Airlines and Telephone Companies

Economics 102 tells us that, in a competitive market, marginal price tends to approach marginal cost.

That is, as long as there is a single cent to be made by producing and selling an additional unit, the producer will reduce prices to sell more. But only up until the point where it is still just profitable to do so.

In most industries, there are economies of scale so costs decline as volume increases. After a certain point, for many reasons, costs no longer drop or they start to rise again. As a result the incentive to produce more declines.

There are some industries whose business models are superficially similar but where the pricing model is radically different: airlines and telephone companies come instantly to mind.

In the airline and telephone industries, the similarities are that large sums of money must be invested to be in business at all - airplanes and telephone networks are expensive - and large numbers of people must be employed for the company to be able to function at even the most minimal level.

In the telephone business, the marginal cost - for another minute of talk time - is vanishingly close to zero. For airlines, the cost of putting a passenger in an otherwise empty seat is not much more.

The major problem for these two industries is that the marginal cost of creating a unit of production (one minute of telephone talk time or one passenger flown for one mile which is the airline unit of capacity) is less than the average cost. Since price inevitably approaches marginal cost, there is now a situation where average price is less than average cost. The inevitable result is the creation of massive losses and, ultimately, a visit to the local friendly (?) bankruptcy court.

The land-line telephone companies have solved this problem by abandoning the usage pricing model and simply charging for access to the network. Mobile operators are still clinging to vestiges of "pay for use" but are close to abandoning it too. Most customers now pay a fixed monthly amount for "all you can eat" service. Since the telephone companies can calculate their costs, they can set a price that should - absent spectacular incompetence - be profitable. That works well provided that they can keep their subscribers for defecting to their competitors or to other communication methods.

The airlines have no prospect of charging for access to the network. I wouldn't pay $500 per month to fly as much as I wanted on Treetop Air. Neither would Treetop Air want to take the risk that I would fly 10,000 miles every month at a cost of around 12 cents per mile to them

So airlines are attempting to increase revenue with additional charges for checked bags, making a reservation by telephone instead of online, selling sandwiches on board etc. It makes me wonder which airline will be the first to have pay toilets on their aircraft!

These additional charges are annoying to travellers and, as a result, may not last. So truth in pricing may return - for a while.

Airlines are also cutting capacity. The idea is, following the supply-demand model that we learn in Economics 101 - that they can raise prices as seats are less available. If, however, they raise prices too much, they will generate empty seats - even with lower capacity - and the temptation to run cut rate sales just to fill the seats will become irresistible.

Filling otherwise empty seats at cut rate prices can be a profitable strategy - if only in the short term. It just doesn't last for long!

Go to Bankruptcy Court. Go directly to Bankruptcy Court. Do not Pass Go. Do not collect $200 million. (Apologies to Parker Brothers makers of the board game Monopoly (R) http://tinyurl.com/6kqpqh)

Owners of telephone company stock may not make much money in the long run but they probably won't lose too much. Owners of airline stocks should remember the phrase caveat emptor (buyer beware) and consider running for the exits.

Home Owners

The term 'Home Owners' ranks high in the pantheon of misleading - even grossly dishonest - terms that could have been used by George Orwell in either Animal Farm or 1984.

We are suffering from the unwinding of the recent housing bubble wherein no one seemed to understand that the ratio of house prices to income (see also Price - Earnings ratios for speculative stocks) can not increase forever. Politicians - in full pander mode - are proposing that massive sums of taxpayer money be GIVEN to those in danger of losing the homes which they never owned in the first place.

Will someone please explain how someone with a zero down mortgage (i.e. no, repeat zero, equity in the property) can be described as a homeowner? The reality is that such a person can only be described as renting from a bank with the really sweet kicker that one hundred percent of any price appreciation belongs to him.

Usually Wall Street tries to create one way bets like this for themselves. This time, however, the investment bankers are on the wrong end of it. They deserve to be punished. The potential damage to the financial system, however, dictates that they be bailed out. If that is not done, the consequences of letting them take their medicine is all too likely to rebound on the real economy.

We will work our way out this hole, sooner or later, but referring to those who are really renter/speculators as home owners merely serves to confuse.

Not always the way they seem to be...

We are encouraged to save energy by using compact fluorescent light bulbs.

That is undoubtedly a good idea for the environment and, now that the fuel cost component of electricity is rising rapidly, good for our wallets too.

As so often, however, there is an ugly side effect: a broken compact fluorescent light releases a significant quantity of mercury. Like almost all heavy metals such as lead, cadmium, plutonium (even were it not radioactive), mercury is a serious poison. Unfortunately there has been only sporadic publicity about the risk and little useful information is to be found on the packages.

That doesn't mean that we should shun compact fluorescent light bulbs, just that we need to clean up carefully when one does break.

It would be nice if there were perfect solutions to our problems and challenges but that isn't going to happen anytime soon.

It would be nicer still if those who are proposing a solution would be open and honest about the side effects. Then we can balance the risks and rewards to our best advantage.

The lesson here is that compact fluorescent technology is an adequate interim solution but better and safer is still needed. LED lights are safer and more economical than compact fluorescents but the initial cost is still prohibitive except for specialized use.

America - and Ronald Reagan - did it right.

During his remarks at the awards presentation of the Detroit Cup [Sailing] Match Racing Championship, Russian Andrei Arbuzov said, "I'm really happy to be here. I also want to thank your President Ronald Reagan. He helped bring an end to the old USSR. Now we have the possibility to come to America. We loved Los Angeles, New York City and being here in Detroit. This is the best country ... "

No further comment needed.

Arms and Legs

I am starting to hearing more stories about the treatment of amputees returning from Iraq and Afghanistan. One is good but most are seriously distressing.

I will start with the good. Here is a short talk by Dean Kamen (inventor of the Segway - better known as one of the archetypal solutions in search of a problem). On the other hand, he was asked to come up with a solution for double shoulder disartics and appears to have done so. http://www.ted.com/talks/view/id/82

High technology for arms is possible because, most of the time, arms don't do anything so power consumption is manageable. High technology also makes sense because arms, to be useful, have to do complicated things. Many arm amputees just don't bother with a prosthesis because, with one arm, life is inconvenient but manageable. As you can imagine, however, being a double arm amputee is very difficult.

The situation with prosthetic legs is much less satisfactory. They are much more basic but the need for two is overwhelming.

High, and expensive, technology is OK but is much less important than fit and lack of pain in use. There have been studies showing that an old fashioned, but well fitting, peg leg using modern socket technology has most of the functionality needed to exist in the modern world. So technology is a bonus but is not, by itself, sufficient.

Unfortunately there are all too few prosthetists who really understand the simple concept that "IT'S NOT SUPPOSED TO HURT". Of course, it will hurt if you push it really hard all day but that is a different story. Natural legs have the same problem.

The other problem is that amputees do not really become good partners until about their third leg - three or four years down the line when they understand the feeling of a well fitting socket - so having a prosthetist who has the skills to work with new amputees is critical. If the stump ("residual limb" for the politically correct) is untidy as a result of emergency combat area surgery, then the skills of the prosthetist will be sorely taxed.

There are now Computer Aided Design/Computer Aided Manufacturing (CAD/CAM) systems that can augment the skills of pretty ordinary practitioners but that is not as sexy - to the bureaucracy - as the latest and greatest computerized knee or energy storing foot.

Unfortunately the situation now is that the prosthetists are not of high quality, there is resistance to adopting modern tools that can improve the fit, and there is too much emphasis on the "sexy" components that, while important, are the lowest priority when it comes to getting leg amputees back in the world and functioning.

Those who have been grievously wounded in our service deserve a lot better than they are getting.

The War in Iraq

The war in, or occupation of, Iraq is proving much more difficult than expected.

Part of this is because of the lack of planning by Donald Rumsfeld's Department of Defense. A greater part, however, is the fact that we, not the Iraqis, are running the show.

Until we stop doing almost everything for them, they have no reason to step up to the plate and carry the burdens of their own freedom. We may particularly ask why, with oil priced at $120 per barrel, we are still paying to rebuild Iraqi infrastructure.

Some ninety years ago, T.E. Lawrence (Lawrence of Arabia) made this observation:

"Better the Arabs do it tolerably than you do it perfectly. It is their war, and you are there to help them, not to win it for them."

It is still applicable and the sooner we act on it, the sooner we can leave. Until we can leave, preferably with some of our honor intact, it is well that we remember another of Lawrence's thoughts:

"Making war on insurgents is messy and slow, like eating soup with a knife."

We should also follow the example of Harry Truman in 1948 when the Greek Civil War was just beginning. He told the Greek Government that, if they wanted to keep their country out of the hands of the Communists, they would have to fight for it. He, also, informed them that the USA would provide cash, some weapons, and a very limited number of troops to serve as trainers and advisers.

The Greeks cared enough to fight for and, with our help, keep their country. The Iraqis can too if they are willing to fight for it. If not, why should we expend lives and treasure in what will surely be a losing cause?