Fri, 12 Mar 2004

U.S. Airlines: From Bad to Nationalized?

Without having read the report, I can state without fear that nationalizing anything is a bad idea. First, what are the costs that airlines face?

Maybe the airlines can trim some costs, maybe not. If they go bankrupt, though, it's because people don't want to fly. They're not going to go bankrupt at the same rate. Some will go bankrupt before others, and stop operating. Other companies may be able to pick up their passengers, and avoid bankruptcy. Nationalizing the whole industry assumes that passengers want every flight to continue -- an assumption based on a price-preference of zero

Another effect that nationalization will have is to reduce the pressure for profitablility. Profitability is price - costs. An airline tries to keep its costs down, because its profits are based on the difference between price of a ticket, and the cost to fly the passenger.

Airlines can be interesting to run because every flight has a large fixed cost. The incremental cost of flying one passenger is very low -- lower now that fewer flights have food. This leads to all sorts of price discrimination as airlines try to over their fixed cost while still giving everyone a price they can afford and are willing to pay. Still, that problem goesn't go away with nationalization.

The problem with nationalization and profitability is that profitability goes out the window. Nobody expects a nationalized business to make money. You lose control over the costs. If every airline has been nationalized, then you lose competition. Without competition, you have no reasonable way to set the price of the tickets.

Nationalization is a major lose, and while airlines and their stockholders would benefit, the flying passengers would lose, and taxpayers would lose more.

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