Basic economics: 9/11 edition

On the 9th anniversary of the September 11th attacks, Bob Crandall, the former president and CEO of American Airlines, appeared on FOX News with Neil Cavuto to discuss airline safety since 9/11 as well as the little known “airline bailout.”

Understandably overshadowed by the worst terrorist attack in our nation’s history (and because Republicans only criticize bailouts and massive spending when done by Democrats) the airline bailout got little attention at the time it was passed. Now, with the distress of 9/11 mitigated by father time, it serves as a great exemplifier of the very core laws of economics – supply and demand – in an ‘era of bailouts.’

In his interview with Neil Cavuto, Crandall claims that the airline industry “might very well have simply run out of cash” sans the government bailout. He goes on to say that without taxpayer cash the industry would not be able to operate, that planes would not be able to fly although, only seconds prior, Cavuto had pointed out one very simple yet paramount fact – “people were very afraid to fly.

This is where it gets very simple: If fewer people want to fly, fewer planes are required to fly them. Fewer flight attendants are then needed to serve passengers, and fewer employees to operate the terminals. The industry will adjust and, if done properly, losses can be attenuated.

These are all economic axioms. Surely Mr. Crandall, a graduate of the University of Pennsylvania’s Wharton School, knows how the profit-and-loss mechanisms of a free market works. What he also knows is that the airline industry was heavily troubled prior to September 11th.

In the early 90’s the entire industry suffered a near $10 billion loss. Many airlines were filing for bankruptcy or collapsing altogether. After Crandall’s departure, American bought Trans World Airlines, which filed for its third bankruptcy as part of the purchasing agreement, in April 2001. Four months later that year, still prior to 9/11, Midway Airlines filed Chapter 11 bankruptcy due largely to competition (imagine that!) from low-cost Southwest Airlines opening shop at Raleigh-Durham. After Christmas came early for the industry via government bailout, Midway resumed operations until filing bankruptcy once more in 2003 and finally ceasing operations for good.

What the airline bailout teaches us is that Keynsianism fails every time it is tried. Markets will adjust to fluctuations in the economy just as the airline industry was in the process of doing before the natural flow of the business cycle was interrupted by government intervention.

In other words, basic economics.


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