airline subsidies, tax breaks, etc.

[David Farber <dave () farber net>]

Begin forwarded message:

From: Edward Hasbrouck <edward () hasbrouck org>
Date: January 30, 2006 1:22:31 PM EST
To: dave () farber net
Subject: airline subsidies, tax breaks, etc.

Somwhat long post prompted by the thread in IP:

http://hasbrouck.org/blog/archives/001001.html

Airlines whine about "regulations" and "freedom of the skies", but it  
in fact they receive a wide range of subsidies, tax preferences, and  
other forms of special treatment from Federal, state, and local  
governments in the USA. (The phenomenon is widespread elsewhere in  
the world, even if the details vary from country to country.)

How? Let me count the ways (in no particular order):

1. Airports and air trafffic control infrastructure are built and  
operated by tax-exempt government entities (consider the real estate  
and other taxes that would be paid by privately owned airports on  
huge tracts of land in prime urban and suburban locations) with below- 
market capital costs (tax-exempt government bonds).

2. Employee training for pilots, mechanics, etc. is provided by the  
military at no cost to airlines. (Ex-military pilots and mechanics  
may require additional training and certification for specific  
civilian aircraft types, but they've already logged thousands of very  
expensive hours of jet aircraft experience.)

3. Air traffic control and other services to airlines are provided by  
the government. (Airlines will claim that they pay for this in user  
fees, but that ignores the taxes that would be paid on private ATC  
infrastructure, and the artificially depressed labor costs: As  
government employees, air traffic controllers and many other civil  
aviation workers are forbidden to strike, enabling the government  
unilaterally to impose below-market wages.)

4. Airlines are paid all the time, even when their aircraft aren't  
being used, for agreeing to make their planes available on demand to  
the government as part of the "Reserve Air Fleet". But the times when  
they are needed -- times of war -- are generally times of reduced  
civilian air travel, when they would otherwise be idle. And when the  
"Reserve Air Fleet" is used, airlines are paid market rates for  
government charters.

5. Government funding for military aircraft subsidizes production and  
operation of civilian aircraft: Manufacturers of aircraft and  
associated equipment pay nothing for knowledge transfers from  
government-funded military aircraft research and development,  
prototyping, testing, maintenance experience, etc. to civilian  
aircraft. Military aviation provides critical support for economies  
of scale and continuity of operations for manufacturtes of aircraft,  
support equipment, and related services during cyclical declines in  
civilian aircraft demand. Many civilian aircraft types are sold  
directly to the military, and these sales are often essential to  
enlarging production runs to the break-even point.

6. Airlines have a statutory exemption from Federal anti-trust law to  
allow them to participate in IATA "traffic conferences" to fix  
standard "industry fares".

7. Under the preemption clause of the Airline Deregulation Act of  
1978, airlines are exempt from state and local truth-in-advertising  
and other consumer protection laws. (This wouldn't matter if the  
Federal government enforced similar rules, But, as state Attorneys  
General have pointed out , the Feds allow many practices that enhance  
airline profits but would be forbidden under state and local fraud  
laws.)

8. Airlines based in the USA are protected by Federal law from all  
foreign competition: No airline based anywhere else in the world is  
allowed to carry passengers between points in the USA, and no foreign  
entity is allowed to own more than 25% of the voting stock in any  
airline based in the USA. This applies even to US colonies: It's  
illegal to buy a through ticket on a foreign airline between Guam and  
the mainland USA via eg. Seoul, Taipei, or Tokyo (even though travel  
agents occasionally issue such tickets by mistake), no matter how  
much cheaper that would be than a ticket on Continental Micronesia,  
the only USA airline with service between those places. You have to  
buy 2 separate tickets, and claim and re-check your luggage at the  
transfer point. Under "Buy American" rules, all travel funded, even  
in part, by the US government must be on a US-flag airline, no matter  
how much more it costs than a foreign-flag competitor. Where, as is  
often the case, there is often only one US-flag airline serving a  
given destination, this gives them a de facto monopoloy on government- 
funded travel, a large and often high-revenue (last minute business  
travel by government contractors, etc.) portion of the traffic on  
some routes.

If airlines really want to be free of governmewnt regulation and  
oversight, they first should have to agree to give up their  
government subsidies and special privileges and protections.

--------------------
Edward Hasbrouck
edward () hasbrouck org
http://hasbrouck.org
+1-415-824-0214

"The Practical Nomad: How to Travel Around the World"
(3rd edition, 2004)
"The Practical Nomad Guide to the Online Travel Marketplace"
http://www.practicalnomad.com


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