What the Big Planes can teach us about Free Market Capitalism

Posted by PITHOCRATES - June 20th, 2011

The Big Planes are Nimble in the Sky but Clumsy and Dangerous on the Ground

In airplane parlance, the Boeing 747 is a big-ass plane.  And the Airbus A380 is an even bigger-ass plane.  Too big some say.  Like a lot of airport administrators.  With a full-length upper deck, boarding requires a two-story passenger boarding bridge (PBB).  Something no airport had prior to the A380.  The 747 has a smaller upper deck and passengers get there by a set of stairs inside the plane.  Which allows the 747 to fit any wide-body gate.  Not the case with the A380.

The A380 also has something the 747 doesn’t.  The world’s longest wingspan on a commercial passenger jet.  The A380 is big.  And heavy.  It takes for big turbofan jet engines and lots of wing area to heft that incredible bulk into the air.  This causes an even bigger problem than the 2-story PBB.  Because it’s not easy to widen taxiways or runways.  Or move buildings and other infrastructure out of the way.  Which makes them a hazard when taxiing.  Which is when a plane is most vulnerable.  And dangerous.  More accidents happen while taxiing than flying.  Even the greatest aviation disaster of all time occurred on the ground.  When a KLM 747 on its takeoff roll crashed into a taxiing Pan Am 747 at Tenerife.  Killing 583 passengers.

So airport people are nervous about planes driving around their airports.  Especially the big ones.  With long wingspans.  Because things like this can happen (see Not again! World’s biggest airliner loses wingtip after striking building at Paris Air Show – two months after doing the same thing in New York by Daily Mail Reporter posted 6/20/2011 on the Daily Mail).

An Airbus 380 lost its wingtip in a taxiing collision with a building, just two months after another superjumbo was grounded for striking a private jet in New York.

The A380 superjumbo was grounded after the smash at slow-speed at the Le Bourget airport, where the Paris Air Show is taking place.

The collision mirrored an incident at JFK airport earlier this year when a private jet was spun round after it was hit by the wing of an A380.

And someone caught that JFK accident and posted it to YouTube.

The big planes soar majestically through the skies.  But they’re clumsy as an ox on the ground.  And dangerous.  But they’re also something else.  Profitable.  Because the more people you can put into a plane the lower your per-passenger costs are and the greater your profits can be.

Big Dollars and thin Margins

‘Can’ being the operative word.  Because it takes a lot of money to make money in the airline business.  Because airplanes are very expensive.  And the business is ultra sensitive to oil prices and recessions (see Aircraft Makers Not Put Off by Excess Capacity by Daniel Solon posted 6/20/2011 on The New York Times).

The carriers are being squeezed between high oil prices — expected to average $110 per barrel this year, against $96 in 2010 — and an overly rapid expansion of capacity relative to demand. Global airline capacity this year is slated to rise by 5.8 percent, while demand is expected to expand by only 4.7 percent.

“But with a dismal 0.7 percent margin, there is little buffer left against further shocks,” I.A.T.A.’s director general, Giovanni Bisignani, said at the annual meeting, referring to the $4 billion profit on projected revenue of $598 billion.

Despite these paper-thin margins some still have confidence in the air transportation industry.  And they’re making big bets.  Some 33,500 in all.

Looking ahead over the next 20 years, Mr. [James] Albaugh [chief executive of Boeing’s commercial airplane unit] forecast global demand for 33,500 new commercial aircraft, worth nearly $4 trillion, of which $1.7 trillion worth would be in the 100- to 200-passenger 737/A320 size range.

That’s a lot of money.  $4 trillion dollars.  It’s bigger than the annual GDP of Germany, France and the UK.  And every other country except the U.S., Japan and China.  It’s more than the sum total of all economic activity in most countries.  But for Boeing it’s just a sales projection.  Incredible.  How do they do it?  How do they do business in a world with such large numbers and such large risks?  Do they get special help from the government?  No.  They have a simpler business model.  They try to deliver what their customers want better than their competitors do.

Airline mergers — like United with Continental, Delta with Northwest, Air France with KLM and British Airways with Iberia — mean that fewer decision makers will be controlling larger purchases as the combined fleets are renewed or expanded. This has major potential consequences for both the large manufacturers in cases where the existing fleets include both Boeing (Continental, British Airways) and Airbus (United, Northwest and Iberia) planes.

Near-term, this may offer Airbus an edge in orders for its A320 New Engine Option, or A320neo, which could cut average fuel consumption immediately while allowing airline managers more time to evaluate the eventual Boeing response. At mid-June, A320 new orders totaled 362, with Airbus’s sales and marketing chief John Leahy targeting 500 by the end of the air show.

On the sidelines of a recent meeting of the chief executives of Star Alliance airlines, Harry Hohmeister, chairman and director general of Swiss, said the flexibility of engine choice offered by Airbus, between Pratt & Whitney’s 1100B and CFM International’s Leap-X, made it easier for him to opt for the A320 neo.

It’s a very complex industry.  Each part of it has its own concerns.  But no one is managing the overall industry.  The market is.  Airlines want to buy planes that cut operating costs.  So they can sell tickets at prices passengers can afford.  Manufacturers want to sell planes.  So they try to make planes that cut operating costs.  Each does their own part.  In response to market forces.  This is Adam Smith‘s invisible hand.  Everybody working independently to maximize their own interests.  And this benefits everyone in the aggregate.  Because planes with low operating costs are brought to market so airlines can buy them in turn allowing them to sell tickets that passengers can afford.

Surely, you ask, wouldn’t it be more efficient if one entity did all this coordinating?  Wouldn’t it improve market efficiencies?  Reduce redundancies?  Make sure we use resources to maximize their value?  To have someone tell the manufactures what to build.  Someone to tell the airlines what to buy?  So the passengers get the lowest possible price?  Actually, it’s been tried. 

The Soviet Economy Collapsed because of too much Government

And it doesn’t work.  And never has worked.  Nor will it ever work.  Because one person or entity cannot be smarter than the millions of decision makers working to maximize their own interests.  Because a business prospers when it sells.  But to sell someone must buy.  Hence a business does best when it best pleases a buyer.  And that’s something a bureaucrat just can’t do.  For if he or she could, the Soviet Union would still be here.  And her GDP would be greater than the U.S., Japan, China, Germany, the U.K., France and every other nation on the planet. 

Well, the Soviet Union is no more.  Many probably don’t even remember the Cold War or the war between capitalism and communism.  (For those of you who don’t, capitalism won.)  Boris Yeltsin‘s right-hand man recounts the events of August 1991, the beginning of the end of the Soviet Union in Foreign Policy.  Key to her collapse was the state-managed economy (see Meltdown by Gennady Burbulis and Michele A. Berdy posted 6/20/2011 on Foreign Policy).

For months we had half-expected something like this. By the summer of 1991, the Soviet Union was falling apart at the seams. The economy was imploding, the deficit was ballooning, hard currency and gold reserves had been decimated, and Gorbachev’s stopgap reforms had only exacerbated the crisis…

…Yeltsin and the other democratic candidates had been elected to the Russian parliament in 1990 with the goal of securing more legally protected rights and freedoms, as well as a market economy, and Yeltsin had been elected president of Russia in June 1991 with almost 60 percent of the vote. But while we were secure in our popular mandate, we were utterly powerless to deal with the greatest threat to Russia: economic collapse. More than 93 percent of the economy, by our estimation, was controlled by the Soviet government. Yeltsin and those of us in his circle of closest associates soon came to believe that unless we were to content ourselves with being nothing more than a ceremonial body, we had to change the legal and economic bases of the union itself.

The government controlled 93% of the economy.  And it was falling apart at the seams.  Because bureaucrats are bad businessmen.  As demonstrated in the Soviet Union.  However, bureaucrats are good at something.  Being a bureaucrat.  And maintaining power.  The Soviet communists resisted the market reforms.  In fact, that August, the old hard-line communists effected a coup d’état.  To resist the Westernization of their country.  To hold on to their power.  At the expense of a suffering citizenry.  But Boris Yeltsin prevailed.  And the Soviet Union is no more.

Of course, it was not an easy road.  The rule of law did not quite catch up to the market reforms.  So there was a lot of corruption.  And crony capitalism.  Which is something that China saw.  And they are being very careful with their market reforms to avoid a similar fate.  But China, too, is rife with corruption and crony capitalism.  But these two nations are shaking off their communist lethargy and are becoming serious competitors in the global economy.  And China will soon be building commercial aircraft to compete against Boeing and Airbus.

Free Market Capitalism provides the Path to Success

Aircraft manufacturers are doing big and bold things.  Because they can.  By providing what the market wants.  It can do this despite the huge dollars involved.  And they don’t need any help from the government telling them what they need to build.  Or buy.

Government is full of bureaucrats who don’t know the first thing about business.  In fact, their involvement only hurts business.  Case in point:  the Soviet Union.  But that doesn’t stop bureaucrats from sticking their nose in where it doesn’t belong.  Especially in the aviation industry.  They see all that money.  And they want a piece of it to bail out their budget deficits.  The latest scheme by the Europeans is to tax carbon emissions in an Emissions Trading Scheme.  Not only are they going to tax themselves, but they’re going to tax any airline flying into the EU for their carbon emissions.  Some are concerned that this may result in a trade war.  Probably because it will.  But that’s government.  They want the money first.  Then they’ll consider the economic damage their policies cause.

One has to marvel when looking at a 747 or an A380.  Incredible examples of what private enterprise can do.  One can only imagine what other great things people could do if they didn’t have to spend so much time and money fighting their governments.  And we can only scratch our heads when we see emerging economies move towards capitalism (to emulate the success of others) while established economies with bloated bureaucracies move away from capitalism (to emulate the failures of others).

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