Disappeared News

In New York, the rich folks who run Bear Stearns and JP Morgan are being bailed out. They need the help of our federal government, or they might lose their yachts and country club memberships.

Nevermind all the homeowners who lost their homes, the rich folks are being taken care of. The sale took place and then the Fed put extra gravy on their potatoes.

In Hawaii, we are, or maybe we are not, bailing out Aloha Airlines. It's hard to tell what is going on here.  Isn't Aloha doomed already, whether or not the Legislature gives them a loan guarantee?

Do you remember when Interisland fares started from $144 for the lowest-priced round-trip tickets, if you could get them? Without planning ahead, you could get stuck paying $208 for that same trip.

Then the airlines took away the price advantage for early reservations and charged according to the flight, so the convenient morning flights, for example, cost more. In 2003, weekly rates for commuters jumped to $599 and monthly passes to $1999 (note the dumb supermarket prices). As a last straw, the airlines cut discounts to tour operators and others.

Ok, so fast-forward to the recent fare wars. $19, $9, even free, for a one-way ticket. $39 not unusual. Were we being gouged when the airlines charged peak fares, or was there some fare needed to keep them profitable? Probably, both are true.

And so Aloha goes bankrupt (again) and the Legislature panics and rapes a perfectly innocent bill moving through the Senate (HB509) to "save" Aloha. We'll get back to this at the very end of this article.

I'm skeptical that it can work. Why? Aloha has started selling off bits of itself. Guess what will happen. The profitable parts might find a buyer, the unprofitable parts may not. Without the profitable parts, there is no gold in the goose. In other words, no profit, no airline.

A Seattle cargo company, Saltchuk Resources Inc., has bid for Aloha's profitable cargo assets, equipment and service lines. If the bankruptcy court permits the sale, then what's left of Aloha will be less viable than before. Keep in mind that Hawaiian has profitable Mainland routes and Mesa seems determined to keep go! going at any cost. This does not bode well for Aloha even with loan guarantees and tax breaks. Why does anyone think that loan guarantees will provide a long-term solution for what's left of Aloha?

Aloha may be just the first of many bankruptcies now on the horizon. As the recession deepens we may see more businesses fail. It comes with the territory. Which should they be bailed out? Shouldn't a failing business just fail, speaking generally?

It used to be that businesses took a risk in order to make a profit. If they lost, so be it. Now, our government eliminates the risk but lets them keep the profit. Note that Bear Stearns/JP Morgan is still keeping their fees. Socialism has arrived in the USA for corporations.

The Fed bailout was extra-legal according to some analysts:

In effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.” [Hussman Funds Weekly Market Comment, March 24, 2008]

Back in Hawaii, the Legislature's loan guarantee appears to be a Band-Aid measure. It does nothing to resolve the fare wars. If Aloha is losing $5 million a month, the Legislature needs to have a business plan in hand from the airline showing that these guarantees will make a difference.

If Aloha is losing money today and sheds its profitable cargo business, why would anyone expect it to be more profitable tomorrow?

Just to wrap up, let's look at what happened to that poor bill. It suffered what is called a "gut and replace" operation.

"Gut and replace" is by its nature antidemocratic. The bill that was passed was not the bill that was heard earlier by each committee.

Chairs get away with it because the public generally doesn't know what has happened. Also, no one in the Legislature seems to bear any consequences if rules are broken. The rule in this case is Senate Rule 54. Bills: Amendments:

Rule 54, line 2:
(2) The fundamental purpose of any amendment to a bill shall be germane to the fundamental purpose of the bill.

But the important thing, one might say, is to preserve competition in interisland air services. If so, then the status quo is unsatisfactory. Aloha can't survive cutthroat, routine fare wars.

It would be better for the Legislature to contemplate sensible regulation of the industry.