A Lesson that Never Gets Learned

As of August 30th, the USAirways’ (now American) flight operations center, subsidized by taxpayers, will close.  Around 650 jobs will either move to Fort Worth or disappear altogether—the result of the airline’s merger with American Airlines.  Such is the nature of business.  Firms are constantly being created, closing their doors, and /or moving.  Government placing expensive bets on the success or retention of specific businesses is problematic on several levels.

 

The first and foremost is that taxpayers should not be bankrolling private investment and second is that there are issues of favorable treatment for some companies and third there is the moral hazard issue. Yet politicians seem to be unable to stop doing it. So many examples of recent memory come to mind; Solyndra and other solar energy companies, Kvaerner Shipyards in Philadelphia, and locally Sony, Lazarus, Lord and Taylor’s to mention a few prominent ones.

 

Recall that USAirways in 2007 asked three cities to put together a financial package to bid on getting a new flight operations center.  USAirways had just merged with America West Airlines, who had such a center in Phoenix but deemed it too small (150 people) to accommodate the new combined airline’s needs.  Pittsburgh, which at the time had the USAirways’ flight operations center, was asked to compete against Phoenix and Charlotte to host the new center.

 

Naturally the news reports of Pittsburgh’s victory were glowing. The center was to cost $25 million and employ 600 people—with 450 coming from USAirways’ current center with 150 new jobs although as reported in the news “the 150 employees in Phoenix will have the option of moving to Pittsburgh once the consolidation is complete.”  The financial aid package put together by the state and County totaled more than $16 million which consisted of $3 million in grants, $12.5 million in loans and $750,000 in state tax credits tied to the number of jobs created by the project.

 

We asked at the time (Policy Brief, Volume 7, Number 54) “will government officials ever learn that lavishing tax dollars on firms is not an antidote for market trends?  It seems a simple lesson, but one that currently escapes them.  The Pittsburgh region suffers dreadfully from this affliction…”  We noted the inexplicable loyalty to USAirways from elected officials.  “Still the most galling case is the region’s support for USAirways over the years.  Allegheny County built the airport facility, designed to accommodate 50 million passengers per year at a cost of half a billion dollars largely to house the USAirways hub and the anticipated surge in traffic through the airport.”

 

Unfortunately, the highest passenger count since completion of the new airport occurred in 1997 (20.7 million).  All Pittsburgh travelers received from this new hub was a strong USAirways’ monopoly, and, for years, the highest airfares in the country.  For a long time, the Allegheny County Airport Authority was stuck trying to make huge debt service payments until money from new external sources (gaming and Marcellus Shale production) came along.

 

In 2007, the time of the bidding process, O&D traffic came in at just over 9.8 million but was slipping and recently has settled in at about eight million origination and destination passengers.

 

We also noted in 2007 regarding the airline’s financial difficulties:  “Almost continuous financial problems arising out of extraordinarily high costs at the airline finally led to bankruptcy in 2002 and again in 2004.  Those bankruptcies eventually resulted in a merger and a dramatic drop in the airline’s presence at Pittsburgh International Airport with flights falling precipitously from well over 500 per day to just over a hundred currently.  USAirways’ employment in the region fell in concert with the decline in flights from 12,000 in 2001 to below 3,000.”

 

Another red flag was raised not long after the announcement Pittsburgh had won the rights and the expense to host the new center.  Flights were again cut from 108 daily to 68 beginning in January 2008.  These flight reductions came with 450 local jobs being lost and the relocation of 500 pilots and flight attendants.  Employment at USAirways in Pittsburgh fell to 1,800.  As we commented, “so the more than $16 million in subsidies used to guarantee 450 flight operations jobs, for which ground was also broken in September, will not offset the loss of 450 jobs and the relocation of 500 others.”  The CEO of USAirways at the time commented that the cuts may continue while the then Allegheny County Chief Executive responded, “the flying public makes that decision. I wouldn’t hold my breath until they figure out how to be competitive in Pittsburgh.”

 

And of course he was correct.  Upon the announcement of the merger with American Airlines in March 2013, the CEO told the media that the flight operations center would close “a couple years from now.”  News reports place the final cost of the 72,000 square foot flight operations center at $32 million and employed 650 people.  It opened in 2008 and lasted seven years.  It is not clear if USAirways repaid the $12.5 million in loans used to build the center, but state and county money ($3.75 million) and the gamble using taxpayer money did not reap the rewards for which elected officials had hoped.

 

As we concluded in that Brief from 2007: “The ongoing USAirways saga should be an object lesson for government officials.  Stop using taxpayer money to support private firms in decisions that are not financially viable absent the subsidies. It is far better to keep taxes low and create a favorable labor climate. But of course if those were present, all this doling out of subsidies would not be necessary to persuade companies to invest in the region and state.”

 

And we might add in this case that given the awful experience with USAirways in the first few years of the new century, the decision to reward them again for a chance at some jobs that were likely to be gone in a few years anyway—not to mention the other significant cuts that were already scheduled—was ill advised at the time and the repercussions are now in full view.

US Airways Taking the Area for Another Ride?

USAirways has entered into a merger agreement with American Airlines.  If the merger passes regulatory muster-it has already received approval of American’s bankruptcy judge-the USAirways brand will disappear from the landscape and possibly most of the remnants of the once powerful airline’s presence in the Pittsburgh area-its birthplace. 

 

The last two operations-other than local flight operations-remaining in the area are the airline’s flight operations center and a heavy aircraft maintenance center.  The former has already been mentioned as a candidate for closing, entailing the elimination of 600 jobs. Meanwhile, the maintenance center employees may want to cross their fingers.  Normally in the course of business, firms come and go and jobs are created and destroyed, but what makes this instance so egregious are the enormous sums of money state and local officials have thrown at the airline over the last twenty plus years in an effort to keep the carrier happy and jobs in place.  It has turned out to be quite futile.

 

At its peak the airline employed more than 12,000 people locally with more than 500 flights per day.  Since 2001 the airline has gone through two bankruptcies and a merger with America West.  These and other events impacting the carrier have lowered local employment that today stands at 1,800 with fewer than 50 daily flights.  The job count is likely to be reduced further if the merger is approved. 

 

What makes this particular news disturbing is the $16.25 million financing package of state and local subsidies that included grants, tax credits and a low interest loan that was provided in 2007 as an incentive to build the $25 million operations center and to retain 600 jobs.  But USAirways has a habit of disappointing the Pittsburgh airport despite receiving heavy subsidies and getting a new terminal built to handle the expansion projected twenty five years ago. They abandoned the airport first as a principal hub and then as a “focus city”.  While the latest developments may come as a mild shock, it should not come as a surprise. 

 

In 2006, USAirways pitted Pittsburgh against Phoenix and Charlotte to see which would offer the best deal to host the operations center.  We commented at the time (Policy Brief Volume 7, Number 54) that “the competition was almost certainly a ruse.  Moving the heart of the operations system on the fly is clearly impossible.  To move the center during operations would have required creating a parallel system at great cost.”  Prior to bidding, Phoenix had a smaller center serving America West that was not adequate to accommodate the much larger USAirways traffic. The odds were very much in Pittsburgh’s favor with or without a subsidy.  The situation with American and Dallas is very different, making the Pittsburgh center odd man out.

 

Not long after Pittsburgh’s “victory” in obtaining the operation center, USAirways announced a large round of flight cuts with 450 local jobs eliminated along and the relocation of 500 pilots and flight attendants.  We also noted in the 2007 Brief, “…that may not be the last of the reductions.”  At the time, the CEO was asked if this is the last of the cuts. He responded “you never say never.”  In defending the cuts he also noted that the nature of the airline industry is “far too hard to predict.” 

 

And he has been proven correct in that assessment.  The airline industry has changed dramatically since the events of 9/11/2001.  Other cities have suffered the loss of hubs as mainline carriers have faltered and discount carriers, with point to point service, have become more prominent.  Thus, showering taxpayer subsidies on airlines seems like a losing proposition-their business is too hard to predict.  The danger for taxpayers now is the temptation for local officials to throw even more money at the newly merged airline in a vain effort to keep the center open.  Phoenix’s operations center may not have been much of a competition for Pittsburgh, but the American operations center in Dallas is.  Short of including the sun and the moon any such offer will almost certainly be rejected.

 

The focus now should be on making Pittsburgh’s airport as attractive as it can be for carriers (in terms of costs of operations, quality of service, etc.) who will compete for and stimulate origination and destination travelers.  One positive arising from the reduced USAirways presence has been the advent of more competition for local air travelers.  Gaming tax revenue is being used to service airport debt, incurred for the new terminal that was built to USAirways specifications, allowing the Airport Authority to lower airline fees. Moreover, the agreement to drill for natural gas on airport property should help drive costs down even further, enhancing the attractiveness to other carriers.  Lowering airline fees still further could entice carriers to offer even more service. 

 

Will area policy makers learn something from the USAirways experience?   Sadly, history is not encouraging on that question.