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Monday, September 4, 2017

Mead's ENDOW Wants State-Run Airline

Just when you thought the tax-and-spenders among our legislators could not invent more ways to dole out our money... the Committee on Minerals, Business and Economic Development finds a way to surprise you:

The impending departure of Allegiant Air from Casper, announced last week, signaled more than the end of popular discount flights to Las Vegas. It showed the extent to which Wyoming is dependent on the whims of commercial carriers to serve relatively rural areas. Rep. Pat Sweeney, R-Casper, said that airport officials had done everything possible to retain Allegiant service, including attending the company’s annual meeting every year in Las Vegas. “What more can we do?” Sweeney asked at a legislative committee meeting Friday. The Wyoming Department of Transportation has a possible, if ambitious, fix. The agency wants to contract with airlines to provide regular service to airports in the state, similar to how large airlines like United contract with smaller carriers like GoJet to provide regional air service.
This is one of the largest spending plans an elected official has come up with here in Wyoming. That is probably why this plan was - I have been told - sprung on the Committee during its meeting on Friday. It was not part of their agenda, but it is an essential part of Governor Mead's ENDOW project

I am going to get back to the ENDOW project in tomorrow's article. I had other issues on my to-write list, but given how fast the governor and the tax-and-spenders in the legislature seem to want to roll out his project, I will gladly change my schedule. 

For now, let us get back to the Star Tribune's presentation of the "Air Wyoming" project (yes, that is in fact what the Tribune calls it in its headline):
The Wyoming Department of Transportation has a possible, if ambitious, fix. The agency wants to contract with airlines to provide regular service to airports in the state, similar to how large airlines like United contract with smaller carriers like GoJet to provide regional air service. 
Right there, a red flag goes up. Commercial airlines contract out "feeder routes" because it makes sense commercially. They are slowly pulling out of that business here in Wyoming for precisely that reason: it does not make commercial sense to supply regional air service to most Wyoming airports. Now, our state government wants to step in and take over the role of general contractor for those same regional air services.

The one question that the Star Tribune did not ask of either the leadership of the Economic Development Committee or Jeremiah Rieman from Governor Mead's ENDOW project, is: if a private business cannot make money on contracting out regional air service, what makes the MBAs and experts in commercial airline operations at Governor Mead's office think they can?

The ENDOW crowd and WYDOT have an answer to that question. It is tucked away in the Star Tribune story:
That would be a different approach than the revenue guarantees currently used to subsidize commercial air service in most Wyoming airports where the local, state and federal government chip in to the tune of $46 million per year to guarantee carriers a minimum amount of business each year by covering any shortfall. 
Earlier this year, President Trump asked Congress to terminate the so called Essential Air Service (EAS) program. If Congress agrees with the president, Wyoming would lose $3.1 million in EAS funds. This money is used to subsidize two SkyWest routes: from Laramie to Denver, which takes two thirds of the federal money, and from Cody to Salt Lake City. 

The WYDOT-ENDOW idea is far more ambitious than just a subsidy to cover the losses that airlines make on unprofitable air services. The Star Tribune explains:
WYDOT’s idea is to start entering what are known as capacity purchase agreements. Those deals give the entity commissioning the contract more control than by offering revenue guarantees alone. WYDOT and local airports in Wyoming would dictate the frequency of flights, number of seats, price and destinations while paying the contracted carrier a set amount. 
Did you hear that? Let's take it one more time:
WYDOT and local airports in Wyoming would dictate the frequency of flights, number of seats, price and destinations while paying the contracted carrier a set amount. 
In other words: 

a) the free market has determined that it is unprofitable to provide commercial air service to most airports in Wyoming;
b) government in all its glories - federal, state and local - throws tens of millions of taxpayer dollars at the airlines;
c) the airlines still cannot make money on commercial air service to most airports in Wyoming;
d) since the free market, despite handsomely funded distortions in the form of taxpayers' money, still does not find it profitable to fly on most Wyoming airports...
e)...government is simply going to step in and terminate the free market and instead have government dictate prices, product specifications, production quality and production quantity. 

In the bad old days, during The Cold War, we used to call this Central Economic Planning. It included airline services as well. 

I actually have a little anecdote to tell, with reference to centrally planned air services. In my early 20s I did a stint as a fireman with the fire-and-rescue service at Arlanda International Airport in Stockholm. Back then, it was the fourth largest airport in Europe, so we got quite a bit of traffic (have you ever seen a Concorde up close? Beautiful!) which included assorted eclectic services to and from odd destinations around the world. 

One fine Saturday morning, when we firemen were busy cleaning our rooms and the garage at the station, the disaster alarm sounds. In 30 seconds we man the fire trucks and rush, lights flashing and sirens wailing, out on the runway system. The tower directs us to runway 19 where we a four-engine turbo-prop machine is making an emergency landing "right now". Our fire captain asks for more details.

"The door fell out" says the control tower.

Upon take off, the Romanian TAROM Airlines airplane (generously defined) had lost its cabin door. It fell out and landed on the runway. After the captain has made a successful emergency landing, the crew exits the machine, picks up the cabin door, puts it back in place and request permission to take off again.

Now, I don't think we will have to expect this level of air service in Wyoming, under any circumstances... but it is always a good idea to live by the rule that when the free market says "no", government should not say "yes". 

Seriously, there are four reasons why Governor Mead and our state lawmakers should avoid central economic planning, in the airlines industry or anywhere else:

1.  Market volume. The reason why the free market says "no" is that there is no way to produce a service of reliable quality while charging prices that allow the business to sustain services, both in terms of quantity and quality. The notion that government somehow can step in and replace government, rests on the idea that airlines somehow have intolerable profit requirements on their products. But as anyone knows, who has been on a commercial jet recently, airlines are not exactly skimping around the air with half-empty planes. In fact, in today's highly regulated and cutthroat competition commercial air service market, they have to overbook in order to secure cost coverage and a tolerable surplus (which is not the same as profit). 

Apparently, the standard regional air service in Wyoming flies with 50-seat capacity aircraft. Since they do not make money despite subsidies, this means they are nowhere near capacity on the flights they offer. Most airlines are shying away from 50-seat capacity flights and want to go nowhere below 70-seat aircraft and would ideally only fly with the next-up size machines, namely the Boeing 737. In other words, to even come close to making commercial sense out of regional air services in Wyoming, airlines would need 50-70 passengers per flight. 

That would put them in the vicinity of cost coverage. And please note that this would have to be for both the inbound and the outbound flight.

Do the airports in Cody, Sheridan, Riverton or Rock Springs have these volumes of passengers to offer?

2. Price. Given a passenger's budget restriction, an airfare is dependent on three factors: production cost for the air service, available air service competition and the cost of alternative means of travel. If we assume that government is not going to tamper with the production cost (an item we return to below), then the only way for an airline to match cost with sales is to exercise its monopoly power - assuming it has no competitors on the route - up to the point where people think the ticket is so expensive they rather drive to the nearest big airport instead. 

Obviously, commercial airlines have tried this, failed and then failed again while collecting tax-paid subsidies. Even under monopolistic conditions, they simply have not been able to sell at a price that makes airline travel competitive compared to other means of travel. Since government is not going to be able to do anything about competition from its own highway system, they, too will have to set airfares low enough to discourage people from driving instead. 

But given, again, that there is no suppression of production costs for the flights themselves, government is going to have to throw taxpayers' money after each and every flight. In other words, they are going to have to dictate that the airline they choose to work with sets its prices so low that nobody will drive anymore. In order to do so, they are practically going to have to make taxpayers the main providers of production-cost funds for the airline involved. 

In short: they have to fiscally socialize air services in Wyoming. They will also need to hire air service experts at WYDOT, including but not limited to high-paid experts in commercial airline pricing, air safety experts, business analysts and possibly a macroeconomic expert or two.

What is all this going to cost taxpayers?

3. Production quality. When taxpayers are put in charge of paying for air service around the state, with token contributions from ticket buyers, and the state budget again goes deep into deficit, there is a significant risk that the state - in order to maintain its "essential" air services - starts looking the other way as the airline cuts cost corners. Anyone who does not think this is even within the realm of possibility should go to a VA hospital next time he or she needs medical services.

While the TAROM example above is just an absurd illustration of this point, it does remind us that when government runs out of money and still wants to provide the services it cannot afford, the quality of the product will inevitably suffer. Furthermore, the longer government holds on to its unsustainable central-planning model, the more it is going to allow quality tampering to maintain its bureaucratic status quo.

I am not building a scarecrow here. I am simply drawing on a century of experience with varying degrees of central economic planning. In case anyone wants more details, I will be happy to elaborate.

4. Economic development... The purpose behind creating a Soviet Airlines here in Wyoming is apparently to facilitate the new arrival and expansion of businesses around our state. The idea itself, that we need more private businesses, is praiseworthy. However, the way to go about it is not to make those businesses dependent on services from a government that already cannot pay for everything it wants. Since it is a given that Soviet Airlines could easily cost Wyoming taxpayers north of $100 million per year (and that is just for air services; we have not even talked about airports, shuttle buses and the new WYDOT bureaucracy to run Soviet Airlines) the legislative Revenue Committee would have to slam another big, fat tax hike on top of the ones they are already in pursuit of. 

What does this mean from a so-called economic development perspective? Simple: by raising taxes on the communities where the government wants new businesses to develop - and fly in and out of three times a day - government will take away most, if not all, of the economic advantages that a business would see in choosing Wyoming over Utah or South Dakota.

The idea of raising taxes to pay for economic development reminds me of Jörmundgandr, or the Midgård Serpent, in Norse mythology. It was big and insatiably hungry, thus ate everything it found. Eventually, it grew so big that it surrounded the entire world. Once its head was back where it had started from, it found a big piece of something, sank its teeth into it - and felt an excruciating pain in its own tail...

There is a lot more to be said about this Soviet Airlines project, and about ENDOW itself. It is quite worrisome that Governor Mead would want to rely on central economic planning to move his agenda forward; in tomorrow's I will analyze the ENDOW reports (there are two) in detail. But even more worrisome is that the legislature is so eager to quickly roll out his plan without much public debate - and without having the faintest idea of what this is going to cost taxpayers. 

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