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March 17, 2012

Terminal Leave and the American Aerotropolis

In the military some people build up their leave balances and have 45 days of leave at the end of their enlistment; they can request "terminal leave" - they depart 45 days early, they're gone and free, walking away to whatever they choose as their next. Of course, the military is a rational organization, and they only let you leave if they can afford it. There are priorities.

Recognized by many as a trenchant contribution, the Washington Monthly's article Terminal Sickness, subtitled How a thirty-year-old policy of deregulation is slowly killing America’s airline system—and taking down Cincinnati, Memphis, and St. Louis with it. is a worthy read.

A tale of Two Khans: Small bit of interweb hyperlink-irony: we note that while co-author Lina Khan is no relation of Alfred Kahn, the father of airline deregulation who openly admitted he didn't understand aviation and couldn't tell the different models of airplanes apart - he famously saw them all as "marginal costs with wings" - a comparison of Alfred Kahn's and Lina Khan's presence speaks clearly about the changes in America over the time gap between Then and Now. (Then is dead, long live the Now.) (edit: spelling corrected)

Terminal Sickness decries the unexpected consequences of 1978 airline deregulation and the subsequent abdication of anti-trust enforcement. "Trust" is a passe term dating from when it was difficult to get a corporate charter, and I hope you get to hear more of the term 'trust' and less of the word 'tryst" over the next few years.

The overt evidence of deregulation's unexpected consequence is the effect of unregulated airline behavior on the economies of Cincinatti, Memphis, St. Louis, Pittsburgh, and Cleveland. (Actually, the Cleveland debacle is just about to take place as municipal subsidies expire and the United-Continental merger and reduction render the legacy Cleveland operation redundant.)

Local governments have invested treasure and incurred long-term debt in order to build the terminals that airlines need; the federal government spends even more on the runways, navigation facilities, and aviation infrastructure that delivers the airplanes to the local government's terminal.

Our common wealth is invested in long term obligations to provide the (aviation) transport that successful modern cities require. Let's be clear that vibrant air service is a public good, a public need, and even - gasp - a public utility.

However, the unregulated behavior of the airlines puts airline service completely under the sway of (short-term) investors who are not motivated to consider the fortunes of the airport authorities that provide their facilities or the public that funds them. In fact, as they whip-saw airports against each other, airlines have found it marginally profitable to drive airports to the brink and into ruin - in the same relentless way they have extracted wealth from their pensions, employees, and customers.

Although deregulation took the government out finessing the airlines, the airlines still very much tweak the government. For instance, bankruptcy: over the last twenty years airlines have gone into strategic bankruptcies to protect their assets and cut their liabilities, voiding long-term costs and contracts and moving their pension expenses from their own balance sheets into the Pension Benefit Guaranty Corporation, which is essentially you and me. In deregulation, government didn't abandon aviation, it just gave up the benefits of influence while retaining the costs.

In many ways, the results of thirty years of airline deregulation should be a tocsin for those who would deregulate other public utilities (energy, transport, etc). Instead the cities abandoned and abused by the airlines invoke the serenity prayer and regard their mistreatment as the result of unfortunate and impersonal market forces, when in fact they are the result of intentional calculation by the airline industry.

So let's be clear on that: in general, what happens in the airline industry is intentional. Your cancelled flight? Their inability to put you on the next plane? Selling 105 tickets for a 100 seat airplane? Your time lost in delays boarding? Scheduling 90 airplanes departures in a time period where only 60 can actually leave in perfect conditions? Those are all airline business decisions, and in general the benefits accrue to the investors and the costs are born by - well, you and me.

Cities and regions need robust, distributed and competitive air service for their economic viability. We regulate gas and electrical utilities, cable companies and phone companies, farm prices and production - because the industry relies on the public and the public relies on the industry, and regulation is mutually beneficial. We can't tolerate the undampened effect of the business cycle (again with the K-waves?) on the dependent population, especially when the business cycle depends on public investment for its infrastructure. Regulation is civilized.

The article is excellent and I recommend it to you. I particularly enjoy the article's exposition of the railroad experience as precursor to today's aviation environment, and I was amused to find myself contemplating the parallels while riding my bicycle on the bike trail, which is itself an artifact of boom-and-bust railroad investment.

For those kind few still reading - and I am grateful - a few more thoughts about airlines and government, and then in a later post we'll move on to what may be the underlying issue.

Forget Metropolis. Think Aerotropolis

The next new trend in urban economic development is the Aerotropolis, a city-airport duality. According to Dr. John D. Kasarda, "Airports will shape business location and urban development in the 21st century as much as highways did in the 20th century, railroads in the 19th and seaports in the 18th". (see,

The perfect situation for an Aerotropolis is a legacy city center with vertical development and the prerequisite mass of the creative class, paired with a geographically removed major airport and connected by multi-modal, high-speed transport (highways, trains, helicopters). A textbook depiction of an area ripe for development as an Aerotroplis might look like this:

In the generic model, a legacy city center with developed education and research facilities, and with robust highway, river and train logistics, connects to a slightly removed major airport by a high-speed corridor of highways and mass transit. Movement between the two nodes needs to be almost frictionless*. The Aerotropolis shows that wealth and growth will occur along the highway connector and around the airport.

So that brings a few new requirements into pragmatic development. The city center and the airport need to be in the same government structure, either City or County, in order for them to share common incentives. No one party can build the Aerotropolis unilaterally; it takes government, business, and airlines.

How can local governments possibly stand with airlines as equal participants when the government bears all long-term risk and the airline can leave at will, abrogating their contracts through creative restructuring every few years? It's not possible; it's a dysfunctional alignment what we have established with our own legislation.

It's as if the military were to adopt a terminal leave policy of: you can leave whenever you want. We'll try to accomplish the Mission without you.

Sometimes we recognize negative trends in time to be able to understand that we've been screwed, but the emotional time-latency and arrested focus on the last time can keep us from seeing how today's rent-seeking works.

Sure, airlines have taken what we gave them - deregulation - and reverted to type. Let's not cry too much about the past, let's look at what's now. Accomplishing the American Aerotropolis and ensuring successful cities in an environment of global competition requires a regulated airline industry.

Don't even start with Spaceports. Please.


Joe said...

This would seem to be an argument for the government of the aerotropolis to own an airline outright.

Frank Van Haste said...

I believe Alfred spelled it "Kahn".


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