President Trump announced yesterday a proposal to privatize air traffic control in the United States by means of a “non-profit” organization. The United Kingdom, Canada, France, Germany, New Zealand, Australia and Switzerland have already privatized air traffic control, some more than two decades ago.
To offer a larger perspective, consider some of the results of the partial privatization of airline businesses and air services that came after President Jimmy Carter signed the Airline Deregulation Act in 1978.
Prior to 1978, going back to the 1930s, all aspects of commercial aviation services were highly regulated by the Federal Civil Aeronautics Board (CAB). CAB dictated the prices of airline tickets and regulated routes, flight schedules, airplane designs, equipment, and technology. This made it impossible for airline businesses to know with any accuracy what the market demand was for any particular air service. Which is why it was often difficult to book a flight when and where one wanted to go.
CAB also had sole authority over which aviation businesses were permitted to offer air travel services. And which were not. The aviation businesses allowed to operate were, by definition, crony friends with CAB regulators.
Some people wax romantically about the 1930s through the 1970s as the golden years of aviation. It was the time of white-gloved flight attendants serving gourmet meals and cocktails during flights, after all. At one point, TWA even put pianos on the second floors of their 747s and offered live music at 40,000 feet in the air.
This was also the period, however, when only the rich could afford to fly. Or business travelers who charged airline tickets on corporate accounts. During the decades prior to deregulation, it was rare for ordinary Americans to fly anywhere simply because it was too expensive for the vast majority of them.
Among the results of the Airline Deregulation Act is the fact that in both inflation-adjusted and real prices, airline ticket prices have decreased steadily since the late 1970s, while airline services have become more reliable and more diverse. More Americans fly to more places today than ever before, for business and pleasure, because flying is now far less expensive than it used to be—thanks in large part to deregulation.
NOT TOTAL DEREGULATION
This is not to suggest that the airline industry has been totally deregulated. Far from it. The world of commercial aviation services is no free market. Government continues to regulate, heavily, many aspects, from antitrust laws, to airport technology, to new airport construction permits, to licensure for pilots and crew, to the Transportation Security Administration (part of the Department of Homeland Security), to air traffic control. And more.
So while some parts of the commercial aviation services industry have become freer, much of what might be called the “infrastructure” has become more regulated and controlled by government. Airlines have been only partially deregulated, which means there continues to exist significant market distortions within the commercial airline industry.
Within any industry and any market, increased regulations always leads to fewer businesses and less competition. Always. Regulations provide advantages for large, established corporations over smaller, competing businesses and potential new start-ups. Often, the biggest businesses help write the regulations, so they design the regs to hurt their competitors. The airline industry is no exception.
Thus the airline industry is one of deregulation in some areas, increased regulation in others. Deregulation in one part of the airline industry sparked lower airfare prices and a greater menu of travel routes and schedules. Increased regulations in other areas of the airline industry have driven out many competitors and prevented many potential new aviation businesses from ever starting.
That’s why the United States now has only four major airlines: American, Delta, United, and Southwest. When some people today voice concerns that privatizing air traffic control will effectively mean putting it in the hands of these four quasi-monopoly airline corporations, they have a point. But let’s be clear about why there are only four major airlines today and why they operate as quasi-monopolies: too many regulations.
THE MISNOMER OF THE NON-PROFIT ORGANIZATION
President Trump’s proposal features turning over responsibility for air traffic control to a “non-profit” private organization. If the organization receives all its funding from sources other than government, then it will indeed be “private.”
If it is not-profitable, however, it won’t long exist.
The term “non-profit” is highly misleading. It’s a misnomer. The term “nonprofit,” used to describe a tax-exempt charity or foundation, emerged at the same time “profit” was becoming a dirty word in modern American political culture. Many progressive Americans look favorably upon mislabeled “nonprofits” because they’ve come to equate “profit” with “immorality.” Progressive Americans, strangely, seem to believe it’s wrong for human beings to have a profit incentive to improve the products and services they offer and to make customers happy.
This is deeply mistaken. On multiple levels.
FIRST, the main difference between a charity and a business is that the former is tax-exempt, the latter is non-tax-exempt. To put this in modern progressive terms, businesses pay (at least part of) their “fair share” in the form of taxes. Charities are tax-exempt. They pay nothing.
SECOND, a business can build asset and equity value for its owners or individual shareholders (providing a financial incentive to make the business successful), while a charity cannot build such value for the benefit of individual trustees or directors.
THIRD, whether any organization is profitable or not is completely separate from its tax status. A business formed as a Sole Proprietorship, an LLC, a C-Corp or an S-Corp, can be “nonprofitable” if its expenses exceed its revenues. And it will go out of business if it does not change the numbers represented on its balance sheet soon enough, depending on how much operating capital it has. Likewise, a charity or foundation whose expenses are persistently higher than its revenues will likely close its doors because it won’t be able to pay its bills.
And just as a business can be “profitable,” a charity or foundation, usually formed as a 501(c)3 under the tax code, can too. Many are. Some tax-exempt charities have executive directors with salaries in the hundreds of thousands and even millions of dollars with amazing retirement packages, to boot. Some charities are so profitable and rolling in so much money that they turn around and give large amounts to political candidates during election seasons.
Please, let’s hear no more about “nonprofits.” There are organizations that pay taxes by law, and there are organizations that the law does not require to pay taxes. That’s the difference, plain and simple.
ARE SKEWED MARKETS + COMPETITION BETTER THAN REAL MARKETS + COMPETITION?
Tax-exempt charitable organizations are usually subsidized by donations from individuals, and grants, which can come from either private foundations or government.
This makes for both bad news and good news regarding charities. The bad news is that a charity responds to a highly-skewed market: it’s biggest donors. The focus for a charity, typically, is not to make happy the individuals who use the products or services offered by the charity. The focus, rather, is doing whatever makes donors happy, whatever keeps those big checks rolling in on a regular basis.
The good news is that in an environment relatively free of regulations, there’s usually competition among charities to provide some product or service. And excellence is achieved through competition. There is little or no competition, however, when regulatory burdens drive competing charities away.
For those who think privatizing air traffic control within the airline industry is at least worth considering, there are important questions to ask: Who is the end user? The airline companies? The airports? The passengers? Others? Maybe some combination?
Should air traffic control become the responsibility of a tax-exempt charity? Or a non-tax-exempt business?
If the answer is a tax-exempt charity (which I am not sure is the best answer), will it be a monopoly protected by laws and regulations? Or will it be a charity that operates in an environment of competition, where airports, aviation businesses, and customers can choose who they want to contract with to provide air traffic control services?
Stated differently, can competition make air traffic control for the commercial aviation industry better? And if so, how is that best accomplished?
Thinking through these and related questions can help us think about how to improve the airline industry in the United States. We might even learn something important about freedom along the way.