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What Do We Taxpayers Get for Our Airline Bailout?
How About 15 Billion Federal Flyer Miles?

Gerald Norlander

When proposals for stricter government safety measures are made, the airline industry often responds by claiming that more regulation is not needed because unrelenting market forces sufficiently teach a basic lesson: profits and corporate survival are at risk when passenger lives are lost. On September 11, four airliners were hijacked with apparent ease from three major airports to create unspeakable horror. Passengers -- the market -- responded swiftly by not rewarding the airline industry with their business.

Did the "airline industry accept that the competitive market is disciplining their breach of passenger trust? Would airlines flunking the harsh market lessons be destroyed, sold cheaply, or be absorbed by other companies with a better reputation for safety, perhaps European airlines?

No. The airline industry immediately turned to Congress for financial assistance. Congress stepped in promptly with subsidy - $5 billion in direct assistance and $10 billion in loan guarantees. This diversion of federal resources necessarily raises taxes, increases debt, or limits other public investments. It is a classic case of the government "picking winners," with airlines prevailing over competing alternatives to air travel such as trains or video conferencing.

What is the public getting in return for this public investment? Why subsidize a "competitive" private industry that is grossly underutilized due to safety lapses that allowed terrorists to destroy thousands of lives?

The answer seems to be that, like the Chrysler Corporation, the airline industry is simply too large to allow its destruction by the competitive market. The airlines got off easy: Chrysler surrendered to the US Treasury authority to order management changes; Chrysler was required to submit an annual operating plan for federal approval; Chrysler put the head of the UAW on its Board; Chrysler was banned from issuing stock dividends; and Chrysler executives took huge pay cuts.

At a minimum, the United States should get airline stock warrants, on which the government eventually could make a profit, as it did in the Chrysler bailout. Perhaps any airline stock profits could be allocated to the Social Security "trust fund," a win-win solution in the minds of some.

But should there not be a more tangible, direct benefit for taxpayers from this new raid on the treasury by a failing airline industry?

In exchange for the subsidy, the airlines should provide $15 billion worth of "federal flyer" miles." This would reduce the uneconomic waste of half-full airplanes. The added cost to an airline of filling an empty seat on a flight is little more than the price of a meal, or these days, peanuts and mini-pretzels. It would be counterproductive, however, to use new "federal flyer" miles for regular government employee travel, since the free ridership would detract from ordinary revenue from paying government customers, and it might encourage uneconomic travel or the moral hazard of unnecessary junkets by government employees.

There is another solution. Most people entitled to federal assistance -- SSI, the Earned Income Tax Credit, or Temporary Assistance to Needy Families -- still cannot afford or dream of flying to distant locations to visit their families. Federal assistance programs typically do not lift beneficiaries above the basic poverty line. Spending billions for the welfare of the airlines necessarily limits the pool of funds potentially available for the needy. As a matter of equity, the airlines should provide beneficiaries of federal aid programs a credit of 15 billion "federal flyer" miles. Such new travel may provide "federal flyers" who otherwise cannot afford to fly with once in a lifetime opportunities, reuniting their families, broadening their experience, and expanding social interaction. Idle airline capacity filled this way would not displace paying traffic or, heaven forefend, invite destructive fare cutting on those routes where several airlines now compete for less traffic.

A lottery to fill empty first class seats could stimulate communication and perhaps better understanding among various social groups. CEOs suffering multi-million dollar losses in their stock options would have new opportunities to commiserate with adjacently seated SSI recipients who must struggle nobly to live on just a few hundred dollars per month.

Many low-income people, of course, will decline the "federal flyer miles" for the same reasons many non-poor persons are not now flying. Others -- perhaps those of advanced age and bad health -- may be more willing to take the gamble. The cumulative personal experience of those who land successfully could help rebuild sagging public confidence in the airline industry, as the news spreads geometrically with the news of each additional successful flight experience. The massive new federal government aid to the airlines would be recouped in the long run by appreciation in the value of government owned stock warrants, if the airlines recover. In the near term, the "federal flyer" miles will be a tangible benefit to at least some people who really need them.