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 2006.

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 in aid.

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 inception.

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 prices.

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 federal subsidies.

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 fares.

This is what Knoxville needs for permanent airline competition. And this can only happen with real economic growth.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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