Unions are not at the Heart of Airlines Problems, Part Two

So let us finish our conversation on Transportation Policy; so that we can move onto more exciting policy discussions. Considering this issue through the usual liberal lens – treatment of the other – is easy. For in this area, small “l” Liberals and big “L” Liberals share the same values: fair treatment of minorities while obtaining what is best for the public. This rubric of “fair treatment of the other” allows us to look for a policy position which provides fair treatment for airline companies and the travelling public.  However, ‘fair treatment of the other’, as a policy tool, also means guaranteeing the interests of other stakeholders including employees, unions, investors, and the Canadian State. Lastly, this tool of fairness does not preclude the addition of the full cost of travelling to the travelling public. Consequently, it is my belief that the fair treatment of all elements of the market is necessary. The question is how does one accomplish this? 

My suggestion is simple: let us find a way to maintain an open and diverse marketplace where companies cannot provide services at below the market cost. Admittedly, this policy will require government intervention into the market place. So most laissez-faire economists will have an issue; but history is on our side. For the real issue for Air Canada and Canadian was the lack of profitability. This is especially true when dealing with  Jetsgo, Canada 3000 and any number of failed airline companies in Canada.  They both started offering flights for a $1. How can one make money back on a per seat basis; when one needs to pay a pilot, a co-pilot, a grounds crew, a maintenance crew and others to get the plane off the ground? Since the Reagan Administration deregulated their industry, the US has been dealing with this same instability. Furthermore, the spread of market philosophies through various world governments has only allowed this instability to spread.

Thirty years of market failure begs for a regulated solution. Just look at the recent Financial Crisis. It took less than a year for governments to get involved. Banks, Insurance Companies and other financial entities were saved in most countries. The Conservatives have fought for tougher criminal legislation because they have argued that there is an immediate criminal danger. This is even though crime rates are falling throughout the country.  Yet, no one is willing to look at a failed transportation policy: one that eats up capital and creates an airline bankruptcy every five to ten years. So what government solution can we look at that will maintain investor’s capital and keep employment stable?

My contention is that airlines’ single biggest problem is the structure of their industry. Generally speaking, airline companies have to run networks to ensure that they are competitive for people rarely have to get from point A to Point B. For example, I like to go to Barbados. However, I am rarely able to find a flight from Calgary to Bridgetown, Barbados, and back. Westjet only runs a seasonal service to Barbados from Calgary. So I have always flown there on Air Canada. This means that I have to fly through Toronto.

Most airlines have a hub network because that is cheaper. Housing, repairing and servicing airplanes is an expensive endeavour. For, everything about it is specialized. The mechanics need to be trained on specific jets and generally need years of training and experience. Consequently, it is not surprising that airlines congregate around hubs. Calgary, Vancouver, Toronto and Montreal have been hubs for different airlines for nearly a half century. Westjet could evolve in Calgary because Canadian used it as their hub. Or put differently, because the infrastructure was there more could follow.

So, Calgary now is Westjet’s hub. Just as New York, Toronto, Montreal, Atlanta and Denver serve as hubs for other airlines. With this type of structure, one problem is obvious: not every route is intended to make money. Some routes are intended to funnel people to profitable routes. Other routes are intended for profile or long term potential growth. Consequently, it is easy for airline companies to have non-profitable routes.

Therefore, if an airline is intending to lose money on a route, who cares if they are losing 1%, 5% or 10%. Generally speaking that airline doesn’t; as long as it matches other marketing or profitability targets. However, from a public policy point of view, the problem is obvious: airlines looking to make profit on these routes will have to deal with an uncompetitive dealer who is operating planes for a reason other than profit. This market structure means it is more likely that a competitive operator will offer uncompetitive prices.

Simply put, if one or a few market players are willing to lose money on routes, a policy answer is required. My solution would be to start with a price floor. By providing a floor, airline operators would not be able to drive the market on cost alone. Therefore, on a long term basis, airlines would not be able to drive each under. 

Airlines would declare whether each particular route was intended to be profitable. Or put differently, in winter months, Air Canada might want to run a scheduled jet between Thunder Bay and Toronto. Winter months in Canada provides a great travelling market. People want to go to any number of “sun” destinations. However, Air Canada would not likely make a profit if it flew to 8 or 10 sun destinations from Thunder Bay. Consequently, Air Canada might provide a lost leader to Thunder Bay. For, while a flight from Thunder Bay to Toronto might not be profitable in itself, the flight might provide audience for more profitable routes: the sun destinations. In this case, Air Canada would be forced to declare that the Thunder Bay to Toronto route is not profitable.  As a result, Air Canada would be forced to abide by a price floor.

Such a floor could be established by “auction”. All airline carriers could be asked to declare whether they intended to make a profit through the servicing the route or not. If they intended to make money, they would be asked what their costs might be. From there, the federal government could establish a baseline or floor. The Federal Government could take the lowest cost projection or it could provide a floor based on a calculation (i.e. the average cost or use some other formula). Either way, a price floor could be established through numbers, evidence and audits. Companies could then compete, on individual routes, knowing that they can potentially make a profit. This would be the case should a carrier be a government owned or supported carrier, or a for-profit airline.

Additionally, the federal government could create a “CDIC- like” fund to deal with the collapse of a domestic airline or to get Canadians home if their airline collapses. When Jetsgo Corporation collapsed, it left a lot of people in the lurch. On March 11th, 2005, CTV staff noted, in an article called “Travellers stranded as Jetsgo shuts down”, that “not only are Jetsgo’s 1,200 employees out of work, but a reported 17,000 passengers have been left stranded during one of the busiest travel times of the year — March break.” Passengers were stranded in Canada, the US and Mexico. Among the passengers were 300 RCMP Officers who attended a national memorial service. When an airline fails, it affects us all: governments, police, military and civilians. 

When Canada 3000 failed, it left 50,000 vacationers stranded in up to 91 destinations. One can look at a number of failed airlines including CanJet, Harmony Airlines, Zoom Airlines, Roots Airlines and Skyservice. Each of them stranded Canadians in different destinations and those citizens had to pay again to get back to their own homes. Some might have purchased travel insurance or might have gotten money back from VISA. But various stakeholders processes would have taken time and would have not gotten Canadians home. Would it not be easier if we had a structure that was designed to do this.

A market failure fund does not require a huge amount of money and it could be based on aircraft movements. This would mean that those that use the system the most are the ones that pay for its maintenance. In 2010, NAV Canada reported that there were 12 million aircraft movements in Canada. These movements include take-offs, landings and overflights in domestic airspace and international airspace assigned to Canadian control. If even half of those movements incurred a $1 fee, $6 million dollars would be collected. If we use Canada 3000, as our example, one would estimate that a fund would need between $75 and 260 million dollars to deal with a collapse.  Depending on the way it is structured a “CDIC- like” could be operational and self-sufficient in less than 10 years.

This is not a unique idea in Canada. More than 90% of our financial companies have some sort of similar market failure fund. Assuris, CIPF and CIDC are just a few of them. This emergency fund might issue debt first to develop a large amount of investable capital. Or it might have a government or industry based guarantee. Either way, there are solutions that are possible. The question is are we brave enough as a part to fight for them.

Getting travellers to pay for the full cost of travel is important. It is a liberal and a Liberal Value. Since “Free riders” destroy markets; everybody should pay their way. This is a first step towards a sustainable market system. It allows investors to make a return; while accomplishing a national public goal. This is a Liberal Policy and one that we should investigate as a party.

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