Monday, November 09, 2009

Solution to Faltering Airlines

One of the participants in an online discussion group gave me permission to steal his novel economic proposal for the entertainment of you blog readers.

Force every oil company to buy at least one airline, i.e. make the operation of an oil company conditional on owning an airline with the size and scope of one of the US majors. Then Congress does not have to worry about bailing out airlines, and they don't have to worry about public outrage about exorbitant profits at oil companies either. It is a win-win all around!

Also, you could redeem petro points for air miles.


david said...

Nice try, but fail.

When the recession hit last year, the airlines would have been doubly screwed, because both oil prices and airline revenue plummeted at the same time.

This is called hedging, and it's precisely what the much-reviled hedge funds do (and airlines do hedge against oil price swings, but by using derivatives like options rather than an outright purchase).

Hedging is hard to get right -- so hard, that even the top investment banks blew it in 2008 hedging against their U.S. mortgage exposures. In this particular case, since airline profit depends not just on oil prices but also on the world economy, labour union aggressiveness, fear of illness (bird flu, H1N1, etc.), fear of terrorism, etc., simply being bought by an oil company (or buying one) is not actually a very good hedge.

Splendor said...

I think that's a brilliant idea, and it's already being somewhat put into practise in parts of asia.


Anonymous said...

Well said David. Besides, if we could "force" companies to do anything, we could solve loads of problems. Would hardly be a free market then would it?

Hedging is the best we have, for now.

Aviatrix said...

Did I write this too seriously?

It's a joke. Of course it's not feasible. It made me laugh, and I wanted to share. It's not supposed to buoy the airlines with oil company profits; it's supposed to fetter the oil companies with an airline so that they are shooting their appendage in the foot when they raise oil prices.

david said...

Sorry, 'trix -- I knew this was light-hearted and you didn't actually want governments to do this, but I did take it in the sense "wouldn't it be nice if the world were like this..."

Oil companies are happy to take profits when they can, buy they don't set crude oil prices -- that's done by the market, based on supply and demand (just like with, say, cocaine).

A cartel like OPEC can have some influence on oil prices by artificially limiting supply, though, and a lot of the governments in OPEC *do* own airlines. So much for that idea :)