. The House has passed legislation imposing charges on waterway users designed ultimately to recover 100 percent of the cost of operating and maintaining federal waterways, and 50 percent of new construction costs. These costs are now paid by all federal taxpayers rather than the users, giving barge operators a large subsidy and a competitive advantage over trucks and trains. If the Senate concurs, the measure—a tax on fuel sold to commercial inland craft—would go into effect Oct. 1, 1979. (Source: Wall Street Journal, Oct. 14, 1977.)

• Vitamin Victory. The attempt by the Food and Drug Administration to classify higher dosage vitamins as drugs rather than foods (and therefore obtainable only on prescription) was "arbitrary and capricious." So ruled the US Court of Appeals in New York, which found no evidence to support the FDA contention that consumers regard such products as drugs, anyway. The Justice Department, acting for the FDA, has decided not to appeal the decision, thereby saving megavitamins—and consumers—from a new dose of costly regulation. (Source: Business Week, Sept. 19, 1977, p. 145.)