Air Regulation

A recent paper by two economists (Aguirregabiria and Ho) caught my eye.

Typically, in America, airlines operate 'hub and spoke' networks. That is, an airline will have a main airport (the hub) and all the other cities in the network (the spokes) only fly to the hub. Why do airlines tend to do this?

There are three main possibilities that the paper explores:

1. Passengers prefer large airports which tend to be more efficient, so are prepared to fly via the hub airport.
2. Airlines benefit from lower running costs (economies of scale) at a hub airport.
3. Airlines find it easier to deter competition by operating out of a hub airport.

Aguirregabiria and Ho find that airlines do benefit from costs savings of a hub airport. But they also find that airlines running a hub and spoke network tend to run more loss making services. They interpret this as a way of large airlines stopping smaller competitors from starting to run those 'spokes'. They also find that by having a hub airport an airline can drive up the cost of other airlines running services to that particular airport.

Thus hub and spoke networks could be a way airlines deter competition. 

If proven, air industry regulators should look into how airlines manage their networks and whether they illegally deterring competition that would benefit passengers.

Diamond Greed - Sweet Caroline

The recent Libor fixing scandal in the City of London just claimed its largest victim yet; the Barclays' CEO Bob Diamond. The scandal raises a wider question about the morality of greed...

The BBC coverage quoted two contrasting emails from members of the public:

C Abbott in Leeds emails: "It's a disgrace how the media and politicians are persecuting Bob Diamond and Marcus Agius for doing their jobs. We all live in a capitalist society where CEOs and chairmen are employed to make profits for their shareholders. If these regulations allow the rate fixing then the heads of Barclays and the other 20 banks under investigation are not to blame. The FSA and the politicians who set the rules and regulations should be held accountable. Instead of this self-righteous drivel that Cameron and Miliband are delivering to the public."

Neil Mcintosh in Worthing emails: "The right decision and about time. Too much mud has now stuck and all under his watch to allow him to stay and maintain the confidence of the market, shareholders and customers. Greed is not good and now it is being dealt with as it should have been since 2007. Now we need successful prosecutions with long prison terms and deterrent penalties such as seizure of profits made from such activities or all of this will have been for nothing. That in my view is the only acceptable course of action."

In other words:

Anything that legally makes profits for shareholders is justified.

or

Greed is not good.

How do you view greed? Is there such a thing as responsible capitalism? Is greed a virtue? If you were a banker, would you have fixed Libor? If you had the power, would you regulate in order to restrict human greed?

Recommended listening:
Sweet Caroline by Neil Diamond