I continue to be fascinated with the little glimpses into the Yglesias family history. Having grandparents (one one side) who were members of the US Communist Party and also grandparents (on another side) who founded a leading economic research institute credited with deregulation policy is ... quite the contrast.
It is fascinating, apropos of nothing, when my dad and I did the “family crest” search thing he was worried it would be something like a rat and a snake stabbing a weasel in the back.
Invariably, opponents of allowing foreign airlines to fly domestic US routes will cite national security concerns. But it's always seemed rather hand-wavy to me. If Air Canada can fly me from DC to Toronto without imperiling national security, why the hell can't they fly me from DC to Chicago?
I think the national-security concern isn’t crazy—but still, we could at least have agreements with friendly countries (e.g. Canada, UK, EU, Australia, NZ, Japan, South Korea) to allow us to fly within each other’s countries. As Matt noted, that’s already the status quo within the EU.
"National security concerns" are a vaccuos false shibboleth used almost exclusively by rent-seekers and protectionists to offer their nativist and extractive behavior a figleaf of legitimacy.
Commercial air is absolutely vital for defense purposes, both for moving personnel to and from combat theaters and, overwhelmingly, for moving cargo, using American companies no one has ever heard of, like Polar and Evergreen, and others people have definitely heard of -- FedEx, UPS and, well, DHL (American-founded but now German-owned).
The DHL case shows that it's possible to use foreign companies but in practical terms there are far more obstacles to that than in using domestic companies.
Can confirm, both times the US military sent me to CENTCOM I flew on weird charter commercial airlines I'd never heard of for at least one flight. The first time it was "Omni Air International" in a 777, it was very similar to long-haul flights I've taken with regular airlines but the flight attendants were kind of mean. Another time it was with "Atlas Air" in a decrepit 747; there seemed to be no flight attendants and instead of seatback movies there was a misaligned projector playing Wonder Woman on a loop for 12 hours.
Atlas Air is marginally infamous for its role in post-9/11 "extraordinary rendition" flights, so possibly they forgot to reconfigure the plane for the next trip?
Absolutely nobody with two brain cells to rub together can actually in good faith believe that there's a even a merely nonzero chance of somehow some Chinese firm being able to swoop in and monopolize any given American logistics market, nevermind the airline industry. What, is United somehow going to be put out of business on its Denver-Houston routes by companies that already can't outcompete it for transpacific travel? You can conjure all the fantasy scenarios you want about how the nefarious Other are totally going to unfairly compete and put every industry in the wealthiest, most powerful, most technologically advanced country on the face of the planet, but crowing about how any given industry is totally "vital" for "defense purposes" is empty, pointless air unless you can offer even a single small shred of evidence that the risk to the industry actually meaningfully exists. You can't just say there could be a risk; there has to actually be a risk if people should actually give a damn.
People have this weird obsession with believing that American companies are poor widdle innocent babies who just can't handle the nefarious wiles of the malicious foreign companies. No, American companies are perfectly capable of competing internationally. They always have been. And when they're forced to compete, they get better at doing what they do.
Someone could say some nonsense about civilian shipbuilding, the merchant marine, and the importance of intracoastal shipping to the American economy and American "national security," and use that to say we need some law that requires all domestic shipping to happen on good AMERICAN ships made by good AMERICAN shipbuilders. Of course, that law exists, it's the Jones Act... and if you look around, you'll notice that the American civilian shipbuilding industry literally doesn't exist, the merchant marine is practically nonfunctional, and the only domestic shipping we really have at all is river barges. Protectionist nonsense tends to in fact prove itself harmful to national security, not beneficial.
I think this is mixing two arguments. As far as I'm aware no one argues that repealing the Jones Act would help the US civilian shipbuilding industry, it really is a case where the US is permanently unable to compete. Equally obviously, this isn't the case for building airplanes
You have this backwards. The Jones Act has created a scneario where US shipbuilders never needed to compete, and therefore have never tried, and consequently, obviously, are not very good at it ("it" being shipbuilding, or competing).
Repealing the Jones Act would *absolutely* harm those existing shipbuilders, because they suck at shipbuilding. That doesn't mean a new company could not come along and do a better job of it.
It may be counterintuitive, but it's actually really easy to argue that. Again, the US doesn't have much of a intracoastal shipping industry whatsoever outside of river barges--the prohibition on foreign-owned OR foreign-made vessels traveling between US ports means that it's cheaper and easier to just load stuff onto trains and trucks and ship it overland (and there're other distortions.) Getting rid of that restriction would in all likelihood massively increase demand for intracoastal shipping--think Houston to LA or NY. Maybe all of that extra demand would just be hoovered by by Japan, South Korea, and China... but I kinda doubt there would be no new American entrants to the market.
Relying on a foreign country's companies to provide critical domestic services is fine—as long as you don't end up in a major conflict with that country. The Chinese government probably wouldn't want US airlines dominating the Chinese market, and US lawmakers probably wouldn't want Chinese airlines dominating the US market, because both sides are concerned about what could happen if hostilities increase. For that reason, I doubt either side would allow it in the first place.
Hence why signing an agreement to let airlines compete domestically in each other's countries is probably only likely with countries deemed relatively friendly. The EU is the primary existing example, along with Australia/New Zealand. (https://en.wikipedia.org/wiki/Cabotage#In_passenger_aviation)
Canada seems like the big one to me. Air Canada may not want to compete too directly with their Star Alliance partner United, but WestJet competing with JetBlue and Spirit could be significant.
My conversations with Canadians have revealed that they mostly HATE Air Canada. It would be interesting to see what happens if US airlines could suddenly offer flights between Canadian cities.
Thinking about it a bit more, it seems like the ability of US-based airlines to compete on cross-country Canadian routes using hubs in Minneapolis or Chicago is greater than the ability of Air Canada or WestJet to compete on cross-country US routes using a Toronto or Calgary hub, so the Canadian airlines might strongly oppose this.
Canadian landing fees are high enough (and AC already tries to route US connections through YUL/YVR for trans pacific) that they might try something crazy with a US hub
I responded to a similar sibling comment here[1], but the gist of my reply is that, it seems "easy" to allow any company to provide domestic service as long as there's a mechanism to prevent an "overnight withdrawal from the market", which seems simple when it come to air fare compared to natural gas. Sure JackalJet and LucifAir can just order all of their planes to leave US airspace, but then this is something that can be easily monitored, and a minimal number of planes can be mandated to be "on US soil or in US airspace", no?
I suspect that any foreign company entering the American market would have to be a participant in DoD's Civil Reserve Air Fleet (CRAF) program) that requires them to offer services during wartime or in times of exigent defense need.
I would add to this that we probably also want to make sure that airframes and engines flying domestically in the US are made in the US or friendly nations. No Ilyushins or Comacs.
By the way, it's kind of surprising to me that Japan and South Korea don't have more of a domestic airliner industry.
"it's kind of surprising to me that Japan and South Korea don't have more of a domestic airliner industry."
The information about the one airliner Japan produced post-WW2 ( https://en.wikipedia.org/wiki/NAMC_YS-11 ) causes me to think the issue was a combination of the US successfully dismantling Japan's native aircraft industry immediately post-WW2 along with the inability of the Japanese government to sufficiently subsidize the creation of a new industry due to lack of military spending.
Given how much the US government spends on Boeing stuff (according to the Google, more than 40% of Boeing's revenue is from "Defense, Space & Security") and the integration of regulatory roles into Boeing itself, Boeing seems almost like a US government agency.
I'm not sure that that fact is either here or there, but it does seem that successful aircraft companies have to be quasi-governmental.
To steel man the case: if domestic airlines get out competed by, for instance, a foreign government subsidizing heavy losses for their own airline, then we could lose domestic airlines and be dependant on non-US companies.
It seems far fetched but that's the justification for a lot of protectionism.
I don't think it's far fetched, but at the same time it seems like a completely run of the mill problem that regulations already routinely solve. Eg. foreign companies can manufacture pharmaceuticals abroad, and - as far as I know - they don't even have to guarantee that they will continue to do so for some time. It's implicit that anyone who goes through the trouble to get FDA marketing approval wants to recoup the money spent, etc..
But of course bad market distortions, like dumping (foreign government subsidized or not) are not new.
And of course it's ridiculous that even in cases of very fungible things there is protectionism (ie. when it comes to steel or textiles) ...
... but sure, effective self-determiniation requires some forethought with regards to these dependencies, market forces, and counter-party risks.
... that said, these are not new things. National security or not. Efficient markets require some kind of competition. Monocultures (monopolies) respond poorly to changes anyway.
So ... it seems to me that the "simple" solution is to make sure that these foreign companies that provide services have an agreement with the state that when/if they go under the state - or any US company - can buy the parts responsible for US domestic service. (And of course, it becomes a slight barrier to entry to maintain a US presence, and to have a periodically revised plan for handing over US operations. But this does not seem that big of a hurdle for an airline that can manage transcontinental flights!)
I wouldn't necessarily bother with your "simple" solution -- it's perfectly acceptable, but may not be worth the lift relative to alternatives. (no aviation pun intended)
I'd rather have the policy be, "foreign carriers can do domestic routes, but if their governments subsidize them, we'll slap retaliatory tariffs on them". Which is pretty much how free trade works in literally every other industry.
Also, perhaps your "buy off the parts" idea would be better suited as a sort of "national market policy". To wit, rather than merely just buying up parts of failed airlines, we'd have a national policy that requires, say, a minimum of 5 large domestic carriers. Any time one fails, the government offers financing for any of the smaller carriers to exercise a "right of first refusal" in the bankruptcy proceedings.
Article 7 of the 1944 Chicago Convention arguably prohibits limited grants of cabotage rights and requires that, if a country allows cabotage in its territory, that it be permitted universally to all other states who are parties to the Convention (which is almost every country on Earth, last I checked).
How would that be different from any other product that a foreign government could subsidize and undercut American suppliers and we already have mechanisms in place to monitor and punish?
Saying it doesn't work for airlines seems like an implicit acknowledgement that the system is broken and non-airlines are fucked by foreign competition and nobody is interested in fixing that.
I think it's easier to monitor and punish that for goods than services. Also, would we allow those companies to subsidize the rest of the network (as they are already doing) but not the domestic US flights? Even when people would often combine those on one itinerary?
Certainly for National Security, it makes sense to me to guarantee at least one major airline that can get to major US cities. In a pandemic case, maybe large foreign operators don’t operate in the states and having some native industry is handy.
This is the same approach to protectionism featured in the CHIPS act, more or less: we don’t need domestic companies to dominate an industry, but it’s important that domestic companies exist.
I mean, it isn't hard to see just how flimsy some national security is? At large, we are safe because we cooperate with each other. Consider why more infrastructure doesn't collapse every year.
That said, with modern surveillance, I do get the impression that most of the concerns are highly overcome by events. There probably is something to be said for inspections and such, but I don't see why those couldn't be part of the package. Agree to inspections and get the privilege of flying routes in our nation.
re this point: “I think DOT probably did the right thing by blocking the Spirit deal and probably did the wrong thing by allowing the US/American merger.”
i happened to write my senior thesis in college on the American-US Airways merger specifically, and airline mergers more generally. i definitely wouldn’t claim this makes me an expert! but i concluded that the data didn’t support blocking that merger, for two primary reasons:
1. there were only a couple dozen routes nationwide on which US and American were the *only* 2 airlines providing nonstop service. fares would almost definitely increase on these routes, but on routes that would go from, say, 3 competitors to 2, there was unlikely to be any meaningful impact (this was based on analysis of fare patterns post-the Delta/Northwest and United/Continental mergers).
2. American and US’s hub networks were complementary, and thus none were likely to be “de-hubbed” post-merger, unlike what we saw with, e.g., Cleveland or Cincinnati, which now have drastically fewer flights than pre-merger (check out the Wikipedia pages for each, it’s quite sad) and are thus far more expensive to fly to/from. this was a somewhat qualitative prediction but it has held up quite well! Phoenix, Philadelphia, and Charlotte (the 3 US hubs) remain hubs for American over 10 years later, and nobody expects that to change.
finally, the other main conclusion was that the presence of an LCC (Southwest, JetBlue, Spirit) on a particular route does exert a meaningful downward pressure on fares. hard to know exactly what this implies for the Spirit-JetBlue merger though (i don’t think i looked at the case of going from 2 LCCs to 1, because there probably weren’t many examples of that), but my personal sense here was the combination of these two was somewhat confusing given they are both very heavily concentrated on east coast routes.
I think the LCC vs Full Service Carrier distinction has degraded a lot since the big 3 mergers... now all three FSCs are putting out ticket offerings that are pretty comparable to Southwest or whatever and Southwest is getting rid of open seating. Also I think its pretty clear that an expanded Southwest contributes more to competition than the loss of Northwest and Continental subtracts since SW provides competition on basically every route... if you live in Minneapolis your life is pretty much the same now as it was before the Delta NW merger... for the vast majority of routes you only have one option but now the color is different.
It has in the larger cities because Southwest has expanded to all of them. I live very close to XNA (Northwest Arkansas). It’s a wonderful airport and we have a pretty good selection of flights thanks to demand for business travel related to Walmart and the other companies here. But, the FSC’s dominate and fares are high. The planes are crappy regional jets. We desperately need Southwest or another big LCC here to bring down fares. Allegiant and Breeze are here but don’t cover many routes. Southwest is hesitant to move in because it is already in nearby Tulsa. I’m guessing other smaller airports have this same dilemma. Instead of blocking the JetBlue-Spirit merger they should have forced them to take Frontier as well so we could have a second national LCC to compete with Southwest.
"the combination of these two was somewhat confusing given they are both very heavily concentrated on east coast routes"
I don't think that's confusing at all from the companies' perspective, it sounds like their routes overlap and that they would reduce competition by merging.
There are some exciting benefits beyond what Matt mentioned explicitly!
1. Better aircraft usage — A major supply constraint in global aviation right now is a lack of planes. Many airlines want to sell more seats but literally can't get aircraft fast enough. Yet, it's common on intercontinental flights for planes to spend hours a day sitting around doing nothing. For example, a plane flying transatlantic might do a round trip that's only 18–20 hours, then it *could* do a short-distance hop but is legally banned from doing so. American can fly a 24-hour cycle of Philly–Munich–Charlotte–Philly, but Lufthansa can't, and American can't do Philly–Berlin–Munich–Philly. It's even worse for flights that are timed to be overnight in both directions (e.g. between North and deep South America). American's Boeing 777 #N886BR was scheduled 3 times this week to sit around for 15 hours (twice in Sao Paulo, once in Santiago), a huge waste of plane capacity. More flexibility to fly in other countries would unlock more seats without more planes.
2. More competition outside the US — There are many countries with significantly less domestic competition than the US; look no further than our neighbors in Canada. Letting us fly in each other's countries might be a small help to us be could be a big help to them.
3. Spreading competition across more aspects of the journey — Different airlines excel at different things. For example, I find that Qatar and Japan Airlines have a significantly better onboard experience than major US carriers, but the US carriers have significantly better digital user experiences. Having more competition between airlines offers an opportunity for passengers to compare and contrast more aspects of the overall experience (hopefully pushing airlines to compete across more aspects of the journey), and for airlines to examine a range of consumer preferences (e.g. maybe we can cut X thing that costed money but passengers don't seem to care about).
> it's common on intercontinental flights for planes to spend hours a day sitting around doing nothing
I realized this recently when I was looking at flights from my country (Vietnam) to Adelaide, Australia and realized that, for example, if we flew arrived on the 21st at 6:30am the soonest return flight is the 24th at 7:30am. So it is just sitting on the ground for 3 days. Presumably paying some kind of hangar costs. And I guess the flight crew is chilling?
I think the reason intercontinental planes sit around so long is the crew regulations on sleep. Crews can only fly a certain number of hours, then need to be given time to sleep. And if you are e.g. Lufthansa, you don't have a bunch of Lufthansa pilots sitting around in Cleveland or Atlanta to take over for the crew that just landed and fly it somewhere else in the meantime while the original crew sleeps.
Though I suppose if it were legal to have that plane fly an Atlanta -> Dallas and back route before returning again to Frankfurt or whatever, you might actually hire US-based crews to work for Lufthansa.
Assuming that's accurate (and I'm not sure it is), that's a function of the US-France and/or US-German bilateral aviation agreement(s) and doesn't relate to the ban on domestic flights in the US, which is ultimately a function of the Chicago Convention. Otherwise, unless something changed in the past few years, US carriers can still operate "dumbbell hubs" in the EU as long as the second leg crosses a national boundary.
EDIT: A semi correction here -- in 2007 the US and EU entered into the US-EU Air Transport Agreement, which superseded the bilateral agreements the US had with individual EU member states. However, the terms of that agreement preserved the same "Fifth Freedom" rights for US carriers as existed in the prior agreements, so my point about a US carrier being able to fly Philly–Paris–Munich–Philly while EU carriers remain unable to fly intra-US routes remains correct; it just relies on a different legal document.
Oh interesting—I just dug into this deeper and you're right re: Europe! “Because the EU is not treated as a single territory for the purposes of the agreement, this means in practice that US airlines can fly between two points in the EU as long as that flight is the continuation of a flight that started in the US (e.g. New York - Paris - Berlin).” https://en.wikipedia.org/wiki/EU%E2%80%93US_Open_Skies_Agreement
That said, my point still remains for European airlines. “The treaty disappointed European airlines as they felt it was tilted in favour of United States airlines: while US airlines are allowed to operate intra-EU flights (if this is an all-cargo flight or a passenger flight if it is the second leg of a flight started in the US), European airlines are not permitted to operate intra-US flights”
And this also remains an issue for US airlines doing this within a country (e.g. Philly–Berlin–Frankfurt–Philly), though obviously that's a much smaller issue.
"I just dug into this deeper and you're right re: Europe! "
Yes, I actually wrote a whole law review article on the subject of the EU/US aviation law regime years ago! This set up is called "dumbbell hubs" and is always a sore point for European carriers -- there are very, very few valuable cabotage routes in EU member states, so a US carrier can have a very compact hub-and-spoke system on both sides of the Atlantic, whereas a European carrier only gets a hub-and-spoke system in Europe and is then forced to either operate purely point-to-point on flights to the US or has to have a hub-and-spoke system that extends out to Canada, the Caribbean, etc., and there are a lot fewer profitable options there.
"... as Elizabeth Warren put it in a speech at the New America Foundation last month — that four airlines control 80 percent of American airline seats, three chains own 99 percent of drugstores and four companies sell 85 percent of the beef."
& so fucking what? Are consumer prices rising? Are these companies colluding? What's the case here? Why has this knee-jerk, anti-bigness, stupid, high school level analysis infected the Left?
Delta is the best run airline. Their stock price has been precisely flat for the past four years. Tyson is the largest beef producer. Same story. Stock was $67 to start 2021 and is down to $61 today (NOTE: It peaked at $88 in Q1 2022). Walgreens Boots is down a *SHOCKING* 83% from 2021. Woah. That's a mess. I could go on. The reason there's fewer companies today than before is how shockingly hard and competitive every single market seems to be these days; coupled with rising costs everywhere compressing margins and a very real *massive* annual CapEx requirement to just keep up.
At the very core of the Warren philosophy is that America should be more like Europe. And that just means making American companies, and in turn America itself, more poor.
Then she should be shot out of a cannon from the Democratic party. What an embarrassment for Biden that he leaned so heavily on Warren's team when forming his administration.
This is just such an oversimplication it's hard to know where to start.
The notion that America has derived advantage from having, over the long-term, a favorable business environment in comparison to Europe is not unreasonable. However, transplanting that to antitrust is ahistorical. America basically invented aggressive competition policy and even if policies converged over time, with convergence and then arguably Europe becoming more aggressive, that's still a long time when you could try to argue that America was richer and better "because" of its antitrust policy.
More importantly though, I think there is a really fundamental and deep misunderstanding of what makes capitalism great in Dave's rather vitriolic comments and in many of the other attempted defenses of bigness from Matt, Ben, and others over the years.
In this framing, the biggest companies companies are obviously "good." Because, well, how could they have gotten so large other than by providing useful products and out-competing many other other companies. And, to be fair, I do think the Stoller/Khanites should respect this point a little more--big companies are generally the end result of smart people doing great work, not of sinister "greed."
But, at the end of the day, no matter how "good" an individual company is, the larger its market share becomes, it will correspondingly start to try maximize the profit by leaning on that market power. Again, it's not a matter of companies being morally corrupt or the CEOs "greedy." It's just basic logic--as the number of your competitors shrinks, you can charge higher prices and feel more secure without needing to innovate as much. Google became a gigantic company by developing of series of incredible products that generated gargantuan consumer surplus. And yet, since reaching behemothic proportions, ever more of its resources have been devoted towards taking its (initially well-deserved) large market share and then trying to squelch potential competition. Google Maps was a phenomenal product that generated massive consumer surplus, but Google buying and defunctionalizing Waze was not a good thing for consumers. It was an actively bad thing that obsessive defenses of big companies as "good" and antitrust as "mean" overlooks. Google Search is maybe the greatest product of the last 30 years (yes, better than the iPhone), but paying Apple bazillions of dollars to keep it as a default is still Not Good.*
*A lot of people will say 'Bing sucks, people would use Google anyway, so it doesn't matter'. But as even Ben Thompson (a guy who is general very pro bigness and strongly critical of the neo-brandeisians) has explained, it's not about Bing, it's about preventing Apple from developing its own search engine, i.e. preventing competition that could have generated very large consumer surplus.
In other words, there is a constant tension--the pursuit of bigness leads to amazing things, but, as companies get ever bigger, "outcompeting" becomes more and more about trying to leverage your existing market power and financial resources to simply prevent competition outright.
I think the serious answer to your question is that like in every society there is some real deprivation in America, but unlike everywhere America is the richest society on earth so it's very tempting to think that more government intervention could alleviate that deprivation. It's hard to do and it leads to some pretty scattershot proposals, and Warren is probably as guilty as anyone of a quantity over quality approach to proposing new interventions. But I don't think she's wrong, there's plenty of dumb regressive stuff in US politics that it would be good to get rid of.
Britain is going through a similar process albeit the details are different. "Just tax the rich" has become the solution to every problem here for a certain group of people. They're often cavalier in how they go about this, to the point of not having a specific proposal at all. But they're basically right. There are parts of British society that the government should be funding better, Britain's property tax is virtually non-existent, and it should be raised to fund those funding priorities. But it seems unlikely to happen because everything to do with property is crazy in this country.
EDIT: to be clear, the 'tax the rich' crowd aren't right that it will solve everything. It won't. But they are right that at least in relation to property (or preferably land-value) tax, it should happen.
Also, I think that link is showing nominal, not inflation-adjusted prices - so even in the 2022-2023 spike (which would have due to the post-COVID demand surge as well as oil prices), real airfares were still lower than in 2013. This does not scream "competition crisis" to me.
The combination of the fact that the airlines were going bankrupt before the mergers, and the fact that consumer prices seem to be pretty reasonable, seems to indicate to me that approving the past mergers was probably the right decision. At first I was happy the Jetblue-Spirit merger got blocked because I didn't want to lose one of America's only low-cost airlines - but I didn't realize at the time how much both airlines were struggling. Hopefully they survive. Blocking a merger doesn't increase competition or help consumers if it causes one or both of the companies to go out of business.
I have no idea how that article gets to "In the last year, the consumer price index for airline tickets has shot up by 25%" - the link they cite literally shows the opposite, a decline in real terms over the year prior to that article's publication.
It's always good to read an article on something I'm knowledgeable about that doesn't make me want to tear my hair out. I worked in airline pricing for most of my career and find the take to be broadly correct. I think it is hard to argue that the airline business isn't competitive, even if there's really only four main competitors, and it's correct that the benefits of doing this would be real but modest as a result.
Air travel is already highly divided between competitive and noncompetitive markets (as defined by pricing analysts rather than economists, who I'm sure use a more coherent definition), where the latter have much much higher fares. Not even per mile higher fares, it's just straight up more expensive to fly between a minor airport and a major one than between two major airports, typically. Because of this, if foreign airlines could fly domestic routes, you'd probably see even bigger drops in fare on flights between top tier major cities, and little/no benefit for most of the small expensive places. Emirates isn't clamoring to enter Colorado Springs - Chicago but they'd definitely want to be in NYC-LA.
DC-Maine example is right that the threat of competition is definitely a lesser concern than actual existing competition. When I was doing revenue management, my advice would've been to milk the market for as much as it's worth in the short term, then if a competitor enters drop the fares at that point or exit entirely and use the planes elsewhere. I'm not sure American Airlines takes quite as aggressive an approach as we sometimes had to at the small airlines I worked for.
What definitely did restrain our fare ambitions in the noncompetitive markets was the threat of government intervention. There were definitely cases where the threat of a competitive subsidy by a state government got us to voluntarily offer (much) lower fares than we would have otherwise. I am not sure that the result was welfare maximizing - usually the result was sold out flights, meaning if you need to go at the last minute for whatever reason, you can't.
Also in the airline business. I think this is mostly right, unsurprisingly. Foreign entrants just won’t do much and won’t want to compete on low load/high jet fuel burn/ endemically expensive small markets. To the minor extent this would create competitive capacity it would be on cross country flights and some high demand/return city pairs which are already high demand for incumbent us airlines and served as such.
This would have marginal effect nationally and no impact on low return rural flying. If someone wants to fly Bangor maine to DC (a very seasonal and low demand market) it could be one of the incumbent low cost carriers.
Rural air travel is tough with carriers upgaugung aircraft, rj jets being fuel burn machines and consumers willing to drive to airports with greater service options etc. As I’ve said to policymakers crudely: living in a rural/small market comes with costs, and one of them is that it’s hard to maintain equal service
Do you think there's any chance foreign airlines might be more willing to use turboprops for low-demand routes? As opposed to the major US carriers, which all got rid of theirs.
And if so, could that be something that could potentially meaningfully lower fares and/or make some routes more economically viable?
Though I suspect you might still have the "Will a foreign airline really want to bother with investing in experimenting on low-demand routes on another continent?" question, whose answer might be no....
My understanding is that is in a US operating context the economics of turboprops is pretty bad. Silver Airways struggles to make it work even though they've got an on paper ideal market connecting Florida and the Bahamas.
So this is a place of personal expertise, and this article suffers from some lack of knowledge. As just one example:
"In Europe, pilots need 500 hours of flight time to qualify for a license, while in the United States
pilots need 1,500 hours, which makes it much more difficult and expensive to become a pilot
with no clear safety benefits. There is also a proposal in Congress to raise the mandatory
retirement age for pilots from 65 to 67, which could help a bit. In both cases, pilots and their
lobbyists have argued against reform precisely because they don’t want more competition —
just like the existing Big Four airlines don’t want competition from foreign brands."
(1) The premise of pilot shortage is not accurate. There have been furloughs at 4 major carriers and most airlines have frozen hiring for a variety of reasons. Most major investor analysis find we have a pilot surplus in the US for a host of reasons - post covid pilot certifications have swamped hiring, tamping demand, and Boeing delivery problems.
(2) The US' 1500 rule is not uniform and has reducible credits for most pilot candidates based on background, with military pilots only needing 750 hours and 4 year aviation degree holders needing 1000 hours based on the FAA's analysis of rigor of the training environments. So most pilots do not, in fact, need or have 1500 hours of flying as an entry point.
(3) The pilot age issue is super complicated and is a based on the pilot age being set internationally by ICAO. The downstream negative consequences for flight routes is really bad if their is disharmony between US law and the international standards, including an inability to efficiently use flight paths in the northern parts of the US where use of Canadian airspace would be prohibited for categories of pilots that are very hard for airline flight ops to manage.
(4) EU pilots have a different and complicated licensure arrangement. While the hours are lower they have academic coursework and knowledge test that we do not require. Put simply the comparison here is crude and not quite accurate.
Broadly, unlike the Jones Act issue, the US has an intensely competitive environment for airlines so the alleged benefits and scalability of foreign cabotage are small. US carriers are in fact, largely, superior competitors on the international scene as well. While its true the Gulf Carriers operate a superior product in some cases they do so by massive state subsidy. The economics of Bangor to DC are too poor and seasonal to sustain a lot of carrier attention and wouldnt be sufficient to attract a foreign carrier if one could enter the market.
Too often, we uninformed outsiders see something like this (1500 vs 500) and just assume, "Ah, regulatory capture to benefit a small group of selfish stakeholders" and call it a day. As is usual, the story is far more complicated.
Thanks, in fact the 1500 number is something matt has said is “arbitrary” but it is instead based on the prevailing requirement for captain hours that Europe also requires and us airlines have mostly wanted and used as private default. When they redeveloped the rules in 2010-2014 1500 was chosen because the captain and first officer increasingly share responsibility. However regulatory flexibility was baked in to allow first officers to come in well below 1500 hour, with some cases as low as 650 hours. So yes, it’s more complicated. It’s fine if people don’t like it, but the presentation here as in previous posts by Matt suffers from an absence of detail.
Aargh, I have lots of work to do today and I'm a Person Experiencing Westerness, so there are already almost 120 comments, but I have so many thoughts on this because I actually wrote a law journal article years ago that has a major discussion of this subject!
A very quick observation is that I did not see any mention of the 1944 Convention on International Civil Aviation (a.k.a., the "Chicago Convention"), which the US is a signatory of, along with basically all other countries with major commercial airline carriers. Article 7 of the Chicago Convention reads:
“Each contracting State shall have the right to refuse permission to the aircraft of other contracting states to take on in its territory passenger, mail and cargo carried for remuneration or hire and destined for another point within its territory. Each contracting State undertakes not to enter into any arrangements which specifically grant any such privilege on an exclusive basis to any other State or an airline from any other State, and not to obtain any such exclusive privilege from any other State."
It has been argued for decades in the aviation law community that the second sentence of Article 7 means that if a country agrees to allow cabotage for air carriers from one country, it must allow cabotage for ALL countries' air carriers. E.g., if you let British Airways and JAL fly domestic US routes, you also have to allow Air China and Rossiya to fly too, if they otherwise can obtain necessary gates and slots at the relevant airports.
The one thing of note that I think was missing from this article was an acknowledgement that many national airlines are *heavily* subsidized. So long as we are creating rules to restrict that, then I agree more competition is better.
How much would foreign governments be interested in subsidizing intra-US domestic flights? This isn't propping up manufacturing (Matt points out we can already use foreign-made aircraft), it's just propping up a service industry in a foreign country to the benefit of those citizens.
China is heavily subsidizing all kinds of production that make prices cheaper, but also drives out competition. If you remove all cabotage rules completely, then its likely that China decides that they want to rule the air, and subsidizes their way into global airline dominance.
China buying American/European planes in order to lose money operating them to help Americans travel around America sounds fantastic (and not at all comparable to steel manufacturing), unfortunately they are not nearly stupid enough to go for it.
So if China managed to subsidize all EV production so that nobody else made EVs and only they did, and then they cut all EV production to us we'd be in some trouble because spinning up manufacturing etc takes time.
Assuming airplanes are being made anyway, isn't a service industry much cheaper to spin back up?
China is trying to build their own domestic competitor to Boeing and Airbus. If they dominate the airline industry, they can choose to buy Chinese made planes. Controlling both the industry and the service would enable them to reinforce their control over each.
It's a pretty capital intensive service industry. If in this hypothetical China owns all the planes you'd still have to wait for Boeing and Airbus to make more if the Chinese call it quits.
If we’re talking contradictory airline policy, my favorite is the combination of the Fly America Act and the GSA City-Pair program.
Fly America says federal employees have to use American carriers when traveling overseas, even if foreign carriers are cheaper (though with various complicated waivers and exceptions). Presumably this is to give a kind of stealth subsidy to US airlines.
GSA City-Pairs are where the GSA negotiates discounted government rates for flights between pairs of thousands of different cities in the US and overseas. These are mandatory for federal employees to use (though with various complicated waivers and exceptions). Presumably this is to avoid giving too much government money to airlines.
These two, combined with other regulations, create a sufficiently complicated regulatory landscape that federal employees can’t be trusted to book air travel for themselves, and instead have to go through dedicated specialist travel bookers, which of course the USG pays for.
Maybe just abolish the city-pairs and Fly America and simplify the rules enough that we can let feds book travel for themselves?
The cherry on top is that many of the city pairs are actually flown by foreign carriers through codeshares. I'm on a TDY to Paris right now, and was forced to fly Air France (with a Delta flight number), even though United has a direct flight from IAD to CDG...
Love your work, but you’re missing the ball on this issue. You’re ignoring the main business dynamics here, which is that historically airlines are a terrible business that constantly go bankrupt, and then taxpayers have to bail them out. Warren buffet had a famous quote pointing out that the cumulative returns to the entire airline industry from Kitty Hawk to today was zero.
Competition is good as long as it’s not so extreme that no one makes money (especially in capital intensive industries), which discourages investment. This is why Europe has bad cellular data speeds. The industry was regulated to the point that no one could justify the investment to increase bandwidth because they weren’t sure if they would ever make it back.
You’re on point with the critique of businesses like CVS, but if you dial up competition in a capital intensive industry with horrible returns you’re just going to bankrupt them. Every major airline has gone bankrupt in the last 20 years.
This doesn’t mean we don’t have a massive problem with conglomerates that need to be broken up, but Google and its competitors haven’t gone bankrupt multiple times because of competition that was so intense they couldn’t pay their bills…..
The ATSSSA assuredly gave loans to airlines that were too sick to survive and do not exist anymore.
The 2020-2021 bailouts assuredly kept the airlines from going bankrupt both from ch. 11 and ch. 13. Source: was there for it all.
If this is nitpick on if company was bailed out after it went bankrupt well sure but that’s not the persons overall point about the difficulty of heavy consumer surplus airline industry where companies routinely go bankrupt. The mergers were a rationale response to the 1990s 00s in which airlines routinely went bankrupt because competition was destructive and bondholders and airline employees got holding the bag. The rationalized and more consolidated airline industry continues to provide low prices and more service options because a bankrupt airline has a hard time growing and developing networks
It isn't a nitpick. The OP wrote a specific situation: "which is that historically airlines are a terrible business that constantly go bankrupt, and then taxpayers have to bail them out."
Lots of bankruptcies...sure. No "taxpayer bailouts" as a result that I can see.
The US airline industry received more inflation-adjusted dollars in the first bailout passed post-9/11 than Amtrak has received in federal funding in the entirety of its existence.
I take no position on the COVID bailouts because I don't know the specifics of that. I was just responding to a request for an example of airline bailout and included the Amtrak reference for a sense of scale.
"In the financial year 2023 the National Railroad Passenger Corporation, also known as Amtrak, recorded operating expenses of around 5.4 billion U.S. dollars."
Airlines had operating expenses 10x(that of Amtrak) that year.
The covid bailouts were not 10x different though - more like 30x, from the numbers I saw ($50 billion vs $1.5 billion)?
It’s not direct company bailouts like Auto industry, they never get to that point because there would be such an outcry if voters couldn’t fly. They do it through loan guarantees and direct cash assistance, or taking over pension liabilities. 15 billion in 2001, 50 billion in 2020, 6.6 billion in 2005 when the gov offloaded pension liabilities to a federal agency.
They got massive cares act subsidies that other industries did it. These protected employees, not contractors. My wife was laid off from a contractor job with Delta while the employees got subsidized to fly empty planes. She landed on her feet, but the practice of treating some categories of jobs as more worthy of protection than others troubles me.
It's always tough to lose a job, but contractors and actual employees are fundamentally different classes of jobs with different levels of risk and compensation built right into the agreement. "Massive black swan disruption to all operations" is precisely the type of scenario in which its useful for large companies like Delta to have optionality for very fast pivots.
That’s not really true legally and I don’t see the point normatively. Most employees, the overwhelming majority, are employees at will. They can be fired at any time for any reason. The biggest difference between independent contractors and employees is who pays the employers portion of social security taxes.
From the government’s perspective, it’s even messier. Airlines received massive cares act subsidies that were unavailable to restaurants, cruise ship operators, hotels, law firms, chip manufacturers or petroleum producers. The quarter million employees of major airlines were basically guaranteed a job through covid— even though the planes were empty— and everyone else was left with their PPP loans and enhanced unemployment. My wife got a grand a week in unemployment for six weeks (untaxed!!) then got a higher paying job, and declined to go back to Delta when they recalled her in 2021. She did just fine. That doesn’t mean airline employees deserved more protection than basically anyone else.
Also just want to point out that airlines and telecom are really the only two industries that this applies to. Every other market benefits from more competition. These two are unique.
While this may not be quite as much of an issue as with goods trade, I do think that you need to engage a little more with the significance of opening up markets to.heavily subsidized competition. The EU carriers are well-chosen, because people are familiar with Europe having a large number of low-cost carriers, but what about cheap flights from Gulf carriers. While you often bemoan the resurgence of pro-tariff (or, in this case, services protectionism) sentiment, the "cheap stuff is good" argument is not just politically mediocre, but it's intellectually under-powered even if you do believe that markets, competition, etc; are good.
I recall reading a Cato argument piece early in the Trump administration talking about the U.S. should have responded to the comically excessive quantity of Chinese steel production in the same way Korea did, with subsidies to certain domestic producers affected by competition, instead of imposing heavy import tariffs. And, it's certainly true that when you draw up the supply demand graphs you get a lower deadweight loss and maybe even more important from an economic perspective don't hurt your downstream industries in the same way as tariffs. But, at the same time, wait a second--this is the Cato Institute talking about how the proper response to a subsidy is to do more subsidies! In other words, endorsing a situation where the countries that decide to massively subsidize an industry then can spark a succession of subsidization as others countries follow the Cato recommendation so that they can a) still benefit from the "competition" as in your post title and b) keep their own companies afloat. This is bad not simply from a protectionist perspective of danger to domestic jobs, but also from a pro-market and competition perspective, because you have misallocations of resources successively spreading across the entire world.
I think is particularly challenging for the U.S. Despite our dabbling in 'industrial policy' and increasing tariffs, the U.S. domestic economy is still far more market-based than most others. In particular, while many other countries have longstanding policies to direct resources like cheap inputs and steady financing to 'good' sectors, like high-value add export manufacturing, while trying to squeeze 'bad' sectors like commodity exports and not offer too much support to 'boring' sectors like services industries, here we have much more the approach of letting the chips fall where they may and letting the market decide where to use resources.*
*Yes, I realize that the U.S. operates a vast plethora individual programs to promote exports and manufacturing and has made some headline grabbing moves in the last few years. But, it really does lack the systemic government policies directing resources towards favored sectors at the expense of other parts of the economy that you see in an obvious way in China, but also in places like Japan, Korea, Southeast Asia, India, and much of Europe. The CHIPS Act was a Big Deal in the U.S., but as people have noted it's kind of a drop in the bucket compared to China's industrial subsidization (and even China's subsidization of semiconductors alone).
I meant more the specific "cheap imported goods/services are good, we shouldn't look too closely at why they're cheap and just enjoy the low prices."
In terms of the last four years, I think it's also shown that monetary and fiscal policy ultimately have a lot more effect on the prices than things like tariffs or greedflation. Trump's blanket tariffs on everyone would be a bit different if imposed, but the steel/aluminum/China tariff increases are trivial as contributors to inflation when compared to the federal budget and even more importantly the money supply.
It also somehow failed to mention the 1944 Chicago Convention, which arguably prohibits reciprocal or limited grants of cabotage under Article 7 of the treaty. This has never been really seriously tested because most past instances of cabotage by Convention members have involved routes that aren't particularly lucrative or desirable to serve anyway, but allowing NY-to-LA flights or something like that would put that issue on the front burner for aviation agreement diplomats.
Just out of sheer curiosity, in what legal venue would a challenge to a treaty violation be held? Is there such an international court for these kinds of disputes?
In practice, there's no forum to litigate this kind of thing in other than *sort of* the EU's Court of Justice when the EU Commission and member states are involved. (In the late 1990s and early 2000s, there was a whole raft of litigation between the EU Commission and multiple EU member states over their various bilateral aviation agreements and whether certain provisions violated EU treaty obligations, regulations, etc.)
The normal way possible violations of aviation agreements are dealt with is retaliatory action by the aggrieved country, which is usually also aviation-related, e.g., prohibiting "Fifth Freedom" flights (an onward flight to a third country, such as a US carrier flying NYC-Paris-Rome) by the violator's carriers from airports in the aggrieved country. But you theoretically could have other "trade war" type actions as well -- tariffs, import quotas, etc.
While I enjoyed this MattY article, as usual, I found the policy logic to be weaker than usual.
The three largest carriers in the US have profit margins of 4-7%. That means your airfare is overwhelmingly going towards pretty fixed costs like the fleet, jet fuel, crew, airport fees, etc. The fuel alone is 30% of the airfare, and aircraft costs (maintenance, depreciation, etc.) are another 20%.
I don't deny that airlines can improve on their IT, marketing, management, etc. to lower costs, but the upside here seems clearly quite limited. Airlines don't produce aircraft, fuel, or crew-- they have to acquire them at market prices, which are passed onto consumers.
I tried to find extensive data on US air travel costs compared to other countries...
This was the best I could find. The US isn't in there, but that would indicate we are not among the top-20. For a rich country with high labor costs, that would seem to indicate we're doing alright.
My recollection from having traveled domestically and abroad is that US domestic airfares are similar to generic airfares covering the same distance. Some searching on Google flights just now shows airfares for NYC<->MIA being very similar to LDN<->BER (about half the distance).
Most people in my world that travel internationally a lot will tell you that the US airlines biggest issue is the unions. The desk and cabin crew have union job security and are therefore incrementally more indifferent to the customers than less unionized Asian and Middle Eastern airlines.
So I'd say the upside to consumers of letting foreign carriers is pretty limited. It's hard to see how airfares could decline by more than a few percentage points.
Matt rightly points out that the unions will hate this. I'll add that a big slice of the population that reflexively supports protectionist policy will also hate this. Matt is usually quite politically pragmatic, but he seems to go all idealistic here. Given the limited upside in this case, why spend the political capital here? Matt is usually a lot better than this.
Matt also comes across as naive as to how international trade tends to work in reality. Sure, we could just open up our skis to foreign carriers. Alternatively, we could *offer* other countries reciprocal market access, providing additional foreign opportunities to our domestic carriers. Although it could still be beneficial to act unilaterally (if we ignore the political costs), it seems far, far preferable to at least try for reciprocity, which Matt does not mention.
Was going to make this point also. For all our (ie American) talk about saving money, we’re remarkably reluctant when it comes to obvious actions like getting rid of Fly America.
A while ago Matt wrote an article explaining why mid-size regional banks, like PNC, Huntington, and Fifth Third, should be allowed to merge and become mega-banks like Citi and Chase. It would cause them to be more protected from economic fluctuations and bank runs. I can't help but think that similar logic applies to airlines. Tiny airlines fail regularly, whereas large ones like Delta and Southwest last decades and even emerge from bankruptcy proceedings relatively fine. Letting Spirit merge with JetBlue and Allegiant merge with Frontier seems like it would be good from a competition standpoint, because then there would be two more large airlines to more directly compete with the Big Four.
I continue to be fascinated with the little glimpses into the Yglesias family history. Having grandparents (one one side) who were members of the US Communist Party and also grandparents (on another side) who founded a leading economic research institute credited with deregulation policy is ... quite the contrast.
It is fascinating, apropos of nothing, when my dad and I did the “family crest” search thing he was worried it would be something like a rat and a snake stabbing a weasel in the back.
The Yglesias family crest is a crossed hammer and slide-rule...
My family's would be a cow and a beer can or something.
Agree. But NERA is not a research institute. It is an economic consulting shop.
That is what I'd call, "a beltway quibble."
Invariably, opponents of allowing foreign airlines to fly domestic US routes will cite national security concerns. But it's always seemed rather hand-wavy to me. If Air Canada can fly me from DC to Toronto without imperiling national security, why the hell can't they fly me from DC to Chicago?
I think the national-security concern isn’t crazy—but still, we could at least have agreements with friendly countries (e.g. Canada, UK, EU, Australia, NZ, Japan, South Korea) to allow us to fly within each other’s countries. As Matt noted, that’s already the status quo within the EU.
"National security concerns" are a vaccuos false shibboleth used almost exclusively by rent-seekers and protectionists to offer their nativist and extractive behavior a figleaf of legitimacy.
Sometimes it's protectionist, and other times there are legitimate points: https://www.theguardian.com/world/2022/jun/02/germany-dependence-russian-energy-gas-oil-nord-stream
Not at all.
Commercial air is absolutely vital for defense purposes, both for moving personnel to and from combat theaters and, overwhelmingly, for moving cargo, using American companies no one has ever heard of, like Polar and Evergreen, and others people have definitely heard of -- FedEx, UPS and, well, DHL (American-founded but now German-owned).
The DHL case shows that it's possible to use foreign companies but in practical terms there are far more obstacles to that than in using domestic companies.
Can confirm, both times the US military sent me to CENTCOM I flew on weird charter commercial airlines I'd never heard of for at least one flight. The first time it was "Omni Air International" in a 777, it was very similar to long-haul flights I've taken with regular airlines but the flight attendants were kind of mean. Another time it was with "Atlas Air" in a decrepit 747; there seemed to be no flight attendants and instead of seatback movies there was a misaligned projector playing Wonder Woman on a loop for 12 hours.
Atlas Air is marginally infamous for its role in post-9/11 "extraordinary rendition" flights, so possibly they forgot to reconfigure the plane for the next trip?
Nah, it would be playing WW1984 if it was for that.
Absolutely nobody with two brain cells to rub together can actually in good faith believe that there's a even a merely nonzero chance of somehow some Chinese firm being able to swoop in and monopolize any given American logistics market, nevermind the airline industry. What, is United somehow going to be put out of business on its Denver-Houston routes by companies that already can't outcompete it for transpacific travel? You can conjure all the fantasy scenarios you want about how the nefarious Other are totally going to unfairly compete and put every industry in the wealthiest, most powerful, most technologically advanced country on the face of the planet, but crowing about how any given industry is totally "vital" for "defense purposes" is empty, pointless air unless you can offer even a single small shred of evidence that the risk to the industry actually meaningfully exists. You can't just say there could be a risk; there has to actually be a risk if people should actually give a damn.
People have this weird obsession with believing that American companies are poor widdle innocent babies who just can't handle the nefarious wiles of the malicious foreign companies. No, American companies are perfectly capable of competing internationally. They always have been. And when they're forced to compete, they get better at doing what they do.
Someone could say some nonsense about civilian shipbuilding, the merchant marine, and the importance of intracoastal shipping to the American economy and American "national security," and use that to say we need some law that requires all domestic shipping to happen on good AMERICAN ships made by good AMERICAN shipbuilders. Of course, that law exists, it's the Jones Act... and if you look around, you'll notice that the American civilian shipbuilding industry literally doesn't exist, the merchant marine is practically nonfunctional, and the only domestic shipping we really have at all is river barges. Protectionist nonsense tends to in fact prove itself harmful to national security, not beneficial.
I think this is mixing two arguments. As far as I'm aware no one argues that repealing the Jones Act would help the US civilian shipbuilding industry, it really is a case where the US is permanently unable to compete. Equally obviously, this isn't the case for building airplanes
You have this backwards. The Jones Act has created a scneario where US shipbuilders never needed to compete, and therefore have never tried, and consequently, obviously, are not very good at it ("it" being shipbuilding, or competing).
Repealing the Jones Act would *absolutely* harm those existing shipbuilders, because they suck at shipbuilding. That doesn't mean a new company could not come along and do a better job of it.
It may be counterintuitive, but it's actually really easy to argue that. Again, the US doesn't have much of a intracoastal shipping industry whatsoever outside of river barges--the prohibition on foreign-owned OR foreign-made vessels traveling between US ports means that it's cheaper and easier to just load stuff onto trains and trucks and ship it overland (and there're other distortions.) Getting rid of that restriction would in all likelihood massively increase demand for intracoastal shipping--think Houston to LA or NY. Maybe all of that extra demand would just be hoovered by by Japan, South Korea, and China... but I kinda doubt there would be no new American entrants to the market.
Can you please elaborate on those concerns?
I think the main concern is that something like what happened with natural gas in Germany happens with airlines: https://www.brookings.edu/articles/europes-messy-russian-gas-divorce/
Relying on a foreign country's companies to provide critical domestic services is fine—as long as you don't end up in a major conflict with that country. The Chinese government probably wouldn't want US airlines dominating the Chinese market, and US lawmakers probably wouldn't want Chinese airlines dominating the US market, because both sides are concerned about what could happen if hostilities increase. For that reason, I doubt either side would allow it in the first place.
Hence why signing an agreement to let airlines compete domestically in each other's countries is probably only likely with countries deemed relatively friendly. The EU is the primary existing example, along with Australia/New Zealand. (https://en.wikipedia.org/wiki/Cabotage#In_passenger_aviation)
Canada seems like the big one to me. Air Canada may not want to compete too directly with their Star Alliance partner United, but WestJet competing with JetBlue and Spirit could be significant.
My conversations with Canadians have revealed that they mostly HATE Air Canada. It would be interesting to see what happens if US airlines could suddenly offer flights between Canadian cities.
Thinking about it a bit more, it seems like the ability of US-based airlines to compete on cross-country Canadian routes using hubs in Minneapolis or Chicago is greater than the ability of Air Canada or WestJet to compete on cross-country US routes using a Toronto or Calgary hub, so the Canadian airlines might strongly oppose this.
Canadian landing fees are high enough (and AC already tries to route US connections through YUL/YVR for trans pacific) that they might try something crazy with a US hub
Thanks for the fast and detailed reply!
I responded to a similar sibling comment here[1], but the gist of my reply is that, it seems "easy" to allow any company to provide domestic service as long as there's a mechanism to prevent an "overnight withdrawal from the market", which seems simple when it come to air fare compared to natural gas. Sure JackalJet and LucifAir can just order all of their planes to leave US airspace, but then this is something that can be easily monitored, and a minimal number of planes can be mandated to be "on US soil or in US airspace", no?
[1] https://www.slowboring.com/p/let-foreign-airlines-fly-domestic/comment/69559914
So your idea is that in the event of a conflict we would just seize the aircraft and seize the crews? How is that going to work?
I suspect that any foreign company entering the American market would have to be a participant in DoD's Civil Reserve Air Fleet (CRAF) program) that requires them to offer services during wartime or in times of exigent defense need.
Seems to have worked pretty well for Russia!
I would add to this that we probably also want to make sure that airframes and engines flying domestically in the US are made in the US or friendly nations. No Ilyushins or Comacs.
By the way, it's kind of surprising to me that Japan and South Korea don't have more of a domestic airliner industry.
"it's kind of surprising to me that Japan and South Korea don't have more of a domestic airliner industry."
The information about the one airliner Japan produced post-WW2 ( https://en.wikipedia.org/wiki/NAMC_YS-11 ) causes me to think the issue was a combination of the US successfully dismantling Japan's native aircraft industry immediately post-WW2 along with the inability of the Japanese government to sufficiently subsidize the creation of a new industry due to lack of military spending.
Given how much the US government spends on Boeing stuff (according to the Google, more than 40% of Boeing's revenue is from "Defense, Space & Security") and the integration of regulatory roles into Boeing itself, Boeing seems almost like a US government agency.
I'm not sure that that fact is either here or there, but it does seem that successful aircraft companies have to be quasi-governmental.
To steel man the case: if domestic airlines get out competed by, for instance, a foreign government subsidizing heavy losses for their own airline, then we could lose domestic airlines and be dependant on non-US companies.
It seems far fetched but that's the justification for a lot of protectionism.
Thanks for the reply!
I don't think it's far fetched, but at the same time it seems like a completely run of the mill problem that regulations already routinely solve. Eg. foreign companies can manufacture pharmaceuticals abroad, and - as far as I know - they don't even have to guarantee that they will continue to do so for some time. It's implicit that anyone who goes through the trouble to get FDA marketing approval wants to recoup the money spent, etc..
But of course bad market distortions, like dumping (foreign government subsidized or not) are not new.
And of course it's ridiculous that even in cases of very fungible things there is protectionism (ie. when it comes to steel or textiles) ...
... but sure, effective self-determiniation requires some forethought with regards to these dependencies, market forces, and counter-party risks.
... that said, these are not new things. National security or not. Efficient markets require some kind of competition. Monocultures (monopolies) respond poorly to changes anyway.
So ... it seems to me that the "simple" solution is to make sure that these foreign companies that provide services have an agreement with the state that when/if they go under the state - or any US company - can buy the parts responsible for US domestic service. (And of course, it becomes a slight barrier to entry to maintain a US presence, and to have a periodically revised plan for handing over US operations. But this does not seem that big of a hurdle for an airline that can manage transcontinental flights!)
I wouldn't necessarily bother with your "simple" solution -- it's perfectly acceptable, but may not be worth the lift relative to alternatives. (no aviation pun intended)
I'd rather have the policy be, "foreign carriers can do domestic routes, but if their governments subsidize them, we'll slap retaliatory tariffs on them". Which is pretty much how free trade works in literally every other industry.
Also, perhaps your "buy off the parts" idea would be better suited as a sort of "national market policy". To wit, rather than merely just buying up parts of failed airlines, we'd have a national policy that requires, say, a minimum of 5 large domestic carriers. Any time one fails, the government offers financing for any of the smaller carriers to exercise a "right of first refusal" in the bankruptcy proceedings.
Article 7 of the 1944 Chicago Convention arguably prohibits limited grants of cabotage rights and requires that, if a country allows cabotage in its territory, that it be permitted universally to all other states who are parties to the Convention (which is almost every country on Earth, last I checked).
I think the concern is more that foreign airlines that are subsidized by their governments would be undercutting prices.
How would that be different from any other product that a foreign government could subsidize and undercut American suppliers and we already have mechanisms in place to monitor and punish?
Saying it doesn't work for airlines seems like an implicit acknowledgement that the system is broken and non-airlines are fucked by foreign competition and nobody is interested in fixing that.
I mean, if we allow foreign airlines to fly within America, we should apply those same standards, but Matt didn't really address that.
I think it's easier to monitor and punish that for goods than services. Also, would we allow those companies to subsidize the rest of the network (as they are already doing) but not the domestic US flights? Even when people would often combine those on one itinerary?
I personally like when foreigners' tax dollars make my stuff cheaper.
Correct.
Certainly for National Security, it makes sense to me to guarantee at least one major airline that can get to major US cities. In a pandemic case, maybe large foreign operators don’t operate in the states and having some native industry is handy.
This is the same approach to protectionism featured in the CHIPS act, more or less: we don’t need domestic companies to dominate an industry, but it’s important that domestic companies exist.
I mean, it isn't hard to see just how flimsy some national security is? At large, we are safe because we cooperate with each other. Consider why more infrastructure doesn't collapse every year.
That said, with modern surveillance, I do get the impression that most of the concerns are highly overcome by events. There probably is something to be said for inspections and such, but I don't see why those couldn't be part of the package. Agree to inspections and get the privilege of flying routes in our nation.
re this point: “I think DOT probably did the right thing by blocking the Spirit deal and probably did the wrong thing by allowing the US/American merger.”
i happened to write my senior thesis in college on the American-US Airways merger specifically, and airline mergers more generally. i definitely wouldn’t claim this makes me an expert! but i concluded that the data didn’t support blocking that merger, for two primary reasons:
1. there were only a couple dozen routes nationwide on which US and American were the *only* 2 airlines providing nonstop service. fares would almost definitely increase on these routes, but on routes that would go from, say, 3 competitors to 2, there was unlikely to be any meaningful impact (this was based on analysis of fare patterns post-the Delta/Northwest and United/Continental mergers).
2. American and US’s hub networks were complementary, and thus none were likely to be “de-hubbed” post-merger, unlike what we saw with, e.g., Cleveland or Cincinnati, which now have drastically fewer flights than pre-merger (check out the Wikipedia pages for each, it’s quite sad) and are thus far more expensive to fly to/from. this was a somewhat qualitative prediction but it has held up quite well! Phoenix, Philadelphia, and Charlotte (the 3 US hubs) remain hubs for American over 10 years later, and nobody expects that to change.
finally, the other main conclusion was that the presence of an LCC (Southwest, JetBlue, Spirit) on a particular route does exert a meaningful downward pressure on fares. hard to know exactly what this implies for the Spirit-JetBlue merger though (i don’t think i looked at the case of going from 2 LCCs to 1, because there probably weren’t many examples of that), but my personal sense here was the combination of these two was somewhat confusing given they are both very heavily concentrated on east coast routes.
"It just so happens that I have Marshall McLuhan right here."
I think the LCC vs Full Service Carrier distinction has degraded a lot since the big 3 mergers... now all three FSCs are putting out ticket offerings that are pretty comparable to Southwest or whatever and Southwest is getting rid of open seating. Also I think its pretty clear that an expanded Southwest contributes more to competition than the loss of Northwest and Continental subtracts since SW provides competition on basically every route... if you live in Minneapolis your life is pretty much the same now as it was before the Delta NW merger... for the vast majority of routes you only have one option but now the color is different.
It has in the larger cities because Southwest has expanded to all of them. I live very close to XNA (Northwest Arkansas). It’s a wonderful airport and we have a pretty good selection of flights thanks to demand for business travel related to Walmart and the other companies here. But, the FSC’s dominate and fares are high. The planes are crappy regional jets. We desperately need Southwest or another big LCC here to bring down fares. Allegiant and Breeze are here but don’t cover many routes. Southwest is hesitant to move in because it is already in nearby Tulsa. I’m guessing other smaller airports have this same dilemma. Instead of blocking the JetBlue-Spirit merger they should have forced them to take Frontier as well so we could have a second national LCC to compete with Southwest.
I hope you used correct capitalization in your thesis!
"the combination of these two was somewhat confusing given they are both very heavily concentrated on east coast routes"
I don't think that's confusing at all from the companies' perspective, it sounds like their routes overlap and that they would reduce competition by merging.
yeah poorly worded on my part - should have said tougher to make the argument for, from a pro-competition perspective, as you said
There are some exciting benefits beyond what Matt mentioned explicitly!
1. Better aircraft usage — A major supply constraint in global aviation right now is a lack of planes. Many airlines want to sell more seats but literally can't get aircraft fast enough. Yet, it's common on intercontinental flights for planes to spend hours a day sitting around doing nothing. For example, a plane flying transatlantic might do a round trip that's only 18–20 hours, then it *could* do a short-distance hop but is legally banned from doing so. American can fly a 24-hour cycle of Philly–Munich–Charlotte–Philly, but Lufthansa can't, and American can't do Philly–Berlin–Munich–Philly. It's even worse for flights that are timed to be overnight in both directions (e.g. between North and deep South America). American's Boeing 777 #N886BR was scheduled 3 times this week to sit around for 15 hours (twice in Sao Paulo, once in Santiago), a huge waste of plane capacity. More flexibility to fly in other countries would unlock more seats without more planes.
2. More competition outside the US — There are many countries with significantly less domestic competition than the US; look no further than our neighbors in Canada. Letting us fly in each other's countries might be a small help to us be could be a big help to them.
3. Spreading competition across more aspects of the journey — Different airlines excel at different things. For example, I find that Qatar and Japan Airlines have a significantly better onboard experience than major US carriers, but the US carriers have significantly better digital user experiences. Having more competition between airlines offers an opportunity for passengers to compare and contrast more aspects of the overall experience (hopefully pushing airlines to compete across more aspects of the journey), and for airlines to examine a range of consumer preferences (e.g. maybe we can cut X thing that costed money but passengers don't seem to care about).
> it's common on intercontinental flights for planes to spend hours a day sitting around doing nothing
I realized this recently when I was looking at flights from my country (Vietnam) to Adelaide, Australia and realized that, for example, if we flew arrived on the 21st at 6:30am the soonest return flight is the 24th at 7:30am. So it is just sitting on the ground for 3 days. Presumably paying some kind of hangar costs. And I guess the flight crew is chilling?
I think the reason intercontinental planes sit around so long is the crew regulations on sleep. Crews can only fly a certain number of hours, then need to be given time to sleep. And if you are e.g. Lufthansa, you don't have a bunch of Lufthansa pilots sitting around in Cleveland or Atlanta to take over for the crew that just landed and fly it somewhere else in the meantime while the original crew sleeps.
Though I suppose if it were legal to have that plane fly an Atlanta -> Dallas and back route before returning again to Frankfurt or whatever, you might actually hire US-based crews to work for Lufthansa.
"American can't do Philly–Paris–Munich–Philly."
Assuming that's accurate (and I'm not sure it is), that's a function of the US-France and/or US-German bilateral aviation agreement(s) and doesn't relate to the ban on domestic flights in the US, which is ultimately a function of the Chicago Convention. Otherwise, unless something changed in the past few years, US carriers can still operate "dumbbell hubs" in the EU as long as the second leg crosses a national boundary.
EDIT: A semi correction here -- in 2007 the US and EU entered into the US-EU Air Transport Agreement, which superseded the bilateral agreements the US had with individual EU member states. However, the terms of that agreement preserved the same "Fifth Freedom" rights for US carriers as existed in the prior agreements, so my point about a US carrier being able to fly Philly–Paris–Munich–Philly while EU carriers remain unable to fly intra-US routes remains correct; it just relies on a different legal document.
Oh interesting—I just dug into this deeper and you're right re: Europe! “Because the EU is not treated as a single territory for the purposes of the agreement, this means in practice that US airlines can fly between two points in the EU as long as that flight is the continuation of a flight that started in the US (e.g. New York - Paris - Berlin).” https://en.wikipedia.org/wiki/EU%E2%80%93US_Open_Skies_Agreement
That said, my point still remains for European airlines. “The treaty disappointed European airlines as they felt it was tilted in favour of United States airlines: while US airlines are allowed to operate intra-EU flights (if this is an all-cargo flight or a passenger flight if it is the second leg of a flight started in the US), European airlines are not permitted to operate intra-US flights”
And this also remains an issue for US airlines doing this within a country (e.g. Philly–Berlin–Frankfurt–Philly), though obviously that's a much smaller issue.
"I just dug into this deeper and you're right re: Europe! "
Yes, I actually wrote a whole law review article on the subject of the EU/US aviation law regime years ago! This set up is called "dumbbell hubs" and is always a sore point for European carriers -- there are very, very few valuable cabotage routes in EU member states, so a US carrier can have a very compact hub-and-spoke system on both sides of the Atlantic, whereas a European carrier only gets a hub-and-spoke system in Europe and is then forced to either operate purely point-to-point on flights to the US or has to have a hub-and-spoke system that extends out to Canada, the Caribbean, etc., and there are a lot fewer profitable options there.
"... as Elizabeth Warren put it in a speech at the New America Foundation last month — that four airlines control 80 percent of American airline seats, three chains own 99 percent of drugstores and four companies sell 85 percent of the beef."
& so fucking what? Are consumer prices rising? Are these companies colluding? What's the case here? Why has this knee-jerk, anti-bigness, stupid, high school level analysis infected the Left?
Delta is the best run airline. Their stock price has been precisely flat for the past four years. Tyson is the largest beef producer. Same story. Stock was $67 to start 2021 and is down to $61 today (NOTE: It peaked at $88 in Q1 2022). Walgreens Boots is down a *SHOCKING* 83% from 2021. Woah. That's a mess. I could go on. The reason there's fewer companies today than before is how shockingly hard and competitive every single market seems to be these days; coupled with rising costs everywhere compressing margins and a very real *massive* annual CapEx requirement to just keep up.
At the very core of the Warren philosophy is that America should be more like Europe. And that just means making American companies, and in turn America itself, more poor.
Then she should be shot out of a cannon from the Democratic party. What an embarrassment for Biden that he leaned so heavily on Warren's team when forming his administration.
https://www.politico.com/news/2021/03/15/elizabeth-warren-aides-biden-administration-475653
Hence her teaming up with JD Vance to “Make America Hungary”
This is just such an oversimplication it's hard to know where to start.
The notion that America has derived advantage from having, over the long-term, a favorable business environment in comparison to Europe is not unreasonable. However, transplanting that to antitrust is ahistorical. America basically invented aggressive competition policy and even if policies converged over time, with convergence and then arguably Europe becoming more aggressive, that's still a long time when you could try to argue that America was richer and better "because" of its antitrust policy.
More importantly though, I think there is a really fundamental and deep misunderstanding of what makes capitalism great in Dave's rather vitriolic comments and in many of the other attempted defenses of bigness from Matt, Ben, and others over the years.
In this framing, the biggest companies companies are obviously "good." Because, well, how could they have gotten so large other than by providing useful products and out-competing many other other companies. And, to be fair, I do think the Stoller/Khanites should respect this point a little more--big companies are generally the end result of smart people doing great work, not of sinister "greed."
But, at the end of the day, no matter how "good" an individual company is, the larger its market share becomes, it will correspondingly start to try maximize the profit by leaning on that market power. Again, it's not a matter of companies being morally corrupt or the CEOs "greedy." It's just basic logic--as the number of your competitors shrinks, you can charge higher prices and feel more secure without needing to innovate as much. Google became a gigantic company by developing of series of incredible products that generated gargantuan consumer surplus. And yet, since reaching behemothic proportions, ever more of its resources have been devoted towards taking its (initially well-deserved) large market share and then trying to squelch potential competition. Google Maps was a phenomenal product that generated massive consumer surplus, but Google buying and defunctionalizing Waze was not a good thing for consumers. It was an actively bad thing that obsessive defenses of big companies as "good" and antitrust as "mean" overlooks. Google Search is maybe the greatest product of the last 30 years (yes, better than the iPhone), but paying Apple bazillions of dollars to keep it as a default is still Not Good.*
*A lot of people will say 'Bing sucks, people would use Google anyway, so it doesn't matter'. But as even Ben Thompson (a guy who is general very pro bigness and strongly critical of the neo-brandeisians) has explained, it's not about Bing, it's about preventing Apple from developing its own search engine, i.e. preventing competition that could have generated very large consumer surplus.
In other words, there is a constant tension--the pursuit of bigness leads to amazing things, but, as companies get ever bigger, "outcompeting" becomes more and more about trying to leverage your existing market power and financial resources to simply prevent competition outright.
I think the serious answer to your question is that like in every society there is some real deprivation in America, but unlike everywhere America is the richest society on earth so it's very tempting to think that more government intervention could alleviate that deprivation. It's hard to do and it leads to some pretty scattershot proposals, and Warren is probably as guilty as anyone of a quantity over quality approach to proposing new interventions. But I don't think she's wrong, there's plenty of dumb regressive stuff in US politics that it would be good to get rid of.
Britain is going through a similar process albeit the details are different. "Just tax the rich" has become the solution to every problem here for a certain group of people. They're often cavalier in how they go about this, to the point of not having a specific proposal at all. But they're basically right. There are parts of British society that the government should be funding better, Britain's property tax is virtually non-existent, and it should be raised to fund those funding priorities. But it seems unlikely to happen because everything to do with property is crazy in this country.
EDIT: to be clear, the 'tax the rich' crowd aren't right that it will solve everything. It won't. But they are right that at least in relation to property (or preferably land-value) tax, it should happen.
A common theme of "tax the rich" is that everyone in that camp defines risk as anyone with income/ wealth > what they earn/ own!
> Are consumer prices rising
I'm no expert but I'm pretty sure airline prices have been skyrocketing since the pandemic.
https://www.cnbc.com/select/airline-ticket-prices-are-up-25-percent-why-and-how-to-save/
No, they in fact have gone down and are low. There was a brief "skyrocket" in prices owing to the oil shock of the Ukraine war.
See FED data on ticket prices adjusted for inflations.
https://fred.stlouisfed.org/series/CUSR0000SETG01
Also, I think that link is showing nominal, not inflation-adjusted prices - so even in the 2022-2023 spike (which would have due to the post-COVID demand surge as well as oil prices), real airfares were still lower than in 2013. This does not scream "competition crisis" to me.
The combination of the fact that the airlines were going bankrupt before the mergers, and the fact that consumer prices seem to be pretty reasonable, seems to indicate to me that approving the past mergers was probably the right decision. At first I was happy the Jetblue-Spirit merger got blocked because I didn't want to lose one of America's only low-cost airlines - but I didn't realize at the time how much both airlines were struggling. Hopefully they survive. Blocking a merger doesn't increase competition or help consumers if it causes one or both of the companies to go out of business.
Yeah, thats all correct. And Spirit is in serious jeopardy, and losing a low cost carrier would be a mistake for the system and pricing.
That... is not what matters? How would you come to that conclusion?
I have no idea how that article gets to "In the last year, the consumer price index for airline tickets has shot up by 25%" - the link they cite literally shows the opposite, a decline in real terms over the year prior to that article's publication.
It's an advertisement masquerading as an article.
Strong chance it was written by a bot too for SEO.
So have costs. The point is margin is down and these stocks aren't attractive because the markets are *that* competitive.
It's always good to read an article on something I'm knowledgeable about that doesn't make me want to tear my hair out. I worked in airline pricing for most of my career and find the take to be broadly correct. I think it is hard to argue that the airline business isn't competitive, even if there's really only four main competitors, and it's correct that the benefits of doing this would be real but modest as a result.
Air travel is already highly divided between competitive and noncompetitive markets (as defined by pricing analysts rather than economists, who I'm sure use a more coherent definition), where the latter have much much higher fares. Not even per mile higher fares, it's just straight up more expensive to fly between a minor airport and a major one than between two major airports, typically. Because of this, if foreign airlines could fly domestic routes, you'd probably see even bigger drops in fare on flights between top tier major cities, and little/no benefit for most of the small expensive places. Emirates isn't clamoring to enter Colorado Springs - Chicago but they'd definitely want to be in NYC-LA.
DC-Maine example is right that the threat of competition is definitely a lesser concern than actual existing competition. When I was doing revenue management, my advice would've been to milk the market for as much as it's worth in the short term, then if a competitor enters drop the fares at that point or exit entirely and use the planes elsewhere. I'm not sure American Airlines takes quite as aggressive an approach as we sometimes had to at the small airlines I worked for.
What definitely did restrain our fare ambitions in the noncompetitive markets was the threat of government intervention. There were definitely cases where the threat of a competitive subsidy by a state government got us to voluntarily offer (much) lower fares than we would have otherwise. I am not sure that the result was welfare maximizing - usually the result was sold out flights, meaning if you need to go at the last minute for whatever reason, you can't.
Also in the airline business. I think this is mostly right, unsurprisingly. Foreign entrants just won’t do much and won’t want to compete on low load/high jet fuel burn/ endemically expensive small markets. To the minor extent this would create competitive capacity it would be on cross country flights and some high demand/return city pairs which are already high demand for incumbent us airlines and served as such.
This would have marginal effect nationally and no impact on low return rural flying. If someone wants to fly Bangor maine to DC (a very seasonal and low demand market) it could be one of the incumbent low cost carriers.
Rural air travel is tough with carriers upgaugung aircraft, rj jets being fuel burn machines and consumers willing to drive to airports with greater service options etc. As I’ve said to policymakers crudely: living in a rural/small market comes with costs, and one of them is that it’s hard to maintain equal service
Do you think there's any chance foreign airlines might be more willing to use turboprops for low-demand routes? As opposed to the major US carriers, which all got rid of theirs.
And if so, could that be something that could potentially meaningfully lower fares and/or make some routes more economically viable?
Though I suspect you might still have the "Will a foreign airline really want to bother with investing in experimenting on low-demand routes on another continent?" question, whose answer might be no....
My understanding is that is in a US operating context the economics of turboprops is pretty bad. Silver Airways struggles to make it work even though they've got an on paper ideal market connecting Florida and the Bahamas.
Interesting. Do you know why that is?
I have a vague sense that it's somehow labor cost related, but fleet planning isn't my area of expertise so I could be wrong.
So this is a place of personal expertise, and this article suffers from some lack of knowledge. As just one example:
"In Europe, pilots need 500 hours of flight time to qualify for a license, while in the United States
pilots need 1,500 hours, which makes it much more difficult and expensive to become a pilot
with no clear safety benefits. There is also a proposal in Congress to raise the mandatory
retirement age for pilots from 65 to 67, which could help a bit. In both cases, pilots and their
lobbyists have argued against reform precisely because they don’t want more competition —
just like the existing Big Four airlines don’t want competition from foreign brands."
(1) The premise of pilot shortage is not accurate. There have been furloughs at 4 major carriers and most airlines have frozen hiring for a variety of reasons. Most major investor analysis find we have a pilot surplus in the US for a host of reasons - post covid pilot certifications have swamped hiring, tamping demand, and Boeing delivery problems.
(2) The US' 1500 rule is not uniform and has reducible credits for most pilot candidates based on background, with military pilots only needing 750 hours and 4 year aviation degree holders needing 1000 hours based on the FAA's analysis of rigor of the training environments. So most pilots do not, in fact, need or have 1500 hours of flying as an entry point.
(3) The pilot age issue is super complicated and is a based on the pilot age being set internationally by ICAO. The downstream negative consequences for flight routes is really bad if their is disharmony between US law and the international standards, including an inability to efficiently use flight paths in the northern parts of the US where use of Canadian airspace would be prohibited for categories of pilots that are very hard for airline flight ops to manage.
(4) EU pilots have a different and complicated licensure arrangement. While the hours are lower they have academic coursework and knowledge test that we do not require. Put simply the comparison here is crude and not quite accurate.
Broadly, unlike the Jones Act issue, the US has an intensely competitive environment for airlines so the alleged benefits and scalability of foreign cabotage are small. US carriers are in fact, largely, superior competitors on the international scene as well. While its true the Gulf Carriers operate a superior product in some cases they do so by massive state subsidy. The economics of Bangor to DC are too poor and seasonal to sustain a lot of carrier attention and wouldnt be sufficient to attract a foreign carrier if one could enter the market.
Thanks for this!
Too often, we uninformed outsiders see something like this (1500 vs 500) and just assume, "Ah, regulatory capture to benefit a small group of selfish stakeholders" and call it a day. As is usual, the story is far more complicated.
Thanks, in fact the 1500 number is something matt has said is “arbitrary” but it is instead based on the prevailing requirement for captain hours that Europe also requires and us airlines have mostly wanted and used as private default. When they redeveloped the rules in 2010-2014 1500 was chosen because the captain and first officer increasingly share responsibility. However regulatory flexibility was baked in to allow first officers to come in well below 1500 hour, with some cases as low as 650 hours. So yes, it’s more complicated. It’s fine if people don’t like it, but the presentation here as in previous posts by Matt suffers from an absence of detail.
Aargh, I have lots of work to do today and I'm a Person Experiencing Westerness, so there are already almost 120 comments, but I have so many thoughts on this because I actually wrote a law journal article years ago that has a major discussion of this subject!
A very quick observation is that I did not see any mention of the 1944 Convention on International Civil Aviation (a.k.a., the "Chicago Convention"), which the US is a signatory of, along with basically all other countries with major commercial airline carriers. Article 7 of the Chicago Convention reads:
“Each contracting State shall have the right to refuse permission to the aircraft of other contracting states to take on in its territory passenger, mail and cargo carried for remuneration or hire and destined for another point within its territory. Each contracting State undertakes not to enter into any arrangements which specifically grant any such privilege on an exclusive basis to any other State or an airline from any other State, and not to obtain any such exclusive privilege from any other State."
It has been argued for decades in the aviation law community that the second sentence of Article 7 means that if a country agrees to allow cabotage for air carriers from one country, it must allow cabotage for ALL countries' air carriers. E.g., if you let British Airways and JAL fly domestic US routes, you also have to allow Air China and Rossiya to fly too, if they otherwise can obtain necessary gates and slots at the relevant airports.
Yes, thanks, and generally agreed
Oh that’s an interesting and highly important point!
Do you know how EU cabotage works? Or Australia/New Zealand? Presumably they've found some legal path.
The one thing of note that I think was missing from this article was an acknowledgement that many national airlines are *heavily* subsidized. So long as we are creating rules to restrict that, then I agree more competition is better.
How much would foreign governments be interested in subsidizing intra-US domestic flights? This isn't propping up manufacturing (Matt points out we can already use foreign-made aircraft), it's just propping up a service industry in a foreign country to the benefit of those citizens.
China is heavily subsidizing all kinds of production that make prices cheaper, but also drives out competition. If you remove all cabotage rules completely, then its likely that China decides that they want to rule the air, and subsidizes their way into global airline dominance.
China buying American/European planes in order to lose money operating them to help Americans travel around America sounds fantastic (and not at all comparable to steel manufacturing), unfortunately they are not nearly stupid enough to go for it.
They are trying to build their own planes - and if they dominate the airline market, they get to choose which planes to fly!
Operating a C919 into DCA will be illegal forever even if Scott Kirby wanted to do it, it's a completely orthogonal question
What about the C939?
So if China managed to subsidize all EV production so that nobody else made EVs and only they did, and then they cut all EV production to us we'd be in some trouble because spinning up manufacturing etc takes time.
Assuming airplanes are being made anyway, isn't a service industry much cheaper to spin back up?
China is trying to build their own domestic competitor to Boeing and Airbus. If they dominate the airline industry, they can choose to buy Chinese made planes. Controlling both the industry and the service would enable them to reinforce their control over each.
I'm still not sure that's worth it to them as an endgoal but at least I understand how that fits in, thanks for explaining.
It's a pretty capital intensive service industry. If in this hypothetical China owns all the planes you'd still have to wait for Boeing and Airbus to make more if the Chinese call it quits.
We subsidize European security through NATO, so if the EU taxpayers want to subsidize our domestic air travel, that's ok with me.
Given what Richard Gadsden said, I don't think its the EU providers so much as Emirates and such.
One reason why the EU is a good test for this is that the EU's own anti-competition rules restrict government subsidies.
If we’re talking contradictory airline policy, my favorite is the combination of the Fly America Act and the GSA City-Pair program.
Fly America says federal employees have to use American carriers when traveling overseas, even if foreign carriers are cheaper (though with various complicated waivers and exceptions). Presumably this is to give a kind of stealth subsidy to US airlines.
GSA City-Pairs are where the GSA negotiates discounted government rates for flights between pairs of thousands of different cities in the US and overseas. These are mandatory for federal employees to use (though with various complicated waivers and exceptions). Presumably this is to avoid giving too much government money to airlines.
These two, combined with other regulations, create a sufficiently complicated regulatory landscape that federal employees can’t be trusted to book air travel for themselves, and instead have to go through dedicated specialist travel bookers, which of course the USG pays for.
Maybe just abolish the city-pairs and Fly America and simplify the rules enough that we can let feds book travel for themselves?
The cherry on top is that many of the city pairs are actually flown by foreign carriers through codeshares. I'm on a TDY to Paris right now, and was forced to fly Air France (with a Delta flight number), even though United has a direct flight from IAD to CDG...
Love your work, but you’re missing the ball on this issue. You’re ignoring the main business dynamics here, which is that historically airlines are a terrible business that constantly go bankrupt, and then taxpayers have to bail them out. Warren buffet had a famous quote pointing out that the cumulative returns to the entire airline industry from Kitty Hawk to today was zero.
Competition is good as long as it’s not so extreme that no one makes money (especially in capital intensive industries), which discourages investment. This is why Europe has bad cellular data speeds. The industry was regulated to the point that no one could justify the investment to increase bandwidth because they weren’t sure if they would ever make it back.
You’re on point with the critique of businesses like CVS, but if you dial up competition in a capital intensive industry with horrible returns you’re just going to bankrupt them. Every major airline has gone bankrupt in the last 20 years.
This doesn’t mean we don’t have a massive problem with conglomerates that need to be broken up, but Google and its competitors haven’t gone bankrupt multiple times because of competition that was so intense they couldn’t pay their bills…..
I’m not aware of any taxpayer bailout of a bankrupt airline. Can you give an example?
Post 9/11 - Bailout called the ATSSSA that provided grants and loans to carriers.
Post Pandemic - 3 rounds of grants (IIRC 63 bn) as well as initial loan and loan gaurantees.
Neither of those situations are what the OP was referencing.
What is the OP referencing?
The ATSSSA assuredly gave loans to airlines that were too sick to survive and do not exist anymore.
The 2020-2021 bailouts assuredly kept the airlines from going bankrupt both from ch. 11 and ch. 13. Source: was there for it all.
If this is nitpick on if company was bailed out after it went bankrupt well sure but that’s not the persons overall point about the difficulty of heavy consumer surplus airline industry where companies routinely go bankrupt. The mergers were a rationale response to the 1990s 00s in which airlines routinely went bankrupt because competition was destructive and bondholders and airline employees got holding the bag. The rationalized and more consolidated airline industry continues to provide low prices and more service options because a bankrupt airline has a hard time growing and developing networks
It isn't a nitpick. The OP wrote a specific situation: "which is that historically airlines are a terrible business that constantly go bankrupt, and then taxpayers have to bail them out."
Lots of bankruptcies...sure. No "taxpayer bailouts" as a result that I can see.
https://en.wikipedia.org/wiki/List_of_airline_bankruptcies_in_the_United_States
The US airline industry received more inflation-adjusted dollars in the first bailout passed post-9/11 than Amtrak has received in federal funding in the entirety of its existence.
Amtrak did get covid-19 bailout as well - less than the 9/11 bailout for airlines but presumably somewhat correlated with its actual costs.
I take no position on the COVID bailouts because I don't know the specifics of that. I was just responding to a request for an example of airline bailout and included the Amtrak reference for a sense of scale.
Thanks.
Hmm...
"In the financial year 2023 the National Railroad Passenger Corporation, also known as Amtrak, recorded operating expenses of around 5.4 billion U.S. dollars."
Airlines had operating expenses 10x(that of Amtrak) that year.
The covid bailouts were not 10x different though - more like 30x, from the numbers I saw ($50 billion vs $1.5 billion)?
It’s not direct company bailouts like Auto industry, they never get to that point because there would be such an outcry if voters couldn’t fly. They do it through loan guarantees and direct cash assistance, or taking over pension liabilities. 15 billion in 2001, 50 billion in 2020, 6.6 billion in 2005 when the gov offloaded pension liabilities to a federal agency.
They got massive cares act subsidies that other industries did it. These protected employees, not contractors. My wife was laid off from a contractor job with Delta while the employees got subsidized to fly empty planes. She landed on her feet, but the practice of treating some categories of jobs as more worthy of protection than others troubles me.
It's always tough to lose a job, but contractors and actual employees are fundamentally different classes of jobs with different levels of risk and compensation built right into the agreement. "Massive black swan disruption to all operations" is precisely the type of scenario in which its useful for large companies like Delta to have optionality for very fast pivots.
I'm glad your wife landed on her feet.
That’s not really true legally and I don’t see the point normatively. Most employees, the overwhelming majority, are employees at will. They can be fired at any time for any reason. The biggest difference between independent contractors and employees is who pays the employers portion of social security taxes.
From the government’s perspective, it’s even messier. Airlines received massive cares act subsidies that were unavailable to restaurants, cruise ship operators, hotels, law firms, chip manufacturers or petroleum producers. The quarter million employees of major airlines were basically guaranteed a job through covid— even though the planes were empty— and everyone else was left with their PPP loans and enhanced unemployment. My wife got a grand a week in unemployment for six weeks (untaxed!!) then got a higher paying job, and declined to go back to Delta when they recalled her in 2021. She did just fine. That doesn’t mean airline employees deserved more protection than basically anyone else.
Also just want to point out that airlines and telecom are really the only two industries that this applies to. Every other market benefits from more competition. These two are unique.
While this may not be quite as much of an issue as with goods trade, I do think that you need to engage a little more with the significance of opening up markets to.heavily subsidized competition. The EU carriers are well-chosen, because people are familiar with Europe having a large number of low-cost carriers, but what about cheap flights from Gulf carriers. While you often bemoan the resurgence of pro-tariff (or, in this case, services protectionism) sentiment, the "cheap stuff is good" argument is not just politically mediocre, but it's intellectually under-powered even if you do believe that markets, competition, etc; are good.
I recall reading a Cato argument piece early in the Trump administration talking about the U.S. should have responded to the comically excessive quantity of Chinese steel production in the same way Korea did, with subsidies to certain domestic producers affected by competition, instead of imposing heavy import tariffs. And, it's certainly true that when you draw up the supply demand graphs you get a lower deadweight loss and maybe even more important from an economic perspective don't hurt your downstream industries in the same way as tariffs. But, at the same time, wait a second--this is the Cato Institute talking about how the proper response to a subsidy is to do more subsidies! In other words, endorsing a situation where the countries that decide to massively subsidize an industry then can spark a succession of subsidization as others countries follow the Cato recommendation so that they can a) still benefit from the "competition" as in your post title and b) keep their own companies afloat. This is bad not simply from a protectionist perspective of danger to domestic jobs, but also from a pro-market and competition perspective, because you have misallocations of resources successively spreading across the entire world.
I think is particularly challenging for the U.S. Despite our dabbling in 'industrial policy' and increasing tariffs, the U.S. domestic economy is still far more market-based than most others. In particular, while many other countries have longstanding policies to direct resources like cheap inputs and steady financing to 'good' sectors, like high-value add export manufacturing, while trying to squeeze 'bad' sectors like commodity exports and not offer too much support to 'boring' sectors like services industries, here we have much more the approach of letting the chips fall where they may and letting the market decide where to use resources.*
*Yes, I realize that the U.S. operates a vast plethora individual programs to promote exports and manufacturing and has made some headline grabbing moves in the last few years. But, it really does lack the systemic government policies directing resources towards favored sectors at the expense of other parts of the economy that you see in an obvious way in China, but also in places like Japan, Korea, Southeast Asia, India, and much of Europe. The CHIPS Act was a Big Deal in the U.S., but as people have noted it's kind of a drop in the bucket compared to China's industrial subsidization (and even China's subsidization of semiconductors alone).
I meant more the specific "cheap imported goods/services are good, we shouldn't look too closely at why they're cheap and just enjoy the low prices."
In terms of the last four years, I think it's also shown that monetary and fiscal policy ultimately have a lot more effect on the prices than things like tariffs or greedflation. Trump's blanket tariffs on everyone would be a bit different if imposed, but the steel/aluminum/China tariff increases are trivial as contributors to inflation when compared to the federal budget and even more importantly the money supply.
Cabotage!
Came here to note that it was weird for the entire article to be written without that word.
It also somehow failed to mention the 1944 Chicago Convention, which arguably prohibits reciprocal or limited grants of cabotage under Article 7 of the treaty. This has never been really seriously tested because most past instances of cabotage by Convention members have involved routes that aren't particularly lucrative or desirable to serve anyway, but allowing NY-to-LA flights or something like that would put that issue on the front burner for aviation agreement diplomats.
Just out of sheer curiosity, in what legal venue would a challenge to a treaty violation be held? Is there such an international court for these kinds of disputes?
In practice, there's no forum to litigate this kind of thing in other than *sort of* the EU's Court of Justice when the EU Commission and member states are involved. (In the late 1990s and early 2000s, there was a whole raft of litigation between the EU Commission and multiple EU member states over their various bilateral aviation agreements and whether certain provisions violated EU treaty obligations, regulations, etc.)
The normal way possible violations of aviation agreements are dealt with is retaliatory action by the aggrieved country, which is usually also aviation-related, e.g., prohibiting "Fifth Freedom" flights (an onward flight to a third country, such as a US carrier flying NYC-Paris-Rome) by the violator's carriers from airports in the aggrieved country. But you theoretically could have other "trade war" type actions as well -- tariffs, import quotas, etc.
Correct again
https://youtu.be/k9-qPrOE_VM?si=HUwWFcMTy4hwkueg
Thank you! (I was running behind on posting that.)
Yes! The Arlington Rap guy’s libertarian content.
Seeing that this is from 2009 makes me feel oooooold: https://youtu.be/4T1RMuoQnKo?si=X36utVKu9G1LX7vJ
While I enjoyed this MattY article, as usual, I found the policy logic to be weaker than usual.
The three largest carriers in the US have profit margins of 4-7%. That means your airfare is overwhelmingly going towards pretty fixed costs like the fleet, jet fuel, crew, airport fees, etc. The fuel alone is 30% of the airfare, and aircraft costs (maintenance, depreciation, etc.) are another 20%.
I don't deny that airlines can improve on their IT, marketing, management, etc. to lower costs, but the upside here seems clearly quite limited. Airlines don't produce aircraft, fuel, or crew-- they have to acquire them at market prices, which are passed onto consumers.
I tried to find extensive data on US air travel costs compared to other countries...
https://www.worldatlas.com/articles/most-expensive-countries-for-airline-travel.html
This was the best I could find. The US isn't in there, but that would indicate we are not among the top-20. For a rich country with high labor costs, that would seem to indicate we're doing alright.
My recollection from having traveled domestically and abroad is that US domestic airfares are similar to generic airfares covering the same distance. Some searching on Google flights just now shows airfares for NYC<->MIA being very similar to LDN<->BER (about half the distance).
Most people in my world that travel internationally a lot will tell you that the US airlines biggest issue is the unions. The desk and cabin crew have union job security and are therefore incrementally more indifferent to the customers than less unionized Asian and Middle Eastern airlines.
So I'd say the upside to consumers of letting foreign carriers is pretty limited. It's hard to see how airfares could decline by more than a few percentage points.
Matt rightly points out that the unions will hate this. I'll add that a big slice of the population that reflexively supports protectionist policy will also hate this. Matt is usually quite politically pragmatic, but he seems to go all idealistic here. Given the limited upside in this case, why spend the political capital here? Matt is usually a lot better than this.
Matt also comes across as naive as to how international trade tends to work in reality. Sure, we could just open up our skis to foreign carriers. Alternatively, we could *offer* other countries reciprocal market access, providing additional foreign opportunities to our domestic carriers. Although it could still be beneficial to act unilaterally (if we ignore the political costs), it seems far, far preferable to at least try for reciprocity, which Matt does not mention.
Matt neglected to take the opportunity to call out the frustrating "Fly America Act", which would also have to go away to make this feasible.
Was going to make this point also. For all our (ie American) talk about saving money, we’re remarkably reluctant when it comes to obvious actions like getting rid of Fly America.
A while ago Matt wrote an article explaining why mid-size regional banks, like PNC, Huntington, and Fifth Third, should be allowed to merge and become mega-banks like Citi and Chase. It would cause them to be more protected from economic fluctuations and bank runs. I can't help but think that similar logic applies to airlines. Tiny airlines fail regularly, whereas large ones like Delta and Southwest last decades and even emerge from bankruptcy proceedings relatively fine. Letting Spirit merge with JetBlue and Allegiant merge with Frontier seems like it would be good from a competition standpoint, because then there would be two more large airlines to more directly compete with the Big Four.