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

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Contrary to popular belief, high fuel prices are just a symptom ofa much deeper disease in the Aviation industry, according to areport by Kenneth J. Button, Director of the Center forTransportation Policy, Operations, and Logistics at George MasonUniversity ">. Offering service in advance in a time of rising prices isterribly risky, profits are negligible even in boom times, themarket is governed by antiquated laws and traffic control systems,and the airline industry is set up to encourage a great number ofcompetitors while restricting mergers and alliances that could saveexisting airlines.
Many of the laws governing mergers and cartels date back over ahundred years, when advanced transportation was by train. Laws needto be reformed to meet the realities of the 21st century where theservice sector dominates. Over 20 percent of the U.S. economy as awhole is engaged in international trade, and the airline industryis rapidly moving in the same direction.
Dr. Kenneth Button states, "Oil is like any other input. Anindustry, even in a normally competitive market, should be able toadjust to the new cost levels, albeit neither immediately norpainlessly, with customers ultimately paying higher prices andconsuming less. The fundamental problem is that once an airlineoffers a service for, say, six months in the future, it has tocommit to have a plane, crew, fuel, landing and take-off slots,gates, check-in counters, and all the rest in place at thatscheduled time. In an attempt to gain revenue, an airline can raiseprices, but because of competition it can't unilaterally keephigher 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 undermounting 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 ofcapacity. Overall delay costs for 2005 were estimated to be atleast $9.4 billion.
This economic conundrum has been largely ignored in policyformulation. Contrary to traditional economists, who believe therecan 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 cangenerate sufficient revenue to encourage long-term investment.Given the tight financial markets in 2008 which seem unlikely toloosen in the near future, investors may be less than enthusiasticabout bailing out the airlines again. As Warren Buffet said, "Ihave an 800 number now that I call if I get the urge to buy anairline stock. I call at two in the morning and I say, 'My name isWarren and I'm an aeroholic,' and then they talk me down."
Even if reforms are made, the underlying problem remains: this typeof market is inherently unstable. It will still require innovation,imagination and entrepreneurial flair by airline owners andmanagement to
continue providing an extensive network of cheap and safe services.The United States airline industry needs to be able to operateprofitably, and updating laws and traffic control systems, allowingmore mergers, and
helping them grow market power are necessary to preserve airlinetravel as the public knows it and depends on it.
To learn more and purchase a copy of the report, contact ParmeleeEastman, EastSight Aviation, at 781-416-3686.
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