“The U.S. government has historically intervened in the aviation industry – at least 19 times between WW II and 2000 – especially after events like the September 11, 2001, terrorist attacks, which severely impacted air travel and prompted a significant response in the form of grants and loans. Proponents argue that these subsidies are essential for preserving air travel accessibility and ensuring airlines can operate without drastically raising ticket prices, especially in less populated regions reliant on air service.
However, critics contend that such financial aid distorts competition, favoring certain airlines at the expense of others and raising ethical questions about taxpayer funding for specific industries. The debate includes discussions on programs like the Essential Air Service, which aims to provide air transport to smaller communities but faces scrutiny over its costs and effectiveness. While the impact of airline subsidies varies based on economic conditions and operational needs, the ongoing discussions reflect broader concerns about government intervention in the free market and the sustainability of such support in the long term. – EBSCO, Authored By: Rich, Alex K.; Grant, Richard A.; Published In: 2024 2 of 2
“Contrary to the narrative today, Reagan did not “reverse the course of government .” The Welfare State, the Regulatory State, the national security state all held steady or continued to grow and government deepened its influence on our economic lives.
What DID change, starting in the late seventies and accelerating under Reagan was the way government pays for itself – by borrowing to cover the perennial deficit. Four decades later, capitalism is addicted to debt.
While Donald Trump was mocked for calling himself the “King of Debt” he captured in one phrase the rulers who [corrupted capitalism] by rolling over credit.” – Ruchir Sharma, What Went Wrong With Capitalism, 2024; 289 pgs. P. 2
“When government becomes the dominant seller and buyer in the market – as it has in recent decades – it distorts the price signals that normally guide capital. Money starts to flow down the path of least resistance, or most government support. Each crisis brings bigger bailouts, leaving capitalism more mired in debt.
The periodic financial crises – erupting in 2001, 2008, and 2020 – now unfold against the background of a permanent, daily crisis of colossal capital misallocation. Sharma, pgs. 3-4
“On March 21, 2020, the chief executives of the nation’s top carriers wrote a letter to congressional leaders urging them “to swiftly pass a bipartisan bill with worker payroll protections to ensure that we can save the jobs of our 750,000 airline professionals who are coming to work every day to serve the traveling and shipping public.” According to this letter, this first COVID-19-era bailout of the US airlines was meant to keep the nation’s aviation system alive through the coronavirus pandemic, given that all employees in the industry were at risk of losing their job owing to the reduction in demand.
Testifying before Senate Committee on Commerce, Science, and Transportation in December 2021, American Airlines CEO Doug Parker said that “it’s not an exaggeration to say the program saved the airline industry.”
Parker’s claim is groundless. Although American Airlines and potentially United Airlines were at risk of chapter 11 restructuring (on the basis of the price of credit default swaps at the time, one can infer that an American Airlines bankruptcy was highly likely), the airline industry was never at risk of disappearing. If some airlines were forced to cease or suspend operations indefinitely, they would be quickly replaced by new ones. In fact, few people realize that every year, many airlines around the world stop flying. Most of them are small, but there are also many examples of major airlines going under, such as Pan American World Airways or Eastern Airlines.
Also, many observers equate bankruptcy with going out of business, but that perspective is far from accurate. The most common path is chapter 11 reorganization. Chapter 11 “ordinarily is used by commercial enterprises that desire to continue operating . . . and repay creditors concurrently through a court-approved plan of reorganization.” Under more extreme circumstances, companies engage in chapter 7 liquidation proceedings, which entail “an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors.”
In other words, the principal goal of chapter 11 commercial bankruptcy, which the airlines would have likely filed for, is precisely the survival of the company. And in fact, any airline that files for bankruptcy can stage a comeback, as Delta Air Lines, United Airlines, and American Airlines have all done. Some may even come back stronger. However, if they do not come back, the supply of flights is not likely to waver. Because the aircraft, hangars, workers, landing slots, and other assets do not simply vanish when an airline goes out of business, another airline will quickly replace the defunct one.
Bailouts may have prevented the bankruptcy of major airlines so far, but the net outcome is unlikely to be positive in the long run. These bailouts cost taxpayers and add to the country’s already outsized public debt. In addition, bailouts create all sorts of perverse incentives. They also prevent airlines from getting a shot at a restructuring—shareholders may not like the idea of bankruptcy, but it would be healthier in the longer term. In fact, whereas bailouts may have prevented bankruptcy during the pandemic, it may have simply postponed the inevitable for some of the airlines. For instance, ExpressJet Airlines, an airline that had been 49 percent owned by United Airlines, has filed for chapter 11 bankruptcy and ceased all flight operations. The company was in trouble already, and the bailout may have given it a lease on life for a while. Now that reprieve is over.
Moreover, bailouts are unfair. Why one industry gets bailouts while others do not is mostly determined by political connections and the perception of saliency rather than by real systemic risks to the economy or other economic factors. There are no systemic risks to the economy from airline failures. However, airlines have long benefited from a preferred status with the political class, which explains why they almost always get bailed out.
This situation creates moral hazard, meaning that airlines, their creditors, and their shareholders soon learn that they need not plan for emergencies, because in times of crises their political friends will not let them fail. Indeed, when the pandemic hit, airlines were coming off a remarkable 10-year run. For instance, in 2019, Delta Air Lines CEO Ed Bastian noted that “2019 was a truly outstanding year on all fronts—the best in Delta’s history operationally, financially and for our customers.” Airlines were doing so well that American Airlines CEO Doug Parker told investors in 2017, “I don’t think we’re ever going to lose money again.” And yet, as soon as demand for their services dropped, the airlines ran to Congress for help as common paupers, instead of letting their shareholders take a hit, selling any of their assets, or fully take advantage of their access to capital and various lines of credit.
Unfortunately, that pattern will continue, as evidenced by the message that Bastian gave his investors during a speech at the Alliance Bernstein 37th Annual Strategic Decisions Conference. Bastian said, “my hope is that we’ve tested at Delta at least the proposition ‘are airlines investable’ and I think the strong answer is ‘yes they are investable.’ And even in the worst crisis imaginable we’ve proven ourselves. We’ve proven the value of what we bring to society. We’ve proven that governments will be there for us if ever needed again, hopefully never again.” – Mercatus Center, George Mason University, Policy Briefs: The 2020 Bailouts Left Airlines, the Economy, and the Federal Budget in Worse Shape Than Before, by Veronique de Rugy and Gary D. Leff; September 8, 2022.
“By 2020, only half of American adults under 40 approved of capitalism, a third were willing to try communism as an alternative, and 70 percent said they were likely or extremely likely to vote for a socialist.” Sharma, p 5
“Capitalism has been twisted into an unfair and inefficient form, but not mainly by rules stacked in favor of big companies and tycoons. It has been distorted above all by governments and central banks pumping more money into the economy than the markets can possibly invest effectively.
More than just socialism for the very rich, the underlying cause is socialized risk for everyone – the government extending the safety net beyond the poor to the middle class and the rich, at a pace and scale that have corrupted capitalism with debt.” – Sharma, p 6
“The US Government debt is expected to rise between 2023 and 2028 by 14 points, to 137 percent of GDP. America’s debt is growing nearly twice as fast as the United Kingdom, more than five times faster than that of Japan and ten times faster than the average for the four largest European states.” – Sharma, p 20
Spirit Airlines consistently generates among the highest customer complaint rates of any U.S. carrier. In 2023 it had roughly 15 complaints per 100,000 passengers, the second-worst after Frontier. The ultra-low-cost model relies on add-on fees for nearly everything, from carry-ons to seat selection.
Although the assistance package is still being negotiated, it appears to consist of a cash grant and loan guarantees. A better approach would seek to lower ticket prices and increase airline travel – and thus jobs and economic vitality. The government could accomplish this through policies that reduce the incremental cost of flying – for example, by suspending federal aviation taxes, including the ticket tax and the fuel tax. – Brookings Institute, Bailing Out the Airlines; Clifford Winstonand Steven A. Morrison; September 24, 2001
“Flawed [economic] history will lead to misguided solutions.” – Sharma, p. 21
See: Horatio Bunce: Conversation with Congressman Davy Crockett
(See also: The Great Deformation: The Corruption of Capitalism in America by David A. Stockman, 2013; 768 pgs. and, The End of Poverty: How We Can Make It Happen In Our Lifetime by Jeffrey Sachs, 2005; 464 pgs.)
