By DAVID MOON, Moon Capital Management
January 8, 2006
When Independence Air announced it
was ceasing operations last week, the headline of this paper read 'Independence
Air out, higher airline fares in.' The implication was that the exit of a
low-cost carrier from Knoxville would drive fares higher in
Of course, an alternate headline
could have been 'Federal government better at manipulating market than locals.'
Or 'Artificially low air fares likely to rise.
The airline industry is one of the
most heavily government-subsidized industries of all time. It didn't just happen
following 9/11. Airlines regularly go to Congress with outstretch hands, arguing
that the future of the entire US economy depends on another few billion dollars
I've not seen aggregate sector
statistics, but it is hard to believe any industry could have received more
federal handouts than the airlines ' even though the entire airline industry has
had a net cumulative operating loss since its
Folks like Delta, United, Northwest
and US Airways receive billions of dollars of federal aid while flying into
bankruptcy. Without the aid, these companies would be forced to change their
operating models, one component of which would likely include charging higher
Instead of paying $260 to fly to
Washington, D.C., you might pay $400, or $600. Or you might choose to drive. The
government handouts allow the airlines to either charge lower fares or support
higher cost structures by passing those costs on to the American taxpayer.
Though their track records suggest
otherwise, airlines are technically in business to generate a profit. If a
low-cost carrier thought it could increase its profitability by serving
Knoxville, we couldn't beat that airline off with a stick.
We can subsidize a new airline's
marketing budget or beg it to stay in town. But unless our community is willing
and capable of competing with the subsidies offered by the federal government,
which is impossible, we're probably going to have to depend on increased demand
to determine the quantity of air service supplied in this area.
And its not even real supply and
demand that will decide the number or cost of flights out of McGhee Tyson;. It
is a debased form of competition, negotiated by the airlines and ruined by
Real competition will never exist in
the airline industry as long as major players can depend on OPM (other people's
money) to pay for mistakes and poor business structures. If Knoxville wants what
passes as competition in air fares, we can only get it with an increase in the
demand for flights. We can't depend on artificially (and temporarily) lowering
prices or trying to compete with the subsidies offered by the infinitely deeper
pockets of the federal government.
Lowering fares increases the number
of people willing to fly at lower prices. But it does nothing to change the
economic structure of the system. That would require an increase in the number
of people willing and able to buy tickets at all price points, not just lower
This is what Knoxville needs for
permanent airline competition. And this can only happen with real economic
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).