Econ 201C: Introduction to Economics

Professor Meyer

September 9, 1999

Airports, Airlines, and the Fight for Supremacy

Air travel, though not always pleasant, is a popular mode of transport. Moreover, the market for air travel continues to grow. This growth in demand is visibly stretching the airports' ability to handle the enormous number of passengers traveling each day. However, in a time of air rage and frustration, the government is examining a proposal that could end much of the stress involved with flying. In a Wall Street Journal article, "Airports, Airlines Rev Up for Dual Over Funding Plans", Bruce Ingersoll examines the bill from all angles, but where do the incentives lie? The proposal before Congress outlines a plan to remove the Airport and Airway Trust Fund from the budget, and to increase the passenger facility charge that travelers must pay in order to fly. Consequently, both the increase in passenger facility charge and the removal of the trust fund from the budget would directly benefit the airports. However, the airlines are worried about the opportunity costs they would face upon the passing of the bill, as the airports salivate at the hint of an increase in revenue.

According to Mankiw's "Ten Principles of Economics", there are choices that must be made, but there is always a cost involved with each decision. The expense of each choice is known as an opportunity cost, or the sacrifice made in order to obtain what is desired. The airlines do not want the proposal passed by Congress, because its introduction into policy would cost them dearly. For example, the bill will allow the airports to increase the fee or passenger facility charge that passengers must pay in order to fly. However, the airlines worry that customers will perceive the added cost as a rise in ticket prices; therefore, large carriers could lose money because their passengers will look elsewhere for decent prices. Another opportunity cost faced by the large carriers is the loss of power they possess over the airports. If Congress decides that the bill is beneficial to air transport, then the passenger facility charges and the removal of the Airport and Airway Trust Fund from the budget would provide the airports with an enormous amount of revenue. The airports' new revenue will provide them with authority previously held by the airlines alone. This supremacy held by the airlines was gained in the 1960s and 1970s. At that time, the airlines agreed to fund the expansion of airports in return for departure gates, and final decisions over plans for building facilities that could hurt them by brining competition. As soon as the airports gain the upper hand in the expansion projects, the airlines will face competition, which they will have absolutely no control over. Hence, they stand to lose a lot of business.

Another economic principle found in the article is the involvement of the government in the market can improve the economy. Although the market, for the most part, does not need government support, it does not disperse economic wealth equally giving greater profits to monopolies or oligopolies. Therefore, the government tries to create policies that will spread prosperity evenly, which is its intent in considering the proposal at hand. If Congress passes the bill, then the competition, previously controlled by the larger airlines, returns to benefit smaller airlines and any new carriers. Furthermore, jobs will be created to handle the security, baggage, and general service to the passengers traveling through the newly renovated airports; thus, the economy in general prospers because of the increase in employment.

Moreover, under the proposed bill, the government provides the airports with incentives. The airports stand to gain from the revenue created by the passenger facility costs and the trust fund. Consequently, they have been lobbying members of the Congress. Their hope is to destroy any opposition to the passenger facility costs, while creating support for the removal of the aviation trust fund from the budget. With the money provided by the passenger fees and the trust, the airports can start expanding and renovating facilities, as well as improving the air-traffic-control system. The airport improvements will not only help to accommodate the large demand for air travel, but also provide a larger number of gates for smaller airlines. The new carriers will, in turn, provide the competition the government desires. Also, the increase in the number of gates and flights from each of the airports will provide an increase in business. The airports can rent space to merchants, which will supply the airports with another source of revenue.

Not only do the airports benefit from the incentives outlined in the proposal, but the passengers stand to gain, also. In addition, the new source of competition will most likely cause a rate war. The new gates are to be occupied by smaller carriers and newer airlines; therefore, their lower rates will force some of the larger, previously established carriers to cut prices. Moreover, as each airline tries to gain the advantage, special prices and deals will be offered for the customers to benefit from. Also, the increase in the number of gates and flights will provide a calmer traveling experience with more flight options. It seems as if the passengers have an incentive to not only inform their congressmen to vote for the bill on their behalf, but also simply remind the politicians that they have probably flown on a crowded plane at a high price.

Although the bill has yet to be made into law, it could potentially provide the airports and passengers with the upper hand in a market dominated by larger airlines. Many people believe that it is time to start alleviating the strain on airports, and with the government's support, the proposal may be the key to ending the inequalities in the airline market.