Political economy trumps economics: Boeing versus BA, Airbus vs Emirates

In aircraft manufacture you see two huge firms, Boeing and Airbus. You have some smaller firms like Comac and Bombardier, but really its a two horse show. The four firm industry concentration is about 70%. That means 70% of the worlds aircraft by value is produced by just four firms. The vast majority of that is Boeing and Airbus. Can you say oligopoly?

This contrasts sharply with Airlines. The four firm industry concentration is only 20%. Not perfect competition, but pretty good. So good, in fact, the average European airline’s margin for the past few decades has been 0%. Aviation is one of the few industries where profit actually is competed away as you see in your textbooks.

There are two points to take from this.

The first is that irrational policies can have positive effects. The reason we have the competitive air market we have is because governments won’t allow airlines to consolidate. A firm from Hong Kong can own the electrical infrastructure of London,  but woe forbid British Airways’ iconic livery disappear. Nothing naturally keeps aviation fragmented, as its manufacturers show. Irrational attachment to a paint job can do the lord’s work and keep an industry competitive and prices down.

The other thing to take away is that the industry that matches the austrian just so story of recession is aviation. In good times airlines order lots of aircraft, in bad times they go bust but those planes don’t stop flying. Once billions of pounds of hardware have been delivered you have to use it, even if it destroys your industry’s profit margins, because if you don’t someone else will.

A more consolidated industry could retire planes earlier, purchase fewer planes or increase prices, but the hyper-fragmented and competitive industry prevents these tactics being employed. Note however, that the unsustainable boom isn’t the result of easy money, it’s capitalist competition that drives this dynamic. And airline executives hate it. Just look at the US where consolidation is advancing as large firms attempt to merge to drive up prices.

Whereas Duncan and Krugman lament that political economy trumps economics, I think we should take solace. At least it’s a mechanism! It cuts both ways, so while the political can get in the way of good policy it can also support it. When making economic arguments it will probably be best to put the political to the fore, even if it’s not your “best” reason.

 

Advertisements

2 thoughts on “Political economy trumps economics: Boeing versus BA, Airbus vs Emirates

  1. Not only does the UK not have any objection to BA being bought, BA is a consolidator – it acquired Iberia.

    Also, you see the same dynamic within subsegments. A and B control the market for big jets; Bombardier and Embraer have the same position in regional jets.

    1. But BA and Iberia both exist, with their own boards, and IAG has its own board. So does Vueling. It’s not nearly as rationalised as it should be.

      BA is still one of the worse examples I could choose, but it still illustrates my point.

Comments are closed.