Tuesday, June 22, 2004
Creative Destruction of UA
I see where United Airlines is planning on reapplying for a federal loan guarantee. If I ran the Transportation Stabilization Board, there would be no way that United would get a loan. Consider that there are numerous other operating airlines many of which are quite healthy. The argument typically used to justify a bailout - that the company is critical to the US economy - is difficult to make when there are so many other companies providing the same service.
More generally, why should the government be in the business of so openly favoring one company over others?1 I'm fairly sure that Southwest, Delta, jetBlue and many other airlines wouldn't mind the same sweetheart loan.
To me what forms the most important consideration, bailing out United prevents the process of creative destruction from occuring. UA is a market loser. There are too many high end national carriers as evidenced by their struggle to make ends. Low fare airlines (a more recent innovation, hence the creative half of creative destruction) are making lots of money. Clearly the market demands more low fare carriers and less high end carriers.2 Unnaturally keeping UA afloat maintains a market inefficiency - an excess of high end carriers.
So as no critical industry is being protected, as it's dramatically unfair, and as it will actually hurt the economy, UA should not be bailed out.
Footnotes
1. I say openly as even when it's not intended, every policy, regulation, and law tend to favor one company or another. This is why businesses lobby Congress so heavily.
2. Note that some high end carriers have recognized this fact and opened their own low fare airline. For instance Delta now operates Song airlines to provide both a high end choice and a low-end choice. This is a pretty wise move as it allows a company to better fill out the demand curve.
This is also something that the auto industry has been doing for years with great success, e.g., Toyota/Lexus, Saturn/GMC/Olds/Saab, Ford/Mercury/Lincoln/Aston Martin. Not everyone wants or can afford a Lexus, nor does everyone want a Saturn. Likewise, not everyone wants to fly Delta and not everyone wants to fly Song.
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More generally, why should the government be in the business of so openly favoring one company over others?1 I'm fairly sure that Southwest, Delta, jetBlue and many other airlines wouldn't mind the same sweetheart loan.
To me what forms the most important consideration, bailing out United prevents the process of creative destruction from occuring. UA is a market loser. There are too many high end national carriers as evidenced by their struggle to make ends. Low fare airlines (a more recent innovation, hence the creative half of creative destruction) are making lots of money. Clearly the market demands more low fare carriers and less high end carriers.2 Unnaturally keeping UA afloat maintains a market inefficiency - an excess of high end carriers.
So as no critical industry is being protected, as it's dramatically unfair, and as it will actually hurt the economy, UA should not be bailed out.
Footnotes
1. I say openly as even when it's not intended, every policy, regulation, and law tend to favor one company or another. This is why businesses lobby Congress so heavily.
2. Note that some high end carriers have recognized this fact and opened their own low fare airline. For instance Delta now operates Song airlines to provide both a high end choice and a low-end choice. This is a pretty wise move as it allows a company to better fill out the demand curve.
This is also something that the auto industry has been doing for years with great success, e.g., Toyota/Lexus, Saturn/GMC/Olds/Saab, Ford/Mercury/Lincoln/Aston Martin. Not everyone wants or can afford a Lexus, nor does everyone want a Saturn. Likewise, not everyone wants to fly Delta and not everyone wants to fly Song.
Comments(0) |
