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U.S. Airline Industry - The Unfriendly Skies

Companies / Sector Analysis Aug 30, 2013 - 02:06 PM GMT

By: Peter_Schiff

Companies

As if the federal government were not already doing enough to kill the U.S. airline industry with restrictive workplace rules, over-regulation, and a monetary policy that supports higher fuel prices, earlier this month anti-trust authorities at the Justice Department blocked the merger between American Airlines and US Air. (Unbelievably, the regulatory roadblock was thrown up more than a year after the two companies had agreed to terms, and after great expense has been incurred to integrate operations). Although long suffering investors had hoped that the merger would allow the beleaguered airline to finally exit bankruptcy, in the days after the surprise announcement, AMR stock almost fell as much as 60%.


Entire columns could be written on why the government had little reason to stop this particular merger, (the preponderance of other air carriers and transportation alternatives) or why the entire "anti-trust" apparatus of the government has done, and will do, nothing to support the living standards of average Americans, but the bigger story here involves the diminished scope of the airline industry in general. The difficulties that U.S. carriers face, which is the driver behind the current "urge to merge," provides us with clear insight into the health of the broader economy.

Over the last few weeks, I have made a few attempts to show how government sleight of hand may be making our economy appear to be healthier than it actually is. For instance, I showed how in recent years initial reports of GDP growth have consistently been far too optimistic, thereby creating a false narrative about the current recovery. I also pointed out how the inflation measures used to calculate GDP have been consistently below other inflation yardsticks, and may have led to overestimates of economic growth. Instead of looking at government yardsticks, I have suggested that the truth can be better observed by looking at the demonstrable changes in living standards.

For instance, compared to prior generations, Americans now save less, use less energy, and devote a greater proportion of their disposable income to meeting basic survival needs. Such outcomes suggest falling living standards. Air travel is another real world metric worth tracking. Americans also use far less air travel than our GDP growth rate would suggest we should.

It may not be too controversial to assert that wealthy working people tend to fly much more than poorer underemployed people. When we are employed (especially at high level jobs) we tend to travel more for business. When our jobs pay well, we have the income needed to travel more on long distance vacations. It should come as the least surprising fact ever that citizens of wealthy nations tend to fly much more than residents of poor nations.

As a result of this basic understanding, the number of airline tickets sold on domestic U.S. carriers should provide a decent barometer of overall economic health. The numbers reveal that more people are flying than in the past, but the increase is less than half of what may have been expected based on the official GDP growth figures.

According to research by the Massachusetts Institute of Technology's Airline Data Center, in 1995 U.S. carriers had a total number of 470.2 million "enplanements" (which is defined by how many times a passenger takes a trip). In 2012 that figure had gone up to 565.1 million, an increase of approximately 20.2%. This doesn't sound too bad.

But over those 18 years, the government reported real GDP expansion (after adjusting for inflation) of 2.9% per year on average. That adds up to 52%of growth. At minimum, you might expect the airline industry to keep pace. Instead, the increase has been less than half that.

The Bureau of Transportation Statistics has another data set that doesn't go back as far but offers a similar trajectory. They report a total of 629.8 million passengers in 2004, and 642.2 million passengers in 2012. This works out to be a 2% increase over nine years. But according to the government, real GDP has risen more than six times that (12.3%) over those nine years. By that yardstick, airline travel is lagging significantly.

Believe it or not, this has happened despite the fact that ticket prices have come down in relative terms. According to the airline industry resource, Airlines.org, the average price for a round-trip domestic ticket was $277.37 (1995 dollars) in 1995. In 2012 that figure had gone up to $355.75 (2012 dollars), an increase of 28% (the U.S. Department of Transportation (DOT) reports a similar figure of 28.4%). In terms of ticket price per passenger mile, the increase is even more modest, just 9% (13.8 cents in 1995 vs. 15.1 cents in 2012). Yet inflation since 1995, as measured by the CPI, is up 55%. This means that in relative terms, the cost of flying on an airplane has actually gone down. The DOT puts the decrease at 14.7% in 2013 dollar terms.

So Americans' air travel has fallen relative to economic growth even while the cost of flying has fallen by a significant margin. This simply makes no sense unless you allow for the possibility that the economy really isn't expanding as rapidly as we are being told. It is possible that the added security and inconvenience of flying since 9-11 has deterred people from flying, but I doubt that it's a significant factor. Yes, many carriers now provide fewer amenities to travelers, and baggage charges, change fees, and food charges have certainly increased, but those factors can't be that determinative. I'll go with the simplest explanation: as Americans get poorer, our citizens fly less.

As the government takes more and more control of the economy, and as money printing, taxes and regulation become the biggest economic determinants, such an outcome is inevitable. The measurement tools can become distorted and the numbers can become fuzzy, but the outcomes are easier to see. We can't grow government and the economy at the same time. We must choose one or the other.

The truth is that our impoverished citizenry can no longer support the airline industry we once had. That's why American and U.S. Air had to merge in order to stay competitive and profitable. That is the sad truth behind the headlines. The government is correct about one thing, the merger would result in fewer choices and higher fares for customers. But given the reduction of our living standards that outcome is impossible to avoid. If our government really wants to protect consumers and allow for more affordable air travel, a better solution would be to reverse the destructive policies that made the merger necessary in the first place. Ironically blocking the merger could result in more flight reductions and larger fare increases than what might have been the case had the merger been allowed.

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Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

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