PRIVATIZATION'S STATE OF GRACE
In March of last year, President Reagan asked J. Peter Grace, the chairman of W.R. Grace & Co., to head up a group of business executives that would "pinpoint inefficient government programs" and recommend reforms. Grace recruited some 2,000 executives from industry, finance, and accounting for the President's Private Sector Survey on Cost Control, or "the Grace Commission." Armed with a presidential order that opens government-agency books to the commission, the small army of business people went at it.
In the last few months, various reports of the group's task forces—which range from agriculture to procurements to Social Security to defense—have been coming in. And some of their findings are very interesting.
A recently issued task force report on privatization of federal government functions, released in late June, is typical. It made recommendations that task force members said could "result in cost savings, revenue enhancements, and cost avoidances of approximately $28.3 billion over a three-year period."
What characteristics, according to the task force, make a government function ripe for privatization? The report suggested four: the service rendered was "not initially available in the private sector [but is now]"; the government "service operations are inefficient"; "managers have insufficient tools with which to manage"; and "the operations are appendages unrelated to the central function of government."
With these in mind, the task force suggested privatization in eight areas, including the government's electric-power marketing, NASA's future space shuttles and expendable launch vehicles, Veterans Administration hospital management and construction, Defense Department commissaries, National and Dulles airports in Washington (see page 32 in this issue), the federal vehicle fleet, Coast Guard rescue activities (see Trends, Aug., page 14), and the Social Security Administration's automatic data-processing operations.
Even though privatization in these areas would be an enormous reform, there are, as REASON readers are aware, many other prime candidates for privatization. The report admitted as much and noted that those others "were not reviewed in depth by our Task Force due to time constraints." However, it did list other privatization possibilities such as Postal Service functions, the air traffic control system, and the National Weather Service's forecasting and data collection and dissemination—all of these familiar to REASON readers.
It's too early to be sanguine about the recommendations of the Private Sector Survey on Cost Control actually being implemented. There is a rather dismal tradition—at least as old as the Truman administration—of presidents railing against government inefficiency and appointing blue-ribbon commissions to recommend reforms. Splendid and well-reasoned reports are submitted, a few cosmetic changes are made, but little of substance changes.
Will the privatization task force report—and reports of other Grace Commission task forces—be able to break that tradition? Possibly. In the areas it investigated, the privatization task force certainly came up with many good answers, and they deserve to be implemented.
REASON will keep you posted.
When government bureaucrats of the law-and-order variety take a notion to prohibit peaceful, voluntary market activities, they often end up looking less like Jack Webb than like Harpo Marx.
Recent government interventions in the recreational-drug market are typical. To begin with, it's obvious that no one has any idea how much cocaine and marijuana is smuggled into the country, partly because smugglers normally don't send semiannual inventory reports to the Commerce Department. Yet that certainly doesn't stop high-minded conservatives and liberals from concocting drug-traffic estimates out of whole cloth.
The Reagan administration's Drug Enforcement Administration (DEA) has said that 11,000 to 13,000 tons of marijuana is smuggled into the country annually, and that the government is seizing "as much as 30 percent of the annual flow." But that's only the tip of the iceberg, according to Rep. Charles Rangel (D–N.Y.), chair of the House Narcotics Committee. According to the Kansas City Star, Rangel and his committee staff think there are 60,000 tons of marijuana being smuggled in—almost five times the administration's estimate. As for heroin, the DEA says 4 tons annually and Rangel says 10 tons.
Why the enormous disparity? Committee chief of staff Jack Cusack told REASON that estimates are based on the amount of drugs seized by government agents, plus the assumption that whenever the government tries to intercept contraband, it will net about 5 percent of the stuff. "Estimating the smuggling of illegal drugs isn't a science, it's an art," Cusack said. Less euphemistically, it's anybody's guess.
But that doesn't stop government types from doing something about it. In October 1982, a stern-faced President Reagan announced the creation of task forces to combat illegal drugs. But in June, an equally stern-faced Rep. Glenn English (D–Okla.) said, "I was concerned to learn that the task forces which were so urgently requested last year are only just coming into being. It…appears that most of the funds which were provided under emergency provisions to the Department of Justice are going to be forfeited at the close of the fiscal year because they weren't used."
And how about those happy occasions when the arbiters of virtue actually get their show on the road? According to a recent General Accounting Office study, federal government spending in the drug wars more than tripled between 1977 and 1982, from $83 million to $277.9 million, yet the GAO's best guess is that "drug availability, the primary target of interdiction, has not been seriously affected."
Meanwhile, at the retail level, the New York Times reports the emergence of some 800 "marijuana stores" in New York City—grocery stores, health-food shops, record stores, and tobacco shops that also sell marijuana. Shop owners circumvent the strictest features of state law by keeping less than eight ounces on hand, selling it in small quantities, and restocking their supply several times a day.
Also, even when judges can impose jail sentences in some marijuana-store cases, the sensible ones rarely do because they "know how overcrowded the jails are," says Julio Martinez of the Division of Substance Abuse Services. "They have to worry about stick up men or arsonists and putting them in jail. So the smoke-shop workers pay a fine, which they consider part of the cost of doing business, and are back at work almost immediately."
If the government's war on drugs has been a failure, the California state government's war on drug paraphernalia is a debacle. Since the much-touted ban on paraphernalia went into effect at the beginning of 1983, there have been 42 raids on "smoking accessory businesses." But California Progressive Businesses Association head Steve Hollowell told REASON that as of mid-June, the state has not won a single case. Prosecutors are losing because the courts consistently rule that an object can be considered illegal paraphernalia only when verbal or written instructions are provided by the seller at the time of purchase or when the devices are marketed as paraphernalia. None of the prosecutors' cases have met those criteria.
As the California NORML newsletter put it, "Bong Ban Bill Bombs." It's part of a larger pattern that says something.
HOUSTON VOTERS DERAIL BOONDOGGLE
By a margin of nearly 2 to 1, Harris County (Houston) residents in June rejected a $2.35-billion bond issue proposed by the area's Metropolitan Transit Authority, 80 percent of which would have been used to construct an 18.2-mile heavy-rail system. Though some MTA officials remain intent on building the system, the bond defeat deals a severe blow to the authority's plans. Not only does the vote put the prospect of local funding for rail in question; following the rejection, the federal government nixed a $110-million grant for the rail project.
Voters, it seems, were put off by both the enormous expense of the proposed system and the MTA's highly questionable master plan, including its ridership and cost estimates. For instance, the MTA's projection of future ridership was glaringly incredible—in an area whose population density of 3,000 per square mile is less than one-third that of Washington, D.C., the MTA estimated that by the year 2000, Houston's rail system would transport more passengers per mile of track than D.C.'s more extensive system does now. (In fact, the MTA estimated that by the turn of the century, the Houston system would carry more passengers per track-mile than does any system in the United States except New York's.)
As for construction costs, the MTA's own figures—$2.1 billion in capital costs and $1.5 billion in interest—work out to about $200 million per mile of track. (But the accuracy of those estimates is doubtful—D.C.'s rail system, for instance, ended up costing about four times more than was initially projected.) And that does not include multimillion-dollar annual operating costs, at least 50 percent of which would have to be subsidized.
In researching the heavy-rail plan, the MTA gave token consideration to alternatives, including a system of busways. But the MTA's hypothetical version was unnecessarily elaborate, calling for completely new six-lane busways at a cost of $92 million per mile, with projected operating costs higher than those estimated for the rail system. Realistically designed one- or two-lane busways, however, would cost from $3 million to $20 million per mile. And based on actual current costs of operating buses and subway cars—rather than theoretical costs—there is no difference between the two (both average 20 cents per passenger-mile).
Most transit experts agree that inflexible, heavy-rail systems only make sense in areas with highly dense populations. Houston is a sprawling city, where settlement is focused in the outlying suburbs and where the automobile is the overwhelmingly preferred mode of transport. The same is true of Los Angeles, but there, too, transit officials are pushing heavy rail. In fact, the House recently approved a $127.5-million federal grant to help L.A. build an 18.6-mile rail system. Yet L.A.'s proposed system would be a similarly massive boondoggle.
Writing in the Wall Street Journal in May, University of Southern California economist Peter Gordon noted: "Using [rail] proponents' numbers (and a 10% discount rate) gives us $3.10 as the cost of a one-way ride. Not cheap. Yet, converting their ridership estimates to a per-mile-of-route basis reveals that they believe that the L.A. subway would carry more people per mile per day than any U.S. subway, including New York's!" (Never mind that New York's population and density are several times that of L.A.'s.)
Gordon suggests that the removal of free and subsidized parking and the creation of more express lanes for high-occupancy vehicles would do more to improve transportation in the area than would a costly and inflexible rail system. But, of course, those are sensible and low-cost solutions—not likely to attract many politicians.
DENT IN RENT CONTROL
Rent control has been a firmly entrenched feature of many California urban areas for some time, so three bits of news indicating some relaxation of rent control's scope there are a pleasant surprise.
First, the Los Angeles County Board of Supervisors voted 3-to-2 in late May to phase out rent control for the 34,000 housing units in the county's unincorporated areas. The new law, sponsored by Supervisor Deane Dana, provides that whenever a tenant voluntarily moves out of a unit that is subject to rent control, it will automatically be decontrolled. This provision will be in effect until the end of 1984. After that, all remaining units still subject to rent controls will be decontrolled by the end of 1985.
Second, a bill introduced in the state legislature by Assemblyman Richard Alatorre (D–Los Angeles) would mandate such "vacancy decontrol" statewide. It would also require local governments to find "substantial evidence" that rent control is necessary before adopting rent controls, and it would exempt newly constructed units from any control. At this writing, it has not yet been assigned to a committee.
Finally, an especially ludicrous provision of the Santa Monica rent-control ordinance—one of the country's most restrictive—has been declared unconstitutional by a district court of appeal. Under the ordinance, apartment owner Jerome Nash was not entitled to a demolition permit for his apartment building, because low- and moderate-income persons occupied the premises and because Nash was deemed "able to make a fair return" on his investment. In other words, the city government was forbidding Nash to go out of business.
Presiding Justice Joan Dempsey Klein struck down that part of the ordinance. She wrote, "Like the right to enter an occupation the right to terminate a business involves a personal decision concerning the individual's role in the economy. Both protect the individual's ability to use his or her talents and resources in the manner best suited to bring life satisfaction and economic security." Klein's sane decision, along with the Los Angeles County Board of Supervisors vote and the introduction of the Alatorre bill, are encouraging.
WITHDRAWING BANKING LAWS?
The regulatory barriers to more efficient, innovative, and competitive operations within the financial-services industry have recently come under increasing fire. Assistant Attorney General William Baxter launched one major salvo when, testifying in June before the Senate Banking Committee, he attacked the McFadden Act and the Douglas Amendment. Baxter urged repeal of these laws, which prohibit banks from interstate branching and other interstate operations. Said Baxter: "There is simply no reason for…prohibiting efficient interstate competition in the financial services industry."
Baxter also attacked aspects of the Glass-Steagall Act, which prevents commercial banks from acting as investment brokers. "Economic and technological developments in recent years," argued Baxter, "have caused both banks and securities firms to offer financial services that may not fall clearly within traditional definitions of either commercial or investment banking."
Reinforcing Baxter's attack on Glass-Steagall was the Federal Deposit Insurance Corp.'s proposal, in May, to permit state-chartered banks under FDIC jurisdiction to underwrite corporate securities. The 1933 Glass-Steagall Act specifically prohibits nationally chartered banks from doing this.
Investment service, however, isn't the only nontraditional area into which commercial banks are now delving. Through the creative exploitation of a loophole in a 1982 federal law designed to restrict banks' insurance operations, several major banks are now gearing up to sell insurance. The law, passed last October, failed to include state-chartered subsidiaries under its purview. Then in March, South Dakota passed a law allowing outside banks to purchase or establish a state-chartered subsidiary—and South Dakota permits its chartered banks to sell insurance.
Shortly following passage of the South Dakota law, Citicorp, First Interstate Bancorp, and Security Pacific Bancorp moved to either purchase or set up subsidiaries in the state, expressly to sell insurance. These large institutions believe that because of their high volume of customers and low start-up and overhead costs, they can offer competitive prices on a number of insurance products. Insurance companies fear the potential competition—and with good reason, for the limited bank involvement with insurance shows a good track record. For example, mutual savings banks in Massachusetts, Connecticut, and New York-which have been selling insurance for some time now—offer life insurance policies at 20 percent below the prices of major competitors.
Consumers could soon be laughing all the way to the bank.
STRONG SIGNALS FOR TV COMPETITION
Two recent decisions by the Federal Communications Commission should do much to increase competition in the television industry. In May, the FCC voted to raise from one to five the number of channels a single "multipoint distribution service" (MDS) company may operate in an area. This opens the way for MDS operators throughout the country to offer multichannel, broadcast pay-TV services in competition with other TV services. MDS operators use microwaves to send TV signals to transmitters, which in turn relay the signals to houses and apartment buildings. Such transmissions range from 15 to 40 miles.
Previously, the FCC had limited MDS operators to the use of only one microwave channel in an area, and only two MDS operators were permitted in an area. Of the 28 channels in this group of air waves, the FCC had traditionally reserved most for teaching instruction by universities, schools, and churches. The new ruling now allows new MDS operators the use of a total of four channels, while established operators may add four more for a total of five. Moreover, as many as eight channels in an area may now be devoted to MDS.
Though in many big cities all 28 channels are already taken, unused channels are available in many other parts of the nation. Overall, there are now about 1 million MDS customers, compared to about 35 million cable customers nationwide. But with the new ruling, MDS business may grow quickly.
Then, in June, another FCC decision paved the way for an early form of direct broadcast satellite (DBS) service. The commission voted to let stand an earlier authorization of United Satellite Communications's plans to start a "quasi-DBS service" this fall, using a conventional satellite (rather than a more-powerful direct broadcast satellite). The satellite will beam signals to subscribers, whose homes must each be outfitted with a four-foot dish, rather than the smaller (two-foot) dish that full-power DBS service requires. Also planning to offer quasi-DBS service this fall is Inter-American Satellite Television, which is backed by Australian publishing magnate Rupert Murdoch.
Eight firms had previously received FCC permission to construct and launch special direct broadcast satellites. The first true DBS service was scheduled for 1986. But United Satellite and Inter-American are gambling that early availability of quasi-DBS service, which requires customers to have the larger dish, will attract subscribers.
The scramble to offer early direct satellite-to-home service has spurred at least one of the firms that had been planning 1986 service of full-power DBS—Satellite Television Corp., a Comsat subsidiary—to get into the game before it had expected. In the fall of 1984, two years ahead of schedule, Satellite Television will launch a five-channel service to 5 million homes in the northeastern United States. The firm will lease space on a conventional satellite, modified so that subscribers may use a smaller receiving dish than those now required for quasi-DBS service.
This alphabet soup of new services—MDS and DBS—promises to add an interesting dimension to the TV industry, which is now dominated by the big three networks and fast-growing cable.
AIRLINE DECONTROL CRUISING STEADY
Since the airlines were deregulated in 1978, we've reported in this column many of the resulting changes within the industry: the creation of new carriers, increased price competition, various service modifications, and so on. And as the new market for airline services continues to evolve, there are several more recent developments to report.
One major change has been the phenomenal growth of commuter and regional airlines, which provide short-distance service to smaller communities. Deregulation opponents had feared that airlines would cut back or cut out service to these communities to concentrate on the more profitable big-city routes. But as large airlines have cut back, smaller ones have moved in to fill the gaps. The Regional Airline Association reports that since the deregulation, commuter and regional carriers have increased their fleets by 50 percent and their flight hours by 91 percent. Their total revenue passenger miles flown during that time have increased a whopping 145 percent. These smaller airlines are expanding operations to nearly 70 communities from which the major airlines dropped service following deregulation. And the RAA projects that regional and commuter carriers' 1983 passenger load will be more than 13 percent higher than in 1982.
Because of the concern over service to smaller communities, however, the 1978 Airline Deregulation Act guaranteed subsidized "essential air service" to 85 communities for 10 years, so that the communities' air-services markets might develop. But a recent General Accounting Office study reports that since deregulation, the number of passengers using this service has declined 50 percent. The GAO recommends early termination of subsidies to small communities where demand is not sufficient to support unsubsidized air service by the 1988 cut-off mark. Of the 14 towns the GAO investigated directly, it found that in 10 of them, demand for subsidized air service was low because passengers were traveling to bigger airports nearby to take advantage of larger carriers' better service, more convenient scheduling, and lower fares.
Indeed, lower fares have been a hallmark of deregulation. Air Transport Association President Paul Ignatius recently testified in favor of continued deregulation at congressional hearings, pointing out that since 1978, airline fare increases have been significantly lower than rises in the consumer price index. Moreover, Ignatius noted, while 49 percent of all coach travel in 1978 was on discount fares, that figure was 80 percent for 1982. And while the average fare discount in 1978 was 34 percent, the 1982 average was 45 percent. In addition, said Ignatius, the number of domestic flights has increased 4 percent since 1978, even through a recession complicated by soaring fuel costs and the 1981 air traffic controllers strike.
Reinforcing Ignatius's favor of deregulation, Civil Aeronautics Board Chairman Dan McKinnon testified that deregulation had indeed produced "a more efficient and responsive industry." The hearings were initiated by several legislators—including Rep. Norman Mineta (D–Calif.)—who are considering reregulation of the airlines. Clearly the airlines themselves, as well as administration officials, are against reregulation. And, of course, the above evidence of deregulation's effects speaks for itself.
LEGAL ADS PAY OFF FOR CONSUMERS
It was about six years ago that the Supreme Court's Goldfarb decision opened the way for lawyers to advertise. The legal industry hasn't been quite the same since. It continues to enjoy many of the protections afforded a government-supported monopoly, but the prohibition on advertising was one of the mainstays of the system, and it is irretrievably lost. As a result, the marketplace for legal services is far freer than before, and there are parts of the country where ads for legal firms have become no more unusual than ads for auto mufflers and sinus medicines.
Many lawyers are clearly nostalgic for the old immunity from serious competition, but other lawyers have seized on the Supreme Court decision as a new opportunity. Take, for example, Cleveland attorney Joel Hyatt. Soon after the Goldfarb decision, Hyatt left his lucrative practice with a corporate law firm in New York and returned to his home in Cleveland, where he started his first legal clinic. At low cost, the clinic provided legal assistance on matters ranging from wills and divorces to personal bankruptcy and traffic offenses.
Besides being a lawyer, Hyatt is clearly an entrepreneur also. At the age of 32, he has built Hyatt Legal Services to a point where it is, according to the New York Times, "the leader in its field." As of early May, it employed 250 lawyers in 117 offices in 17 states and the District of Columbia. (Its closest competitor, Jacoby & Meyers, has only 65 offices in New York and California.)
Not coincidentally, Hyatt spent nearly $2.3 million last year on television commercials alone. "Most Americans don't have a lawyer, and they don't know how to find one," he says. "Using television advertising, I have developed a way to give these people access to legal services."
According to the Times, the ads all have the same basic pitch: "There is a lawyer at Hyatt Legal Services who handles a variety of legal problems, and it only costs $15—$20 in Milwaukee—for an initial consultation." Just as the fees are exceptionally low, the salaries for Hyatt's attorneys are also low—starting lawyers get $17,000, while Wall Street firms pay as much as $50,000 in starting salaries.
With energetic and aggressive Hyatt types nibbling at the edges of the legal industry, Business Week reports that even the most conservative corporate law firms that would never have considered advertising in the past "can no longer ignore the new reality." Few have sunk so low as TV ad campaigns (a Minnesota firm that sponsors the Nightly Business Report on the local PBS station is still an exception), but a surprising number have hired marketing consultants and public relations firms to build their images, ghost write bylined articles for trade journals and editorial pages, and promote their victories in court.
The consequences of all this are entirely natural. While advertising has been disorienting for the pillars of the industry, clients have more and better information for deciding which lawyer to choose and often—as Hyatt has shown most dramatically—can choose lower prices as well.
So what will be next? Special Labor Day bargains on wills and parking tickets? Two-for-one sales on personal bankruptcies? Who knows? The marketplace has its ways.
LOW-COST SATELLITE FLIES HIGH
When the shuttle Challenger went on its June mission this year, it took with it an experimental reusable satellite known as SPAS (for shuttle-pallet satellite). The shuttle crew tested SPAS's viability as a retrievable platform for scientific and technological work in space—and the device passed. What is remarkable about SPAS, the product of the West German firm Messerschmidt-Broelkow-Blohm, is its cost—the satellite was developed and produced at a total cost of $10 million, perhaps one-sixth the cost of a conventionally produced comparable satellite.
In contrast to the American (subsidized) space program's gold-plated approach to building spacecraft—using high-cost, custom-designed components at every turn—SPAS's German manufacturers relied heavily on low-cost materials readily available off the shelf. The satellite's frame, for example, is constructed of a carbon-fiber tubing developed originally for use in windsurfer masts. And rather than equip SPAS with specially designed lights—at a cost of $50,000 to $100,000 each—the innovative German firm used $10 helicopter lights, SPAS's fuel tanks are modified scuba-diving tanks, which ended up costing a modest $1,000 each.
During SPAS's space test, in which the satellite was expelled from the shuttle and later retrieved, the device ably performed a number of functions with little mishap. Though the satellite's data-collection system overheated, causing the cancellation of a few experiments, none of SPAS's bargain-basement components was responsible for the malfunction.
No go on commuter tax. Citing the "constitutionally protected right to pursue an occupation outside" one's home state, New Jersey's Supreme Court knocked down a special tax on the 100,000 New York residents who work in New Jersey. The tax was passed in 1961, ostensibly to compensate for the New Yorkers' use of the state's transit facilities. Commuters will still have to pay New Jersey income tax, however.
Freeing pay phones. The Federal Communications Commission and several state regulatory agencies are considering whether competition should be introduced in pay phones. The FCC is expected to rule on the issue next year, but some small companies are already selling pay phones.
Show of interest. The Depository Institutions Deregulation Committee has voted to do away with the interest-rate ceilings on nearly all savings accounts except passbook accounts. The decision takes effect October 1.
Contraceptives ads now legit. In a unanimous ruling, the Supreme Court in June declared unconstitutional a 1970 federal law banning the unsolicited advertising of contraceptives through the US mails. The law, whose origins were in the 1873 Comstock Act (which prohibited all contraceptives advertising), was revised in 1970 to ban only unsolicited ads.
Disaster insurance. Nine states have approved the sale of an insurance policy that protects against financial loss stemming from an IRS audit. If worse comes to worst, the insurer, Central National Insurance, pays any additional taxes assessed up to $100,000.
UK ELECTIONS MAKE MARKET LOOK OKAY
GREAT BRITAIN—Not long after Margaret Thatcher's landslide reelection victory in Great Britain, commentators began to ask what her victory might mean for government policy there. There are several reasons for free-market advocates to be optimistic.
One is the Adam Smith Institute, a free-market think tank that has great influence on the Conservative Party. When it published a series of position papers called the "Omega Project" shortly before the election, observers considered it a harbinger of what would be in store in a second Thatcher government.
Among the institute's recommendations were:
—ending the Post Office monopoly on letter delivery;
—privatizing parts of the British Broadcasting Corporation;
—providing tax rebates for parents of private-school students and beginning an education-voucher program;
—exempting small firms from employment-protection legislation and abolishing minimum-wage legislation; and,
—allowing a 50 percent tax rebate for private health costs up to a given limit and reducing the National Health Service budget by 50 percent of the amount returned in tax rebates.
The Wall Street Journal reports that Thatcher herself has been rather coy about the Omega Project recommendations, but she has said, "It would be a pretty poor government that stopped a think tank [from] thinking and was unwilling to look at any new ideas."
However, her government is not at all coy about continuing its efforts to privatize large sectors of the economy that had been nationalized by previous governments. The Economist has pointed out that privatization is occurring on several fronts.
Rolls-Royce (the jet-engine producer, not the auto company) hired a new chairman with a contract that tells him to prepare for privatization. For British Leyland, privatization of mainstream divisions is "in the cards," with Unipart components, then Jaguar and Land Rover, moving to the free market. British Shipbuilders is selling off warship yards and getting out of ship repairing, and British Telecom privatization is "proceeding full steam ahead" with plans being drawn up to sell shares to telephone subscribers.
Privatization is not without problems. For some industries, says the Economist, the government's plans have "been blown to pieces by recession and old-fashioned rigidities in old-fashioned industries," notably coal, steel, and the railways. But Thatcher had had her successes, not least of which is making radical free-market reforms politically respectable.
Shortly after her election, the Economist—the doyen of the British establishment—urged her in an editorial to "allow competition with everything in Britain's public sector." It continued, "Her second term should be one of radical deregulation of big chunks of British business, public and private, such as internal airline routes, telecoms, television, drink licensing laws and Sunday shopping."
There's no question about it. With Thatcher's reelection, free enterprise is now very much a presence in British politics.
MONOPOLY GAME GROUNDED DOWN UNDER
AUSTRALIA—Australia's government-sponsored domestic airline duopoly has recently come unstuck. The reason is competition. For more than 30 years, Australia's commercial aviation has been dominated by a cozy relationship, known as the Two Airline Agreement, among the national airline, Trans-Australia Airlines (TAA); a private operator, Ansett; and the federal government. The arrangement effectively grants TAA and Ansett sole access to the trunk routes by restricting the importation into Australia of large aircraft. In the face of a continuing slump in domestic air travel, the two airlines have been steadily increasing the fares on the profitable routes between the state capitals.
But things are changing because of a small branch-route operator called East-West Airlines. Earlier this year, East-West, using small Fokker Friendships, began offering one-stop service between Australia's two largest cities, Sydney and Melbourne, for less than half the price of the big two. It wasn't long before East-West ran into difficulties with the Independent Air Fares Committee, set up by the previous, and so-called pro-free-enterprise, Liberal Government to ensure that airlines do not harm themselves financially by competing for passengers. The IAFC began imposing heavy bureaucratic demands on East-West in early May, threatening not to extend the airline's landing rights at Melbourne Airport.
East-West, which was already offering half-price services to two other state capitals, successfully applied to the Australian High Court for a temporary injunction preventing the federal government from closing the airport to its planes and immediately began a court action under a provision of the Australian Constitution, which protects free trade between states. There is little doubt, on the basis of past decisions of the High Court, that East-West will succeed in its attempt to establish its right to offer the cheap air service.
Indeed, even before the litigation had formally begun, it was having an effect. The IAFC softened its demands and extended its approval of the cheap Sydney-Melbourne service to June 1984. Also, TAA and Ansett have introduced a 45 percent discount for advance-purchase fares on the major routes. Budget Transport, a rental-car operator owned by the son of Ansett's founder, has announced its intention to operate cut-rate air services if East-West's action succeeds. (It is so confident of East-West's victory that it has taken over a small New South Wales airline even before the decision is announced.)
Given the new Labor Government's discontent with escalating air fares—which it sees as hitting the lower-middle-class passenger—and its reluctance to repeat its recent $90-million bail-out of TAA, Australians are now facing the possibility of airline deregulation under Labor, a move the Liberal Government had always refused to make.
This article originally appeared in print under the headline "Trends".