How our political economy trumps the market: lessons from the airline indsutry


9:20 am - September 4th 2013

by Left Outside    


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In aircraft manufacture you see two huge firms, Boeing and Airbus. You have some smaller firms like Comac and Bombardier, but really its a two horse show. The four firm industry concentration is about 70%. That means 70% of the worlds aircraft by value is produced by just four firms. The vast majority of that is Boeing and Airbus. Can you say oligopoly?

This contrasts sharply with Airlines. The four firm industry concentration is only 20%. Not perfect competition, but pretty good. So good, in fact, the average European airline’s margin for the past few decades has been 0%. Aviation is one of the few industries where profit actually is competed away as you see in your textbooks.

There are two points to take from this.

The first is that irrational policies can have positive effects. The reason we have the competitive air market we have is because governments won’t allow airlines to consolidate. A firm from Hong Kong can own the electrical infrastructure of London, but woe forbid British Airways’ iconic livery disappear. Nothing naturally keeps aviation fragmented, as its manufacturers show. Irrational attachment to a paint job can do the lord’s work and keep an industry competitive and prices down.

The other thing to take away is that the industry that matches the austrian just so story of recession is aviation. In good times airlines order lots of aircraft, in bad times they go bust but those planes don’t stop flying. Once billions of pounds of hardware have been delivered you have to use it, even if it destroys your industry’s profit margins, because if you don’t someone else will.

A more consolidated industry could retire planes earlier, purchase fewer planes or increase prices, but the hyper-fragmented and competitive industry prevents these tactics being employed. Note however, that the unsustainable boom isn’t the result of easy money, it’s capitalist competition that drives this dynamic. And airline executives hate it. Just look at the US where consolidation is advancing as large firms attempt to merge to drive up prices.

Whereas Duncan and Krugman lament that political economy trumps economics, I think we should take solace. At least it’s a mechanism! It cuts both ways, so while the political can get in the way of good policy it can also support it. When making economic arguments it will probably be best to put the political to the fore, even if it’s not your “best” reason.

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About the author
Left Outside is a regular contributor to LC. He blogs here and tweets here. From October 2010 to September 2012 he is reading for an MSc in Global History at the London School of Economics and will be one of those metropolitan elite you read so much about.
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Reader comments


The reason we have the competitive air market we have is because governments won’t allow airlines to consolidate. A firm from Hong Kong can own the electrical infrastructure of London, but woe forbid British Airways’ iconic livery disappear.

I’m not sure that’s entirely true. BA is no longer listed on the LSE after its merger with Iberia; other flag carriers (Sabena, Swiss Air) have been swallowed up by Lufthansa; the US companies are consolidating pretty rapidly too (the merger between US Airlines/American Airways is scheduled for this autumn). The trend is definitely for fewer, larger airlines.

The competition between Boeing and Airbus is cutthroat. The competition between two traditional-model, unallied long-haul flag carriers from different countries is negligible.

Airline mergers and alliances are very rarely about dominating a single route (most of which are only flown by one or two carriers anyway), but rather about building a network that can compete with other networks to deliver the most destination pairs.

Flag carriers aren’t unprofitable because “profit is competed away”, but because they are incompetent. In turn, this is because they are at the very least protected from competition, and often actively bailed out with massive state funds.

The cheapest airlines operating in the most competitive markets (EU and Asian low-cost aviation) are invariably the most profitable – compare Ryanair to Alitalia, or Air Asia to Air India. The airlines that are lossmaking can’t afford new planes, except for a few whose governments are willing to funnel yet more billions they can’t afford into them.

The capital stock part is also nonsense, since the growth in Asian aviation has far outstripped any decline or excess capacity in European aviation. Planes are pretty much the epitome of a mobile asset. It’s just that politicians refuse to do what the market would do: let unprofitable airlines wither and die, and sell their planes to fast-growing Asian airlines.

In short, this might be the least well informed piece and most diametrically wrong pieces I’ve read about global aviation, *and* one of the least well informed pieces I’ve read on LC, which is quite an accolade.

TimJ: your point is correct, but your example is odd. IAG has its primary listing on the LSE and its HQ at Heathrow (it’s registered in Spain for tax reasons). It also has a brilliantly arcane corporate structure which ensures that for certain purposes to do with ongoing protectionism over international slots, 50.01% of BA is British-owned and 50.01% of Iberia is Spanish-owned.

If one were to defend protectionism (I don’t), then one could also argue that a firm in Hong Kong is distinctly unlikely to dig up London’s electric cables and ship them east, whereas a merged airline could easily axe services and redeploy its fleet overseas.

TimJ: your point is correct, but your example is odd.

Well, it wasn’t exactly my example – it was the OP that highlighted BA as a national champion.

Can someone correct the spelling error in the headline, please?

When a capitalist has a competitive advantage there is no greater advocate of the open market. When he has a competitive disadvantage there is no greater advocate of protectionism.

john b

I am a bit confused: how does one differentiate between zero-profits because of competition and zero-profits because of incompetence?

I guess you could observed lack of competence and lack of competence, but I’m still not sure that’s possible. If there is no competition, why can’t even an incompetent airline put its prices up and make a profit? Maybe competence is easier to observe, because we have a benchmark of what competent airlines look like (Ryanair?) although I don’t know enough above aviation (zero) to know whether Ryanair’s business practices are replicable in their markets.

8. Derek Hattons Tailor

It’s probably worth mentioning that both Boeing and Airbus are effectively taxpayer subsidized – and have been embroiled in a long running legal dispute because of it, and that both make substantial revenues from military aviation and other non commercial air transport divisions, to the extent that it could be argued civil aviation is a loss leader, used to recover development costs and raise profile, rather like Ferrari sponsoring a F1 team. In any event, most of the profit in the airline Industry now is in after sales – long term spares and maintenance contracts.


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