# "But Planes aren't subsidized!..."



## The Metropolitan

I've seen some rail forums have big debates on how rail is "subsidized" but highways and air are not.

Here's one very obvious example of how those planes are subsidized too:

http://www.baltimoresun.com/business/bal-m...,0,213831.story


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## Green Maned Lion

This is more than a subsidy- this is ridiculous. See, they get this money if they make less than 8% ROI. I mean come on.


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## PRR 60

Right now, BA flys to London from both Philadelphia (PHL) with two daily round trips and Washington Dulles (IAD) with two or three daily round trips. That draws O&D pax from the single daily 767 flight from BWI. So, all of BA's terminal costs at BWI are supported by revenue from that one flight using BA's smallest long-haul aircraft. To the extent that the flight is not making money for BA, then maintaining that terminal is a money losing proposition. Based on that, BA was threatening to pull out of BWI. It certainly looks like BWI and the state of Maryland wants them to stay and is willing to put up $5.5 million to make that happen.

Based on estimated pax count, the payments would amount to about $40 per passenger if all $5.5 million is paid. The trigger is not meeting an 8% rate of return on sales (not return on investment). If BA's profit from operations at BWI falls below 8% of the revenue generated by BWI ops, then the payments kick-in up to $5.5 million per year. So, it could be zero, it could be $5.5 million, or it could be anything in between.

It is worth $5.5 million for BWI to keep BA from pulling out? Who knows. Maybe they think BA generates enough revenue for BWI to objectively justify the payments, or maybe it is as subjective as bragging rights to keep TATL service at an airport in the shadow of other larger airports. That is their call. But it should be noted that this does not mean that BA is being paid $5.5 million to operate at BWI. It means that BA is paying BWI $5.5 million less to operate there. The net will still be that BA and BA passengers will continue to pay BWI for ops there. It means that BA will get $5.5 million of that back.


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## Joel N. Weber II

How would the $5.5 million a year compare to the cost of running a train from the BWI Amtrak station directly to the Philadelphia airport terminal?


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## PRR 60

I'm thinking the state of Maryland and BWI Airport would not be too enthusiastic about making it easier for BWI passengers to get to PHL.

But, Amtrak could directly service PHL Airport using the SEPTA R1 airport line. In fact, for a short while in the early 1990's Amtrak did just that. Amtrak had a code-sharing arrangement with the early 1990's incarnation of Midway Airlines (ML). Several Amtrak Philadelphia - Atlantic City trains were extended from Philadelphia 30th Street Station (ZFV in airline-speak) to PHL Airport using the R1 line. These trains served as connecting "flights" for ML from their mini-hub operation at PHL to Atlantic City. Unlike the present Amtrak arrangement with CO at EWR, the ML code share was the real-deal with through ticketing by ML, baggage handling right to the destination, and even an ML ticket and check-in counter at Atlantic City.

The Amtrak-ML code-share service died in 1991 when ML closed it's mini-hub at PHL in the midst of the post Gulf War I economic downturn. ML went out of business a short while later. Pity. ML was a classy operation.


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## Joel N. Weber II

I get the impression that Boston Logan airport isn't entirely opposed to passengers going somewhere else, but I think they also have some real issues with the number of flights per day the runways can actually handle vs the number of flights the airlines would like to operate.


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## Green Maned Lion

PRR 60 said:


> Based on estimated pax count, the payments would amount to about $40 per passenger if all $5.5 million is paid. The trigger is not meeting an 8% rate of return on sales (not return on investment). If BA's profit from operations at BWI falls below 8% of the revenue generated by BWI ops, then the payments kick-in up to $5.5 million per year. So, it could be zero, it could be $5.5 million, or it could be anything in between.


My point is that it isn't a matter of making sure they don't lose money operating an important or useful service. Its a matter of making sure they make a nice amount of money. That doesn't jibe with my view of the world. A company should only make money after it has satisfied its social responsibilities. Helping a company not lose money is ok, but providing them with a profit for maintaining service they simply should provide is patently ridiculous.

Transportation providers exist to serve a need, which they should always serve. If they make money in the process, so much the better. The current situation seems to be the diametric oppisite. That is, Transportation providers exist to make money- if they happen to serve the needs of the world, thats a nice bonus. That should not be the way things work, my friends.


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## Joel N. Weber II

Typical transportation companies that aren't government funded are traded on the stock markets. Is the typical investor wrong to avoid mutual funds that have a 0% rate of return that at least they provided transportation to the world in spite of that 0% rate of return?

(It's a little more complicated than that, because companies only get cash when they issue stock, but investors are willing to pay for stock at the time of the IPO because they expect that other investors will be willing to buy it from them later on.)


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## Green Maned Lion

I'm not objecting to their making money. Making money is an important facet of running a good business. But one should not be self-destructively greedy (Not to mention names... *cough*WALMART*cough*) or negligent of one's societal obligations. An airline should, by its nature, attempt to operate its business efficiently, with the least amount of overhead needed to ensure offering a service consumate with its price point. It should make a point of increasing service to serve market demand. And so on.

However, if it provides an important service by linking two places- which is the job of a transportation company, remember- and isn't losing money (not losing profits elsewhere or whatever, just not losing money) then it is an obligation for that company to continue that service.

In return, it is the job of the society it serves to make sure that said company be helped along in times of difficulty, such as to maintain the ability for that company to continue meeting the needs it serves.

Further, the operation of any business entity should be mutually beneficial to all stake holders. Company X produces shoes, paying its employees a fair salary for their efforts and their suppliers a fair price for their materials. Company X then sells the shoes to Store Y at a price that allows Company X to make a fair profit. Store Y pays its employees fairly for services rendered and sells the shoes to Customer Z at a fair profit. X shoes are of a quality that justifies the purchase price. Everyone gets a fair deal.

Thats not what goes on in business these days, you see. No no. Mr. Z wants to get a "good deal" and demands lower and lower prices. Store Y gives them lower prices by cutting its profit margin to be small, paying their employees the least they can, and squeezes Company X to force them to produce shoes at a low price. Company X, faced with the prospect of not selling to the Might Store Y chain, fires all their loyal employees, and contracts with Li & Fung (if you don't know who they are, look them up!) to provide the cheapest shoe possible using highly underpaid labor. Store Y keeps squeezing until Company X is just turning money around. The product is crap, so Mr. Z doesn't really like it, but hey, its cheap.

Thats today's business model. And it sucks.


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## PRR 60

Green Maned Lion said:


> ...However, if it provides an important service by linking two places- which is the job of a transportation company, remember- and isn't losing money (not losing profits elsewhere or whatever, just not losing money) then it is an obligation for that company to continue that service.


Since I'm a narrow issue type of guy, I'll just address this particular circumstance.

I'm not sure I would describe a single daily flight from BWI to London as an "important" service. There are six or seven flights each day by three carriers (depending on day of the week) from Washington Dulles (IAD) to London, and four flights each day by two carriers from Philadelphia to London. A flight from BWI to LHR is nice for people near BWI, but with multiple flights from reasonably nearby airports, the people in the Baltimore area still have decent ways to get to London. And if they don't want to trek to PHL or IAD, there are always connecting flights. So, even in you assume that BA has a corporate obligation to provide essential service regardless of financial viability (and I assure you BA does not share that assumption), I think it can be argued that BWI-LHR non-stop service does not meet that definition.

Having said that, The State of Maryland and BWI Airport obviously feel it is important to them to retain the LHR flight for BWI customers. They may be looking out for best interest of their customers, or maybe they don't want their customers using airports (and spending money) in Virginia or Pennsylvania, or it may it is to prevent a blow to their civic pride by losing their last Trans-Atlantic service. Regardless, that is their desire. BA is willing to oblige them, but not for free. BA is not obligated to cater to Maryland and BWI's desires. If Maryland and BWI want BA to stay and fly that 767 every day to Heathrow, the price tag is $5.5 million.


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## Joel N. Weber II

Green Maned Lion said:


> However, if it provides an important service by linking two places- which is the job of a transportation company, remember- and isn't losing money (not losing profits elsewhere or whatever, just not losing money) then it is an obligation for that company to continue that service.


In other words, we should create incentives for transportation companies to never start offering service that might turn out to be barely profitable, because they will have trouble discontinuing that service?



Green Maned Lion said:


> In return, it is the job of the society it serves to make sure that said company be helped along in times of difficulty, such as to maintain the ability for that company to continue meeting the needs it serves.


So when the airlines have trouble continuing to offer cheap flights because of rising fuel costs, taxpayers should pay the increased fuel prices?



Green Maned Lion said:


> Further, the operation of any business entity should be mutually beneficial to all stake holders. Company X produces shoes, paying its employees a fair salary for their efforts and their suppliers a fair price for their materials. Company X then sells the shoes to Store Y at a price that allows Company X to make a fair profit. Store Y pays its employees fairly for services rendered and sells the shoes to Customer Z at a fair profit. X shoes are of a quality that justifies the purchase price. Everyone gets a fair deal.
> Thats not what goes on in business these days, you see. No no. Mr. Z wants to get a "good deal" and demands lower and lower prices. Store Y gives them lower prices by cutting its profit margin to be small, paying their employees the least they can, and squeezes Company X to force them to produce shoes at a low price. Company X, faced with the prospect of not selling to the Might Store Y chain, fires all their loyal employees, and contracts with Li & Fung (if you don't know who they are, look them up!) to provide the cheapest shoe possible using highly underpaid labor. Store Y keeps squeezing until Company X is just turning money around. The product is crap, so Mr. Z doesn't really like it, but hey, its cheap.
> 
> Thats today's business model. And it sucks.


This blog post makes me think you need to qualify some of those statements a bit.


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## Green Maned Lion

I qualify my statement on today's method of business by agreeing that John Mackey's opinion, indeed, doesn't agree with GML's opinion.


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## zoltan

I assume that MD decided that the economic benefit of the flight exceeded the cost of subsidising it. And so be it.

However, this is the same calculation applied to Amtrak, Commuter rail, and local and regional bus services, and therefore - and I think this is the point of the post - the airlines, presented with this, have to lose their sense of superiority in claiming to be a self sufficient mode.

It isn't just Maryland; in fact, this New York Times article sheds light on just how widespread the subsidising of airlines is. I don't know about the US, but in Europe, every single flight is subsidised by a huge amount of money, simply by not paying fuel tax - this effective subsidy is estimated, according to pressure group Friends of the Earth, to amount to $15.7 Billion in the United Kingdom alone.

I can't help put think that the money being thrown away in this manner might be far more effective in the long term being spent on high speed rail, good quality regional rail - services like the Downeaster, the Hiawatha service and the Michigan service are examples of what can be done for settlements off the core network - and, as PRR 60 cites, better connectivity between rail and air.

Referring back to the initial example, I love that BWI flight! In all seriousness, it is by far the best flight in terms of accessibility for Central Washington DC and the rest of Maryland. From BWI station, you can get a one-seat ride to Central DC, not having to negotiate any steps, unlike arriving at Washington Dulles, where one has to use a bus and a metro train, neither at all suited to carrying large amounts of luggage with you. And because the MARC takes you to Union station, you can transfer easily for Frederick, Laurel, Brunswick and Harpers Ferry, and that same MARC train from BWI also takes you to Odenton, Baltimore, Aberdeen and Perryville. And this regional connectivity is what Maryland are paying for!

Now, let me go a bit off on a tangent, and analyse my own trips to Frederick, MD:

From Dulles:

1 "moving lounge"

1 bus

two flight of steps

2 metro trains

two flights of steps

1 Marc train

= 5 vehicles, of which:

3 are unsuited to large amounts of luggage.

4 flight of steps

From BWI:

1 bus shuttle

2 Marc trains

= 3 vehicles, of which:

0 are unsuited to large amounts of luggage.

0 flights of steps (Although one encounters two at BWI station footbridge on the return journey).

And there are three points to be made here:

1. The economic benefit of better links to Baltimore and regional MD is what Maryland consider to offset the cost of subsidising the flight;

2. The Airlines cannot justify claims to be a self-sufficient industry, when they are not;

3. You can see how pissed off I was that I had to fly into Dulles on my last trip, because BWI would have cost me $150 more.


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