A Crisis of Security and Economics. (Transportation)

By Phillips, Laurence T. | Regulation, Winter 2001 | Go to article overview

A Crisis of Security and Economics. (Transportation)


Phillips, Laurence T., Regulation


THE ATROCITIES COMMITTED ON SEPTEMBER 11 imposed substantial short-term and long-term costs on the U.S. economy. While all sectors were adversely affected by the attacks, many transportation firms experienced especially serious harm.

As a result of the attacks, we are beginning to see a significant reallocation of private and public expenditures away from investments that would have increased transportation capacity and raised productivity, toward those that are deemed necessary to ensure safety and security. As a result, shippers will face higher costs and fewer options, and some may be forced to redesign their just-in-time supply chains and distribution systems. Air travelers are experiencing longer trip times and more inconveniences that, in turn, threaten to reduce demand for air travel. Other transportation industries could also experience lower capital and labor productivity, higher costs, and reduced demand for their services if new federal laws, regulations, and security procedures prove ineffective.

AVIATION

Even before the September 11 attacks, analysts were predicting that the U.S. airline industry would lose $2.5 billion in 2001 because of the slowing economy and a surprisingly large decline in business travel. After the attacks, air carriers grounded hundreds of planes and cancelled thousands of flights. Industry capacity was slashed by at least 25 percent and thousands of employees were laid off. In an effort to draw customers, airlines instituted dramatic fare reductions that cut prices by as much as 40 percent in some markets.

Despite those moves, air travel demand collapsed further, and the airlines incurred enormous daily financial losses. Six weeks after the attacks, airlines reported record third-quarter losses -- "hemorrhaging money," in the words of former United Airlines CEO James Goodwin. By the numbers, the nine largest U.S. air carriers had operating expenses of $26.7 billion in the third quarter of 2001 (80 percent of which had transpired prior to September 11) as compared to operating revenues of only $21.5 billion, thus producing an operating loss of $5.2 billion. The General Accounting Office now estimates that U.S. airlines will lose between $6.5 billion and $10.5 billion as a result of the terrorist attacks, an estimate that may prove to be too low. Most analysts are predicting that several carriers will be forced to file for bankruptcy in 2002.

Airports The financial tidal wave that engulfed the airlines also swept across the nation's airports. At a time when they were forced to incur tens of millions of dollars in higher security costs (e.g., paying overtime wages to local police officers), their revenues plummeted because of fewer passengers and flights. Los Angeles International Airport, for example, estimated that its revenues would decline by as much as $108 million in the first year after the attacks. As a result, credit agencies have warned that airport bond ratings could be downgraded.

Airports have responded to the financial crisis by lobbying for federal aid and delaying or deferring new terminal and runway projects -- projects that only a few months earlier were deemed essential to relieve congestion and reduce delays. The airports also are considering imposing higher fees (perhaps substantially higher) on airlines and concessionaires to cover the costs of installing new security measures.

Federal aid On September 22, President Bush signed into law the Air Transportation Safety and System Stabilization Act (H.R.2926). The act provides some $15 billion in funding to implement new security measures and offset the financial losses experienced by the airlines. Given the size of the financial crisis facing the air industry after the attack, the unprecedented grounding of the nation's air fleet for several days, the understandable desire by congressional and executive branch policymakers to take some action in the face of the crisis, and the effectiveness of the industry's lobby, it is not surprising that the airlines received federal assistance. …

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