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Flying Pork BarrelsThe airline bailout enriches stockholders at the expense of taxpayers.

By Steven E. LandsburgPosted Friday, Sept. 28, 2001, at 3:00 AM ET

Illustration by Robert Neubecker In the past few weeks, politicians have been transformed into statesmen, and George W. Bush has perhaps had greatness thrust upon him. But you can't escape your origins. Congress and the president have pulled off the neat trick of rising to the occasion while simultaneously stooping to pork-barrel politics as usual.

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I refer to the airline bailout—$5 billion in cash and an additional $10 billion in loan guarantees. You might think that in times like these our leaders would be too busy for everyday pursuits like handing out giant dollops of corporate welfare. You'd be wrong.

Let's be clear about what this bailout will do for the flying public: exactly nothing. It won't keep any planes in the air that wouldn't have been there anyway. Airplanes are flown when it's profitable to fly them, and they're not flown when it's not profitable to fly them. Giving cash to the airlines doesn't change the profitability of any given flight, so it doesn't affect any decision about which flights to offer.

If a given route can generate $100,000 in fares in exchange for $80,000 worth of fuel, labor, and maintenance, somebody will fly that route. If the same route can generate only $60,000 in fares, nobody will fly it. That's equally true whether the owners of the airlines are rich or poor.

What if the airlines go bankrupt? So what if they do? They'll be reorganized, and the profitable flights will continue to be flown—if not by existing carriers, then by new carriers who will step in to fill any breach. All those jumbo jets will still be out there, and as long as enough people want to fly, someone will be flying them.

So, what does the airline bailout accomplish? One thing and one thing only—it enriches the millions of people who own airline stocks at the expense of the millions of others who don't. And in the process, it undermines the very principles that we uphold and our enemies want to destroy.

There has always been some small risk that an unforeseen disaster—whether natural or man-made—would dramatically reduce the demand for air travel. It is one of the glories of our capitalist system that such risks are borne by precisely those people who are willing to bear them. If you want to participate in this particular risk, you buy airline stocks. If not, you buy stock in something else. That's called freedom of choice, and it's part of what we're fighting to preserve.

The bailout is tantamount to canceling everyone's bets after the wheel of fortune has already been spun. That's unfair to taxpayers who will foot the bill (and don't get to share in the bounty when the airlines have a year of windfall profits). It's also unfair to everyone else. Here's why: Risky investments usually yield high returns; that package is frightening to some investors and attractive to others. But if you start bailing out troubled industries, you reduce both the risk of stock market investing and the high returns that go along with that risk. That limits the range of options available to everyone. The risk-averse are forced (through the tax system) to bear the very risks they were averse to, and the risk-preferring are prevented from shouldering other people's risk burdens and earning a fair reward for their courage.

So, if it won't affect air traffic and it's patently unfair, what's the argument for bailing out the airlines? It's the same as the argument for agricultural subsidies—these guys have a lot of political clout, and they're exploiting it. Period. It's not like they're the only ones who are suffering these days. I'll wager that the average airline investor is hurting a whole lot less than, say, the average New York City taxi driver.

In Afghanistan, you can't choose your reading material, your occupation, or the length of your beard. In the United States of America, it just got marginally harder to choose your risk portfolio. The gap between our systems is immense, but we've just taken one tiny step toward closing it. Chalk up a small but disconcerting victory for the bad guys.

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Steven E. Landsburg is the author, most recently, of More Sex Is Safer Sex: The Unconventional Wisdom of Economics. You can e-mail him at .

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Reader Comments From The Fray:

[Notes from the Fray Editor: Tom Gottschalk had a good line: "Socialism for the rich, capitalism for the poor." A Pilot Instructor calls for nationalized pilot training here. W.F.Thomas wonders if all that business travel is strictly necessary these days, and calls for more flexible transport options.]

The entire concept of a bailout is insipid. People aren't traveling because they have had the bejezus scared out of them...hence demand for air transport services has declined. The free market response: consolidate companies, rationalize fleets, reduce prices, take advantage of lower jet fuel costs.

I can only guess that the thinking is "...well the airline industry facilitates so many other portions of the economy that we simply 'must' prop it up" (i.e. hotels, theme parks, car rentals etc.). This would be a supremely prudent action if (a) airlines could be relied upon to pass all of the subsidy along to consumers in the form of price reductions and (b) the funding wasn't coming from taxpayers in the first place...neither of which is true

--Laffer Curver

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The fact that all major airlines announced catastrophic layoffs immediately after the terrorist attacks says something. Either they don't have the business acumen to be running their own companies, which is quite possible, or they are stunning opportunists whose exploitation of the tragedy is the most callous display of corporate ghoulism in history.

The current problem with the airlines is mirrored in all major cities in terms of supporting public transit. In the 1930's and 40's most cities went from accounting transit as an expense to accounting it as a potential profit center, and the demise of public transit was assured. If the airlines were accounted as part of the cost of doing [business], rather than potential profit centers, then they would be run as the street car lines in the early twentieth century were run: as civic amenities whose excess revenue over operating costs were reinvested in personnel and hardware.

Transportation is part of the cost of doing business. There are rare circumstances where the mere transport of something creates all added value. In most cases, the value is created by extraction of raw materials and subsequent processing. A simpler model of the national economy would involve taxes and profits concentrating proportionally on value added, rather than resources exposed. This would be more robust in the event of any specific problems, and the entire culture wouldn't be vulnerable to its weakest link, further weakened by rapacious business practices.

--Zeitguy

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If the bailout didn't occur, many airlines may go under like Midway because of the 9/11 events. You say, so what? Well, the "so what" is that competition would greatly decrease, prices increase, and service levels decrease. Maybe we should go back to regulation of the airlines? If so, you can knock off probably 80% of current leisure travel, and maybe 25% of business travel. So, less vacations taken by people.

Not helping the airlines would work if there was a viable alternative, but the U.S. doesn't have one. We don't have a bullet-train systems like they do in Europe or Japan. Amtrak is too slow and almost bankrupt themselves. Greyhound is just plain slow and not nice. Therefore, like it or not, we need to maintain the ailing airlines who became casualties of the 9/11 attacks. They represent an import part of our logistical system in the U.S. Granted it is very flawed and frustrating, but when you need to get somewhere over 600 miles away at a reasonable price, the options are very few.

--Jeff Pretzel

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(9/28)

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