Although dwarfed by the human tragedy, the horrific events of September 11th also precipitated a financial tragedy for the airline industry. As the talking heads noted? with perhaps too vivid realism? when flights were grounded for four days, the airlines began to "hemorrhage" money. And the situation didn't improve much when the skies reopened. Stunned, distraught and cautious, travelers stayed home in droves. As planes flew half-empty and flight schedules were reduced, the financial bleeding continued.
Panicked airline executives and industry analysts
raised the specter of widespread bankruptcy and did little to
dispel murmured fears and media hype that suggested we were in
danger of losing air travel altogether. Responding to fears of
massive airline bankruptcy and eager to do something, Congress
approved a $15 billion relief package of $5 billion in direct
payments and $10 billion in the form of loans and loan guarantees.
In the comparative calm after the storm, as we try to sort out the hysteria from the reality, we have to ask ourselves: Was it ever truly conceivable that massive airline failure would have left Americans without air travel? The simple answer is, "No!" As long as consumers have a demand for air travel, the demand will be met. How can we be so sure? Because air travel is provided in the United States by markets, and markets?as history has shown us countless times?provide the products that consumers demand.
It does not minimize the financial impact of 9-11 to suggest
that the economic implications are less than catastrophic. Even
in the worst case scenario?widespread airline failure causing
massive and persistent disruption in air travel?disrupted travel
is not no travel. It may not be air travel as we've been used
to thinking about it, and it may not be provided by the companies
whose logos currently festoon our airports, but we'll have air
travel. Markets work because entrepreneurs are always on the outlook
for profit opportunities, and if consumers want and are willing
to pay for airline travel, they will step in to provide it. Yes,
it would take big money to resurrect, restructure, or start up
an airline, but the very wealth of our economy is evidence that
entrepreneurship on that scale not only exists, but thrives.
Dispensing with the fear that the only way to Grandmother's house might be going "over the river and through the woods," allows us to focus our attention on the $15 billion bailout as an economic phenomenon. It raises some interesting questions, one of which, obviously, is whether or not it was necessary. "Necessary" being a subject term tied firmly to such things as individual tolerance for air travel disruption and uncertainty, we're going to leave that question unanswered and turn instead to consideration of the effects of the relief legislation. As the consequences of the choice become apparent, we'll learn how well Congress, and the airlines themselves, assessed the opportunity cost and benefits of the alternatives they faced. The following articles illustrate those consequences, ranging from specific concerns about who will be hurt and who helped, to the ripple impacts on competition in a global economy, to the repercussions of the airline industry giving up some of its hard-won independence in return for a helping hand. Before much of the relief legislation money has even been distributed the ripple effects of trading money for government control are beginning to show themselves throughout the industry. As the scenario plays out, consumers and airline executives may both find that the question we really want to ask ourselves is not, "Was it necessary?" but rather, "Was it worth it?"
Directions:
Read:
The New York Times, "US Takes Big Role in Airlines' Crisis," by Laurence Zuckerman, www.nytimes.com/2001/10/04/business/04AIR.html
The Financial Times, "Brussels urges US to act over air fare 'cuts,'" by Francesco Guerera,
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3GZYY0TSC
In groups discuss the following questions:
- How does the relief legislation increase the US government's control over the airlines?
- Devise a "rule" by which to determine how much control the government should have over a vital industry.
- Apply your rule to the airlines: Do you think the bailout gives the government too much control over the industry? Why?
- Economists claim that economic change always creates winners
and losers. Who benefits from the relief legislation? (Be sure
to think about all the people and industries that might gain
from this relief)
- Who will be hurt by the relief legislation?
- Where does the $15 billion come from? Who pays for the bailout?
- Who should be happy about that situation? List specific groups.
- Who will be hurt?
- How, specifically, does the relief legislation affect the
competition between US and foreign airline companies?
- Does the US have a responsibility to heed those concerns?
- Does the US have a responsibility to heed those concerns?
Teacher notes
You can use these articles in small group or classroom discussion.
In groups discuss the following questions:
1. How does the relief legislation increase the US government's control over the airlines?
Because the newly formed Air Transportation Stabilization Broad will have the discretion as to which airlines to give loans to and under what conditions it will have extraordinary power. It is conceivable that it can literally tell and airline what wages to pay, what routes to cut and how much to charge customers.
2. Devise a "rule" by which to determine how much control the government should have over a vital industry.
The answers will vary, but might include thins like setting management wages, profit levels, representation on the board of directors, setting prices, deciding production levels of each company to reduce competition, or no involvement at all.
3. Apply your rule to the airlines: Do you think the bailout gives the government too much control over the industry? Why?
4. Do you think we might be left without any airline companies in the US if the government did not provide the bailout? Why or Why not?
As the introduction points out, as long as the market is allowed to function someone will meet the demand for air travel. However, it might not be the existing companies, it could even be foreign companies providing airline service in the US.
5. Economists claim that economic change always creates winners and losers. Who benefits from the relief legislation? (Be sure to think about all the people and industries that might gain from this relief)Groups that will benefit by the airlines being able to stay in business are: Employees of the airlines, consumers who travel on the airlines, travel agents, suppliers of food, fuel and other services to airlines, manufactures of airplanes and airplane parts, etc.
- Who will be hurt by the relief legislation?
It appears that if the US airlines can under price foreign competition because of the bailout that those foreign airlines might be hurt. In addition, the ripples of the action can extend very far as the general wage level in the US is likely to be higher than if many of the airline employees lost their jobs.
6. Where does the $15 billion come from? Who pays for the bailout?
- Who should be happy about that situation? List specific groups.
- Who will be hurt?
Because it is a government expenditure the only possible answer is that the money will come from increase taxes, either to pay the bill directly or to pay to finance additional government debt. Consumers of airline travel should be happy because they are likely to be able to purchase tickets at lower prices than they would otherwise be able to do. This is already evidenced by the complaints of the European airline companies. It you are a non-flying taxpayer you are going to be in a position of subsidizing the tickets of flying taxpayers!
7. How, specifically, does the relief legislation affect the competition between US and foreign airline companies?
If indeed the legislation is allowing US companies to lower their ticket prices as the Europeans charge then in effect the airline market is now the US airline companies and the US taxpayers teaming up to compete with the European airlines.
- Does the US have a responsibility to heed those concerns?
The question of responsibility is certainly an open one. However, whether we heed the concerns or not, either way, we are in a position of changing the structure of the world airline market. If we allow US airlines to lower prices because of the tax funded bailout we, the US government, has affected the market, and if we tell US airlines they can't lower prices then the government is in effect setting prices for air travel. Either way the government has assumed a much expanded role in the international air travel market.