Monday, 30 January 2006

Government subsidies to airlines

There’s a discussion on Dave Farber’s Interesting-People mailing list about the ways that governments subsidize commercial passenger airlines.

As I’ve been writing about for years, airlines whine about “regulations” and “freedom of the skies”, but 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 manufacturers 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 e.g. 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.

  9. 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.

  10. Fuel for international airline flights has been exempted from all taxes and duties by provisions of the Chicago Convention on Civil Aviation and many other bilateral and multilateral international aviation treaties to which the USA is party.

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

Link | Posted by Edward on Monday, 30 January 2006, 08:28 ( 8:28 AM)

A very well-written viewpoint. Mr. Hasbrouck's article includes often-forgotten factors when discussing so-called "successful" coorporate (private industry)results of the Deregulation Act of 1978.

The blog begs two overall questions:

1. How "successful" would the private airline industry be if it were not subsidized by the government?

2. When will Mr. Hasbrouck buckledown and get a long-overdue, military-style haircut and shave?

Posted by: CMSgt Joel Coppolino, USAF, 7 May 2006, 09:24 ( 9:24 AM)

I found you article interesting as I am a retired railroad conductor. I worked both freight and retired off Amtrak. I have alwys argued that Amtrak gets a bum rap from those who don't realize the cost saving to other modes of transportation. Thank you for your comments

Charles w. Bassett

Posted by: Charles W. Bassett, 2 November 2007, 04:58 ( 4:58 AM)

I'm not sure how valid your #2 point is. Most airline pilots paid their own way to a commercial pilots license. The airlines do pick up the tab once the pilots are hired, but it's not military training. The airlines have their own training facilities for continuing education.

I attend a flight school here in Dallas and know a lot of pilots that have been hired and a lot of "soon to be" pilots. Also, I have a friend who works at the Southwest Airlines training center.

Posted by: Anonymous, 9 May 2008, 16:37 ( 4:37 PM)

#1 and #3 are *good* things. These absolutely should not be privatized. They are infrastructure, and were they private certain airlines would likely be 'preferred' based on under the table bribery and the like. Bad, bad.

The rest, I agree with you on.

Posted by: JamesB, 9 May 2008, 19:19 ( 7:19 PM)

Your point 2 is waaay off the mark. It's true that a number of Military personnel (Myself included) find their way to the Civilian job market. But the Military doesn't come even close to providing enough pilots for the 6000+ commercial aircraft that ply the skies on a daily basis. Remember that many, many military pilots are helicopter pilots as well - and rotary wing flight time counts for virtually nothing when you are applying for an airline job.

Posted by: Justin, 9 May 2008, 20:24 ( 8:24 PM)

You left out all of the hundreds of millions of dollars the state of Minnesota tax payers forked over to keep Northwest's hub and maintenance facilities, and their associated jobs, in MN.

Posted by: mnesotan, 9 May 2008, 21:06 ( 9:06 PM)

so what is your estimated total amount of all these subsidies (perhaps with the exception of number 2)?

we need electric high speed (400+mph) rail.

Posted by: mwelinder, 9 May 2008, 21:31 ( 9:31 PM)

Air Canada is the only airline that takes live animals on & off Vancouver Island. They put a moratorium on shipping live animals all summer now they put a moratorium on shipping all winter from Oct 31/09 to March 31/10. We can only ship spring & fall. Dog & cat breeders on the Island must figure out how to get their animals to go into heat, & have puppies ready for shipping spring & do you do that? This does not just affect breeders, but people wanting to buy a pet from other than Vancouver Island. How do I e mail the Gov't with my complaint? Who do I direct the e mail to?

Posted by: Anonymous, 11 November 2009, 20:55 ( 8:55 PM)

Could you address the 1934 Decision 83 and mail pay? As I understand it, mail pay is another government subsidy which covers airline losses on passenger tickets, as well as covering the cost of transporting mail.

I would really like to know if airlines still operate under the benefit of mail pay.

Also, I disagree with the importance you place on #2. The military's role in training pilots qualified for the airlines has greatly diminished over the years.

Posted by: Laura, 17 January 2010, 13:38 ( 1:38 PM)

Laura: I said that these items were listed "in no particular order".

Mail carriage undoubtedly played a critical role in the development of airlines as we know them, but it also played a key role in supporting other transport systems, from stagecoaches and the pony express to railroads. Cargo is essential to airline economics, and mail is an important category of cargo. But mail is also important for surface carriers.

Mail used to be a significant source of revenue for Amtrak, subsidizing passengers, as it had been for predecessor railroads. But Amtrak stopped carrying mail in 2004. For now, airlines still carry mail, but there has been debate since 11 September 2001 over whether airlines should continue to carry mail on mixed passenger and freight services.

Many people have echoed your comment that the percentage of airline pilots trained by the military isn't as high as it used to be. But it's still substantial. And my mention of subsidies for training wasn't limited to pilots.

There are many aircraft mechanics for every one pilot, for example, and my impression is that an even higher percentage of mechanics and workers in some other skilled aviation job categories have military training.

Posted by: Edward Hasbrouck, 17 January 2010, 14:04 ( 2:04 PM)

WHAT A HACK ! not a single one of the listed items is anywhere close to being a subsidy ! Your claims are ABSURD. No wonder no one has ever heard of you with drivel such as this !

Let me educate you ED - Currently a military aviator signs a TWELVE YEAR commitment the day he/she enters flight school. At twelve years said aviator is at the rank of Major or O-4. With Aviation Career Incentive Pay or ACIP and housing allowance said aviator is easily clearing in excess of $98,000 a year. Why, Ed would anyone leave that to make $36,000 a year ??????????????????????? It just ain't gonna happen.

Just because a male flight attendant spurned your advances is no reason to put out such outright lies on your shitty little corner of the web.

Posted by: Hugh Jorgan, 2 February 2010, 19:58 ( 7:58 PM)

What about all those critical "General Aviation" Subsidies? And the fact that no small airplanes have any noise or polution control equipment requirements? Plus, the air over my house was stolen from me. Id like 500,000.00 for it please.

Posted by: Hugh Jerorgan, 3 June 2010, 11:25 (11:25 AM)

With whole hunks of Boeing 737s now tearing off the tops of their cabins, I'm inclined to agree with you. The least the airlines could do if they're taking government funds is to be sure we're safe when we're in them!

Posted by: Nory, 6 April 2011, 11:02 (11:02 AM)

I'm sorry but I must disagree with the one that thinks the airline industry gets its own pilots. It is only in recent years that has been the case. 20 years ago in the airline early years it was almost all ex-military. The airline gets a huge free ride. Alway has.

Posted by: KIM, 1 May 2011, 15:37 ( 3:37 PM)
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