The Airline Bailout Sets a Bad Precedent

Market forces would have led carriers to tighten security and shave waiting time to lure back passengers

By Gary S. Becker

The airline industry was in trouble even before September 11, and it has become sicker since then. But that's not a good enough reason for generous government subsidies or federal help for other industries hurt by the recession and the terrorist attacks.

By early September, high fuel prices and a decline in travelers had already lowered airline profits and pushed some companies toward bankruptcy. The sharp drop in air travel after the 11th severely worsened these already bad short-term trends. Prices of airline stocks fell by over 40% from Sept. 10 to the close of markets on the 17th, and they have not recovered.

Airlines used the attacks as justification for large federal subsidies, and Congress responded. A board of federal officials, headed by Federal Reserve Governor Edward Gramlich, has been authorized to dole out $10 billion in government-backed loans. Some $5 billion more is available in outright grants, and half of this amount has already been distributed to many airlines.

This assistance, with perhaps more to follow, is unwise because stockholders, creditors, employees, and suppliers should have to bear most of the costs of the economic slump and the aftermath of the hijackings.

WHO ELSE? Airlines might well be compensated for their losses while airports were forced to close for a few days after the attacks. And both the Senate and House bills properly give airlines protection against liability claims that will result from these hijackings. But instead of greater subsidies, it would be much better for the economy to loosen some regulations, including restrictions on cross-border airline mergers and on foreign airline operations within the U.S.

Federal aid to airlines sets a bad precedent for other industries that are also suffering from the recession and consequences of the attack. Insurers, hotels, and others have asked for government support, and the case for helping them is no weaker than the one for subsidizing airlines.

To be sure, without public assistance, several airlines probably would have failed and entered into bankruptcy proceedings, and so might some hotel chains and insurance companies. But the stronger ones would continue to operate while in Chapter 11, and they would shed debt and gain greater financial strength. Subsidies mainly delay their adjustment to reduced travel and other effects of greater concerns over safety. Moreover, propping up weaker companies hurts the strong ones, since they then have to cope with subsidized competitors. National and international market forces are much more efficient at determining who survives and in what form than government officials subject to pressures from constituents and industry lobbyists.

The Federal government should be responsible for setting and monitoring tough security standards at all airports, but financing and implementation ought to be left to airports and airlines. Security is a cost of travel that should be ultimately borne by passengers, just as they pay for pilots, planes, and fuel.

WHAT CUSTOMERS WANT. Heightened security while checking in and gaining access to departure lounges inevitably leads to some increase in waits at airports. The cost of such waiting time does not show up on any company's balance sheet, but it can become a major deterrent to flying. Since there are about 800 million passenger-flight segments each year on U.S. airlines, an additional hour, or even 30 minutes, of delay on each segment is likely to considerably reduce the demand for air travel.

If airlines are responsible for security, they have to hire additional security employees, add checkpoints, and introduce other changes to prevent unnecessary increases in waiting due to improved airport security. Airlines already take account of the value of time when they provide quicker check-ins to first-class and frequent fliers, whose time is deemed more valuable. The House Aviation Security Bill anticipates that a surcharge of under $3 on each flight segment would be enough to pay for upgraded security. Most passengers would pay more than twice that to reduce lines by 30 minutes.

Democrats in Congress and others argue that private personnel cannot guarantee adequate airport security and that the government should run security with federal officers. Yet El Al and many European airports with much tighter security than American airports mainly use private security companies. But I fear that public managers of American airport security would consider extended waits at airports an inevitable cost of travel, just as long lines at gas stations during the 1970s was attributed to the high price of oil, even though it was caused by government rationing of gasoline.

The attacks on September 11 were terrible enough without becoming a shield for increased federal spending on politically powerful industries. The hasty bailout of airlines should not be compounded by further assistance to this industry or by subsidies to the many other industries who await their turn at the public spigot.

Gary S. Becker, the 1992 Nobel laureate, teaches at the University of Chicago and is a Fellow of the Hoover Institution.

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