Not Just Oil: Dr. Kenneth Button Reveals Underlying Causes Of Airline Industry Crisis

Contrary to popular belief, high fuel prices are just a symptom of a much deeper disease in the Aviation industry, according to a report by Kenneth J. Button, Director of the Center for Transportation Policy, Operations, and Logistics at George Mason University ">. Offering service in advance in a time of rising prices is terribly risky, profits are negligible even in boom times, the market is governed by antiquated laws and traffic control systems, and the airline industry is set up to encourage a great number of competitors while restricting mergers and alliances that could save existing airlines.

Many of the laws governing mergers and cartels date back over a hundred years, when advanced transportation was by train. Laws need to be reformed to meet the realities of the 21st century where the service sector dominates. Over 20 percent of the U.S. economy as a whole is engaged in international trade, and the airline industry is rapidly moving in the same direction.

Dr. Kenneth Button states, "Oil is like any other input. An industry, even in a normally competitive market, should be able to adjust to the new cost levels, albeit neither immediately nor painlessly, with customers ultimately paying higher prices and consuming less. The fundamental problem is that once an airline offers a service for, say, six months in the future, it has to commit to have a plane, crew, fuel, landing and take-off slots, gates, check-in counters, and all the rest in place at that scheduled time. In an attempt to gain revenue, an airline can raise prices, but because of competition it can't unilaterally keep higher prices, so it fails to recover its fixed costs."

Airlines rely on a considerable amount of public infrastructure. They are under the direction of the FAA, which has been under mounting criticism over the way it provides and manages air space, and delays occur because of congestion and failures in the system. Airports exacerbate the problem with inefficient allocation of capacity. Overall delay costs for 2005 were estimated to be at least $9.4 billion.

This economic conundrum has been largely ignored in policy formulation. Contrary to traditional economists, who believe there can never be too much competition, unless competition is limited, the industry may implode.

Of mounting concern in the U.S. is whether the airline industry can generate sufficient revenue to encourage long-term investment. Given the tight financial markets in 2008 which seem unlikely to loosen in the near future, investors may be less than enthusiastic about bailing out the airlines again. As Warren Buffet said, "I have an 800 number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say, 'My name is Warren and I'm an aeroholic,' and then they talk me down."

Even if reforms are made, the underlying problem remains: this type of market is inherently unstable. It will still require innovation, imagination and entrepreneurial flair by airline owners and management to
continue providing an extensive network of cheap and safe services. The United States airline industry needs to be able to operate profitably, and updating laws and traffic control systems, allowing more mergers, and
helping them grow market power are necessary to preserve airline travel as the public knows it and depends on it.

To learn more and purchase a copy of the report, contact Parmelee Eastman, EastSight Aviation, at 781-416-3686.
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   Ms. Parmelee  Eastman
   EastSight Aviation Associate
   EastSight Aviation
   MA,    USA
   781-416-3686 (phone)
   info@eastsightaviation.com
   www.eastsightaviation.com