Freeman

ARTICLE

Essential Air Service Subsidies: Just Plane Foolish

OCTOBER 01, 1981 by JOHN SEMMENS

Mr. Semmens is an economist for the Arizona Department of Transportation.

One of the arguments that is always offered in opposition to deregulation of transportation is that some remote, sparsely populated regions will be denied essential services. In order to neutralize this argument and get airline deregulation passed in 1978, Congress provided for subsidies to support “essential air service.” Little thought was given to just exactly what constitutes “essential air service.” Consequently, the “essential air service” subsidy program is one of the most wasteful perpetrated by the federal government.

The major accomplishment of this subsidy program is to finance under-utilized scheduled commercial air service. The ordinary person quite naturally imagines that “essential” must mean necessary or indispensable. What is “necessary” or “indispensable” about flying largely empty aircraft around various parts of the country? The official definition of what is “essential air service” is determined in a completely arbitrary and silly fashion. If a point on the map had scheduled air service at some time during the 1968-78 base period, it is entitled to a subsidy for the provision of scheduled air service until 1988.

Since most of these points receiving scheduled service between 1968 and 1978 were also receiving subsidies for this service, the decisive criterion for future subsidy is a historical demonstration of previously unviable or inefficient air service operations. In other words, past waste serves as the justification for future waste.

There should be no misunderstanding of what is being subsidized, though defenders of the program do their best to disseminate misleading interpretations of the meaning of “essential air service.” What is being subsidized is business and tourist travel. This program is not giving aid to the destitute. It is not feeding starving children. It is simply utilizing taxpayers’ money to allow businessmen and tourists to pay less than the full cost of their transportation. The subsidy can be substantial. On one series of routes in New England it amounts to about $40 per passenger. In Montana, it amounts to $90 per passenger, in Arizona to $200, and in one section of Nebraska over $600 per passenger.

This is unconscionable waste. What justification can there be for requiring that taxpayers finance some Arizonan’s vacation to the tune of $200 or some Nebraskan’s business trip to the tune of $600? There is no justification. There is no reason why the users of air service should not pay the full cost of that service. Advocates of the subsidy point out, quite correctly, that requiring riders to pay the full cost will reduce the number of trips made. So what?

There is nothing inherently beneficial about air travel. Trips should only be made if the benefits outweigh the costs. This weighing process is distorted when part of the cost is covered through an involuntary payment by a third party—namely the taxpayer. More trips than would be justified by the benefits are taken because the user is not paying the full cost. This wastes scarce resources and reduces the general welfare of the society.

Aware of the pitiful current operating results under the “essential air service” program, some of its proponents have sufficient gall to claim that the real problem is undersubsidization. The CAB, they assert, is too niggardly in its subsidy awards. If the CAB would only authorize sufficient funds for larger aircraft and more frequent service, we could really develop the sched uled air service system. The subsidy, these people assure us, is an “investment” that will pay off in the long run.

These claims are unfounded and the reasoning is fallacious. By way of illustration, let’s examine an example from Arizona. Recent subsidized service to Prescott has been performed with an eight-passenger Cessna 402 at a load factor of about 20%. That is, less than two passen gers per flight are enplaned or deplaned at Prescott. Advocates of a larger subsidy argue that the small plane discourages many would-be passengers. To buttress their case they point out that enplanements at Prescott in 1968 were ten times greater than the most recent year (6000 vs. 600). In 1968, a larger aircraft and more frequent arrivals and departures produced more passenger trips. Undisclosed in this simplistic comparison is the fact that in 1968 the load factor was only 8%. This is the equivalent of three passengers boarding the 40-seat aircraft employed. Thus, in 1968 three of 40 seats were filled vs. two of eight in 1979.

This example would appear a rather convincing demonstration of the inelasticity of demand for air service. No sane person could seriously propose to add 30 seats in order to fill one, and claim that this is a wise “investment.” Investments that will pay off in the long run will be undertaken by private capital. There is no need for subsidy. Private firms are adequately familiar with start-up costs for new products and services. Firms have been known to sustain several years of losses in order to build a market. In fact, the lack of willingness of a private business firm to engage in providing a service unless subsidized is a convincing expression of the firm’s belief that there will not be a long-run payoff on their investment.

In the past year, the federal government has spent nearly $90 million in subsidies for scheduled air service. This expenditure has involved a coercive expropriation of funds from the general public in order to finance inefficient and wasteful air service. The nation is ill-served by this policy.

The market place is well-suited to the task of selecting and funding investments that will increase consumer choice and welfare. The “essential air service” subsidy can only interfere with the market’s ability to ascertain and meet society’s genuine needs. There is no reason for the retention, and ample justification for the elimination, of this subsidy program. Congress would do well to dispense with the “essential air service” program.

ASSOCIATED ISSUE

October 1981

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