Tuesday, June 28, 2005

Protectionism is for losers

Literally, that is true. Only those who would lose in free market competition want protectionism. In this case, American Airlines can't compete against a certain discount carriers, so they have abused the power of government to make Southwest Airlines less competitive.
Battle at Love Field

As a sales executive for a San Diego software firm, Gary Sabin hops aboard a Southwest Airlines jet several times a month to visit clients. But when he wants to fly the discount carrier nonstop to Dallas, he's out of luck.

"It's very disappointing," said Sabin, 46, who laments that he has to fly to Dallas regularly "but can't on Southwest."

Instead, he pays more to take a full-service airline nonstop rather than taking Southwest and facing the hassle of connecting through another city such as Albuquerque or Houston.

It's a problem familiar to many who have tried to fly Southwest direct to Dallas. But it's not just some convoluted airline route logic. It's the law.

An arcane 1979 federal statute bars nonstop flights out of Southwest's home base at Dallas' Love Field unless they are bound to or from cities in Texas or one of seven nearby states. Fliers who want to avoid connection aggravations must use the larger — and more remote — Dallas-Fort Worth International Airport, where American Airlines dominates.

But the days of the so-called Wright Amendment may be numbered. Southwest, which stayed on the sidelines during past efforts to repeal the law, is now energetically spearheading the latest attempt in Congress to kill it. In the process, it has sparked a Texas-sized brawl with American Airlines, which is trying to block Southwest's effort and protect its Dallas-area franchise....

"Southwest is the largest carrier in Florida and California, and it can't fly to either state from Love Field," [Southwest Chairman Herb Kelleher] said. If the law is repealed, "fares would go down and the number of travelers would increase." ...

Because of its low fares, Southwest claims that lifting restrictions at Love would save travelers more than $700 million a year on flights to and from the Dallas-Fort Worth area, including $36 million in savings in the Los Angeles area alone.

Rival American Airlines, the nation's biggest carrier, disputes those claims, noting that airfares have been falling at Dallas-Fort Worth International in recent years and that Southwest's study failed to examine how it would affect fares at that airport if it moved there from Love.

But the airline has a history of pushing down fares wherever it launches service, a phenomenon known in the industry as the "Southwest effect." Steven Morrison, an economics professor at Northeastern University, says that when Southwest begins service on a particular route, rival carriers can be forced to cut their fares by as much as 50% to compete — bad news in an industry in which older carriers already are being squeezed by rising fuel costs and falling fares....

American contends that Dallas-Fort Worth and the North Texas area face disastrous economic damage if Southwest is free to fly anywhere from Love Field.

By seeking repeal, Southwest is trying to exploit its dominance of Love Field "after we, the community and others have continued to invest billions of dollars" at Dallas-Fort Worth, Gerard Arpey, chief executive of American and parent AMR Corp. told an investor conference this month.

The simple solution, he said, is for Southwest to shift all or part of its Dallas operations to Dallas-Fort Worth.

"They can start service tomorrow," Arpey said. Otherwise, "we will do everything we can to defeat" the law's repeal.

Besides American, Dallas-Fort Worth is pressuring Southwest to give up the fight and shift at least some of its service to the big airport. It has offered Southwest free rent for a year and $22 million in other incentives.

"We urge Southwest Airlines to abandon this divisive effort," Kevin Cox, Dallas-Fort Worth International's chief operating officer, said in a recent statement.

But Southwest said moving any of its operations there was a nonstarter. The airline prides itself on, in most cases, avoiding the biggest, most congested airports, a strategy it claims helps keep its costs — and fares — low....

For some travelers, the Wright Amendment is a moot point. "I won't fly Southwest," said Rod Nowicki as he waited at LAX for an American flight to Dallas. The 6-foot-tall computer consultant, who flies several times a month, belongs to American's frequent-flier club and prefers the airline's legroom and ambience over Southwest's.

But for fans of Southwest's low fares and reputation for quick airport turnarounds, the prospect of repealing the Wright Amendment is heartening.

"I'd rather fly Southwest," said Colette Thompson, a 59-year-old retired financial manager from Dallas, who also was waiting for an American flight at LAX. "Southwest is cheaper. They're faster with everything — getting you in, getting you out — everything."
What a mess!

The Wright Amendment is named after its sponsor, former House Speaker Jim Wright. As early as the late 1970s, American Airlines had to use Wright to protect their status in the airline industry, because Southwest was already so competitive. Like all other cases of protectionism, American Airlines abused the power of government to sustain high prices and its profits; meanwhile it has cost society far more than the profits made.

I don't doubt Southwest's figure that, if it could fly to and from Love Field without the legislated restrictions, passengers could save $700 million a year. Also consider the valuable time saved by not having to take connecting flights, and not having to fly through the Dallas-Fort Worth airport. This dwarfs the paltry concessions offered by the Dallas-Fort Worth airport: free rent for a year, and $22 million in other incentives. It turns out that this isn't a generous offer in the least; it's merely DFW executives' desperate hope that Southwest's executives are schnooks. Look here and scroll down to the 1/6/2005 entry, and you'll see DFW has offered the very same terms to anyone who will take over the 24 gates that Delta abandoned. DFW's offer to Southwest is nothing special at all!

That was back in January. It's now almost July, and since no airline has taken the deal, we can surmise it's a pretty crummy deal. Southwest wisely wants to avoid the antiquated, congested DFW, because that would wreck Southwest's business model of efficient flights and cheap fares. Furthermore, what does it matter that "billions" have been invested in DFW? That should not compel or encourage Southwest in the least to use it. After all, no rational person will patronize a new business just because a great deal of money was invested in it.

American Airline's argument essentially boils down to, "But Southwest will cause prices to fall!" More specifically, Southwest causes prices to fall so low that the airline dinosaurs, like American and United, cannot compete. Since when are lower prices, which Bastiat reminds us mean a greater abundance of goods, a bad thing? And did this Steven Morrison, an economics professor at Northeastern, really say it's "bad news" that Southwest's entry forces existing airlines to cut their prices to compete? Unless he meant it's "bad news" for the competitors, and not "bad news" in an absolute sense, he's a bad economist.

Similarly, American Airline's bad economics is to assert "disastrous economic damage" for DFW and north Texas if Southwest can use Love Field without restriction. The only damage would be American and DFW losing business. The gains would be in passengers saving approximately $700 million on fares -- remember that's just on flights to and from the Dallas-Fort Worth area. Not the DFW airport, but the vicinity.

In fact, it's unnecessary, and in fact illogical, that Southwest should have to perform a "study" of how it would impact ticket prices at Love Field. The only relevant "study" Southwest needs to do is if they can make a profit. American Airlines is merely grasping at straws, trying to pin any kind of blame on Southwest.

If you want a cheaper flight with exceedingly few frills, you can fly Southwest. Conversely, if you're willing to pay more for additional legroom, you can fly American Airlines. The fundamental issue is our freedom to choose, above and beyond what government thinks is "best" for us -- particularly when government is lobbied by a company seeking protectionism, because the company cannot compete.


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