Airports and Economies of Scale

Moneybox
A blog about business and economics.
March 13 2012 1:50 PM

Airports and Economies of Scale

I could not be in less agreement with this article by Phillip Longman and Lina Khan advocating the re-imposition of non-safety non-environmental non-nuisance regulations ("deregulation" is a bit of a misnomer in an industry that's rightly regulated on all those scores) on the American passenger aviation industry. But it's fascinating nonetheless for the basic model it sketches out.

It starts with the story of Chiquita Banana relocating its headquarters out of Cincinnatti and to Charlotte, which they claim is driven by the declining availability of flights to and from the Cincinatti Airport. And they have an interesting story about the decline of Cincinatti aviation. They observe that a given plane flight has a large fixed fuel cost involved in taking off and reaching cruising altitude. Therefore the per mile cost of long flights (Chicago to New York) is lower than the per mile cost of short ones (Chicago to Cincinatti). What's more, airports have high fixed costs. So once the imposition of market competition caused some medium-sized midwestern cities to lose flights, the per flight cost of the remaining ones went up. That tends to produce a death spiral. Eventually the market reaches a new equilibrium with fewer, but more expensive flights. Except that equilibrium tends to drive businesses out of town. And once Chiquita leaves town, Cincinatti will have even fewer aviation opportunities which will further impair the business climate for the remaining large companies in the city.

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This is a great concrete and usefully non-mystical illustration of agglomeration externalities. If Cornell were to leave Ithaca, New York that would have a devastating impact on the availability of flights to and from the Ithaca airport which would leave Ithaca College weirdly isolated in an upstate town that's not even on a freeway. Longman and Khan for some reason seem to think the moral of the story is that is that we should force passengers who want to fly from DC to San Francisco or from New York to London to subsidize the operation of the airport in Cincinnatti. But for the exact reasons glossed by the article this would be economically and environmentally destructive. You have flights where it doesn't make economic sense to burn the jet fuel even without pricing the environmental externalities, and Longman/Khan want us to subsidize them for the sake of offering a private benefit to Chiquita Banana. What we seem to have here is actually an argument that the states of Ohio and Kentucky should consider subsidizing flights to Cincinatti as beneficial to the wider community. But why should working class people in Los Angeles or Philadelphia offer a cross-subsidy to help the CEO of Chiquita avoid the mental anguish involved in moving away from the Reds? States and localities need to compete with one another to try to strike the correct balance between infrastructure investment and low taxes.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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