A quick lesson on subsidy distortion of markets

So, there’s a program of government subsidies called the Essential Air Service Program that pays airlines to provide scheduled flights to small markets that might not otherwise have regularly scheduled airline service.

Might not.

The NYT holds Pierre, SD up as the poster child for a city that needs this wonderful subsidy.

Delta flew 4,840 of the total 6,833 passengers who boarded flights at Pierre this year through June, and Delta’s planes left with 47.4 percent of the seats filled on average. If Delta leaves and no other airline comes in, most travelers from the South Dakota capital would have to drive to the closest bigger airport in Rapid City, 140 miles away. Time-constrained corporate and government travelers dislike that idea, Ms. Gill said.

Actually, if you wonder who the other 1900 odd passengers flew, it turns out that a small regional carrier also provides unsubsidized service to Pierre.

Do you think maybe if Delta isn’t willing to provide service to the market, Great Lakes Air might just increase their service to pick up some of the business?

That this article doesn’t realize that the government subsidy is crowding out smaller entrepreneurs is hardly surprising. The NYT (as well as the government) have shown a remarkably consistent inability to grasp even the basics of economics and capitalism.

6 thoughts on “A quick lesson on subsidy distortion of markets”

  1. We are talking about the old grey hag here. They are staffed by 16 year olds who understand only that they want what they want.

  2. The “Delta” flights are actually not Delta flights anyway. They are Mesaba flights. I’ve flown Mesaba a number of times in the midwest.

    “Founded in 1944, Mesaba Airlines is the longest-flying regional airline in the United States. Known throughout the industry for its commitment to the safety of both passengers and employees, the airline has successfully navigated through evolving times in an exciting industry. As a subsidiary of Pinnacle Airlines Corp., Mesaba operates as a Delta Connection carrier under service agreements with Delta.”

    http://mesaba.com/

    So all that the subsidy does is put money in Delta’s pocket (directly and from what Mesaba would get in profits if they operated without the partnership). If only we could say that the people flying for $50 less on Mesaba planes labeled Delta were millionaires, then the subsidy could be removed.

    1. I’m not sure you can make the argument that Mesaba would be able to operate the routes efficiently if they weren’t in partnership with Delta. Without a much greater understanding of their business model, it is impossible to say. For instance, Delta is probably a guarantor of loans for Mesaba’s lease/purchase of its aircraft (or possibly leases aircraft from its own fleet to them) or provides discount maintenance services as an incentive package for the subcontractor.

      But it Great Lakes can operate unsubsidized into Pierre, it tends to undermine the argument that subsidies are needed to ensure service to the market. What it really says is that Delta has used subsidies to crowd out an unsubsidized competitor.

  3. Oops. They do hire their own mechanics, but I checked further and Mesaba is actually a wholly owned subsidiary of Delta (via Northwest).

    Found in the history:

    April 24 (2007 ) – Mesaba Airlines emerges from bankruptcy protection and is officially acquired by Northwest Airlines as a wholly owned subsidiary of the longtime partner. The successful restructuring, brought about by the dedication of the airline’s employees, competitively positions Mesaba for future growth in the industry.

    Nonetheless, somehow, Great Lakes is operating there without the subsidies, so in all likelihood, Great Lakes could expand (perhaps picking up some no-longer leased Saab 340Bs that need just a little re-painting) to fill the needs of “Time-constrained corporate and government travelers”.

  4. Reminds of back when I was contracting for Immigration. Airline tickets for the INS employees were the same price to the government regardless of when they were purchased, so they would often schedule things at basically the last moment. It worked for them, since they needn’t plan as much. Unfortunately, all the contractors had to pay the exhorbitant rates that a last minute flight engenders. It didn’t hurt us personally because the entire travel would be passed on to the government, but that meant that a whole heck of a lot of tax dollars were wasted so that they didn’t have to plan ahead. Since their budget was typically based on how much they spent the prior year, they had no incentive to econmize on the travel costs – if they didn’t spend it, they would get less money the next year.

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