Tuesday, October 05, 2004

Come Get Bankrupt with Me

You’d think the Wall Street Journal would know better.

Today’s Journal ran a front page article about the decline of major US airlines and how competition are forcing them to adapt. It’s another great article about the wonders of the free market. Like Merck, companies including Delta and US Airways are in danger of going completely under because they made stupid decisions (thus bringing Capitalism’s victory total up to between 6,853,409,823,748 and 6,853,409,823,752—I don’t know exactly how many airlines are serious danger; I know it’s at least four and probably not more than eight).

These stupid decisions include not concerning themselves with keep costs down, refusing to take on good ideas when they see them, relying on the horribly inefficent “hub” system and so on. Back in 1978, the idea was deregulation would lead to lower prices and better service. Instead, the Journal insists, the average consumer was “gouged” while the airlines practiced these stupid things. (As mentioned hundreds of times in other blogs during the summer, the idea that a private firm can “gouge” anyone is a myth.)

Susan Carey and Scott McCartney, the authors of the article, attributed the Internet, oil prices and 9/11 to the airlines’ downfall. They call strategies that the major carriers used to protect themselves from the upstarts of the 1980s as a “bag of tricks.” This includes frequent flier programs, something the article notes that was cheifly responsible for defeating the up and comers like People Express Airlines. (The very idea that there are new competitors on the field just a few years after deregulation speaks volumes for the economy.)

True, the circumstances Carey and McCartney noted probably did help the new upstarts; I have no doubt in that. But to presume that they are the reason why the big companies are getting blasted while in the same article note that these companies haven’t been paying attention to competition is a contradiction in terms. Frequent-flier programs are good; that’s why they worked. But they are no longer good enough; that’s why US Airways is filing for bankruptcy.

Clearly one of these two journalists know some economists. You’d think one would have taught the other some, collaborating on the article they were collaborating on.


Glen Whitman said...

I think you're mistaken to say the hub system is horribly inefficient. Yes, Southwest and other small carriers have been using a point-to-point (or "puddle-jumping") model with great success. But there's no reason to think the airline market should be characterized by a homogeneous equilibrium. Back in the 1970s, point-to-point was the norm, but it proved vulnerable to invasion by carriers using the hub system. The hub system allowed better service for many locations underserved by point-to-point, whose residents were happy to take layovers for lower prices and greater availability. By the 1990s, hub was the norm, but it proved vulnerable to invasion by point-to-point. Point-to-point flourishes in the cracks created by a hub system, driven by the desire of people to have more direct flights between locations. I think we're now settling down into a heterogeneous equilibrium.

David said...

You make a very good point and I was mostly drawing from personal experience; I've never had the option to use the point-to-point system (to my knowledge) because I was born in the early 80s. I HAVE, however, spent scores of hours in hub airports and an untold number of hours backtracking between points. The real question is, which system will end up being the expection? I'm guessing that as more and more people move to larger urban centers (as is the trend), point-to-point systems will be the norm; the time costs for the hub won't be worth the slightly smaller amount they save, compared to the alternative.