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A crisis of security and economics. (Transportation).

THE ATROCITIES COMMITTED ON SEPTEMBER 11 imposed substantial short-term and long-term costs on the U.S. economy. While all sectors were adversely affected by the attacks, many transportation firms experienced especially serious harm.

As a result of the attacks, we are beginning to see a significant reallocation of private and public expenditures away from investments that would have increased transportation capacity and raised productivity, toward those that are deemed necessary to ensure safety and security. As a result, shippers will face higher costs and fewer options, and some may be forced to redesign their just-in-time supply chains and distribution systems. Air travelers are experiencing longer trip times and more inconveniences that, in turn, threaten to reduce demand for air travel. Other transportation industries could also experience lower capital and labor productivity, higher costs, and reduced demand for their services if new federal laws, regulations, and security procedures prove ineffective.


Even before the September 11 attacks, analysts were predicting that the U.S. airline industry would lose $2.5 billion in 2001 because of the slowing economy and a surprisingly large decline in business travel. After the attacks, air carriers grounded hundreds of planes and cancelled thousands of flights. Industry capacity was slashed by at least 25 percent and thousands of employees were laid off. In an effort to draw customers, airlines instituted dramatic fare reductions that cut prices by as much as 40 percent in some markets.

Despite those moves, air travel demand collapsed further, and the airlines incurred enormous daily financial losses. Six weeks after the attacks, airlines reported record third-quarter losses -- "hemorrhaging money," in the words of former United Airlines CEO James Goodwin. By the numbers, the nine largest U.S. air carriers had operating expenses of $26.7 billion in the third quarter of 2001 (80 percent of which had transpired prior to September 11) as compared to operating revenues of only $21.5 billion, thus producing an operating loss of $5.2 billion. The General Accounting Office now estimates that U.S. airlines will lose between $6.5 billion and $10.5 billion as a result of the terrorist attacks, an estimate that may prove to be too low. Most analysts are predicting that several carriers will be forced to file for bankruptcy in 2002.

Airports The financial tidal wave that engulfed the airlines also swept across the nation's airports. At a time when they were forced to incur tens of millions of dollars in higher security costs (e.g., paying overtime wages to local police officers), their revenues plummeted because of fewer passengers and flights. Los Angeles International Airport, for example, estimated that its revenues would decline by as much as $108 million in the first year after the attacks. As a result, credit agencies have warned that airport bond ratings could be downgraded.

Airports have responded to the financial crisis by lobbying for federal aid and delaying or deferring new terminal and runway projects -- projects that only a few months earlier were deemed essential to relieve congestion and reduce delays. The airports also are considering imposing higher fees (perhaps substantially higher) on airlines and concessionaires to cover the costs of installing new security measures.

Federal aid On September 22, President Bush signed into law the Air Transportation Safety and System Stabilization Act (H.R.2926). The act provides some $15 billion in funding to implement new security measures and offset the financial losses experienced by the airlines. Given the size of the financial crisis facing the air industry after the attack, the unprecedented grounding of the nation's air fleet for several days, the understandable desire by congressional and executive branch policymakers to take some action in the face of the crisis, and the effectiveness of the industry's lobby, it is not surprising that the airlines received federal assistance. What is surprising is the speed with which the aid package was enacted into law (10 days), its size, and the lack of restrictions on its distribution.

The act provides $5 billion in cash for air carriers ($4.5 billion for passenger carriers and $500 million for cargo carriers) as compensation for the "direct and incremental losses incurred as a result of the September 11 attacks." Any carrier that can demonstrate to the U.S. Department of Transportation that it has incurred such losses is eligible for assistance, regardless of its financial status before the attack or its long-term prospects. The act also authorizes the secretary of transportation to take appropriate action to ensure that all communities that received scheduled passenger service before September 11 continue to receive "adequate" service, a provision that could be used to justify partial re-regulation of the industry.

The distribution of the $5 billion is based on simple market-share formulas (share of available seat-miles for passenger airlines and share of revenue ton-miles for air cargo carriers). For example, United Airlines, the second largest domestic air carrier, should ultimately receive slightly less than $800 million.

The legislation also establishes the Air Transportation Stabilization Board, the members of which are the chairman of the Federal Reserve and the secretaries of Transportation and Treasury (the comptroller general is a nonvoting member). The board is authorized to guarantee $10 billion in loans if it determines that credit is "not reasonably available" for an air carrier, that the obligation is "prudently incurred," and that "such agreement is a necessary part of maintaining a safe, efficient, and viable commercial aviation system in the United States."

To many observers, the broad statutory discretion afforded to the board indicates that Congress expects most, if not all, loan-guarantee applications will be approved. But some parties, both inside and outside government, argue that it makes little sense to provide financial life support to airlines that, even before September 11, were seen as likely candidates for bankruptcy. Thus, even before the first loan-guarantee application was filed, it was clear that, for better or worse, the board's decisions will mean financial life or death for some air carriers and thus will alter the industry's structure and the intensity of future airline competition.

Security The consensus that made it easy for Congress and the executive branch to enact an airline financial aid package in a matter of days broke down when it came to deciding what should be done to improve airport and aircraft security. Of course, there was strong agreement both in Congress and the general public about the need to adopt initiatives such as strengthening cockpit doors, increasing the flow of sensitive criminal and national security information from federal agencies to airlines, updating airline and airport employee identification credentials, conducting detailed employee background checks, deploying federal air marshals on certain routes, modifying airline computer software to better identify passengers who could pose a security risk, and restricting access to parked aircraft and secure areas within airport terminals. Policymakers in Congress and the executive branch viewed those initiatives as necessary, but by no means sufficient, to ensuring public safety.

The disputes that now are occurring involve additional initiatives, and chief among those is how to handle the screening of airline passengers and baggage. Currently, airlines in the United States are responsible for such screening, and they rely on private-sector contractors to perform the function. Because the airlines are reluctant to take actions that would raise their costs or impede the flow of the two million passengers who move through busy terminals on a typical day, a consensus quickly emerged following the attacks that the airlines should no longer be responsible for screening passengers or for hiring private firms to do so for them.

That consensus brings the United States in line with most other nations. Of the 102 countries that have an international airport, only three -- the United States, Canada, and Bermuda -- have assigned responsibility for screening passengers to the airlines. In Israel and most Western European nations, the local airport authority is responsible for screening passengers and baggage. The national government sets extremely high compliance standards and closely monitors security procedures, but the airport authority is free to hire private contractors or to use airport employees to screen passengers.

The Bush administration called for greater federal oversight of airport security operations and more police presence at security checkpoints. But the administration wanted the discretion to use either federal employees or private firms to provide screening services, depending on the situation at a particular airport. The Senate, however, unanimously passed legislation (S.1447) that required screeners to be federal civil servants (except at the very smallest airports where local law enforcement personnel could be used). The senators argued that only this approach would ensure that all U.S. airports are safe. Meanwhile, the House of Representatives passed legislation (H.R.3150) in tune with the Bush proposal. House Republicans, who were the main proponents of the bill, argued that the Israeli-European security model works well, that establishing a federal screener work force of 28,000 would be costly and unnecessary, and that federal personnel practices would make it more difficult to introduce new management s ystems or deploy new technologies to screen passengers and baggage.

The House and Senate bills contained many of the same provisions -- such as a $2.50 per passenger screening fee -- but the House bill required the creation of a new agency within the Department of Transportation to supervise all airport security and screening services, perform employee background checks, develop standards for hiring and retaining screeners, and adopt procedures to test and train screeners. The House bill, moreover, would have granted Transportation officials the discretion to use federal employees to screen passengers at those airports where they believe it is necessary.

While House-Senate conferees were negotiating the airport security bill, several well-publicized lapses in airport security occurred, and the resulting pressure to federalize the screener workforce became overwhelming. Under a House-Senate agreement, within one year federal employees (under the control of the Department of Transportation) will become responsible for screening passengers at 423 airports. After three years, airports could switch to using private security companies for the work, but it is highly unlikely that many will do so, despite the implementation of a pilot program that will permit five airports to employ private companies (or local law-enforcement personnel) during the three-year transition period. Airlines will help defray the cost of the new security service up to the amount they previously paid to private security companies ($700 million to $1 billion), but airline passengers will be charged an additional $2.50 security fee for each flight (with a $5 maximum on one-way trips).

Whether the Transportation Department can hire, train, deploy, and supervise 28,000 new federal workers within one year is, of course, the crucial issue. But other transitional problems could also affect the change, including whether private screening companies and their employees will leave the industry before enough federal employees are available to replace them, and whether the screening companies are entitled to compensation because of the abrogation of their long-term contracts.

Smart technology Because it will now take more time to process and screen passengers, many observers speculate that, if air traffic returns to normal levels, most airports will be clogged perpetually. That, in turn, will make air travel more costly (including the value of travelers' time) and even less enjoyable.

Fortunately, some of that inconvenience may be diminished by the deployment of new "smart" technologies that would greatly enhance our ability to identify, track, and verify the identity of travelers and employees. Smart technologies, especially those that are based on biometric data (essentially, computer-assisted recognition of unique physical characteristics), could play a major role in the war against terrorism. Already, several major U.S. airports are considering deploying face-recognition technologies, thus allowing airport security personnel to scan large crowds for specific individuals.

Smart technologies could also be used as part of a voluntary "pre-screening" program for travelers. For instance, an individual who opts to participate in the program would receive a "smart travel card" containing background information and biometric information that would allow security personnel to verify the individual's identity easily, thus enabling her to bypass certain airport security procedures. Amsterdam's Schiphol International has a pilot program underway that is based on iris-recognition technology: A traveler who has opted to have an image of her iris stored in a computer and who has been prescreened by Dutch police, receives expedited processing through passport control once a picture of the iris is matched to the image on file. Such uses of technology would improve security and reduce travel delays.


After September 11, rail freight shipments to metropolitan New York were suspended for two days for fear that terrorists could somehow use the rails in further attacks. In the days and weeks that followed, freight railroads strengthened their security systems. Much of the initial effort focused on ways to improve security for shipments of hazardous materials. But railroad managers also restricted access to critical facilities, stopped or rerouted freight operations in the vicinity of major public events, deployed personnel to ensure the security of their physical assets (bridges, tunnels, rail yards, dispatch centers, and other structures), examined their communications and control systems to ensure that existing security systems were adequate, and worked closely with the U.S. military and national security agencies to ensure prompt delivery of critical defense materials.

To offset the costs of those measures, railroads have sought -- so far, unsuccessfully -- federal aid. Sen. Ernest Hollings (D-S.C.) has proposed legislation (S.1550) that would grant the U.S. secretary of transportation the authority to develop a prioritized list of projects that should be undertaken to improve railroad security and to approve loans and loan guarantees for track rehabilitation and other purposes.

Amtrak Before September 11, Amtrak, the nation's provider of intercity passenger rail service, was facing serious financial problems. Moreover, it had made only minimal progress toward achieving the statutory goal of being free of federal operating subsidies by the end of fiscal year 2002 or else face liquidation. Amtrak operates a national 22,000-mile route network (all but 650 miles is over tracks owned by freight railroads), but only in the heavily traveled Boston-D.C. corridor (and a few niche markets) does intercity rail passenger service provide a viable competitive alternative to air and auto transportation for a significant number of travelers.

Following the attacks, Amtrak experienced a spike in demand for its services, a welcome event for almost any other business. Amtrak, noting the increase in demand, promptly requested $3.2 billion in additional federal aid to upgrade security and buy equipment to handle more passengers.

Whether there has been a large, permanent increase in the demand for intercity passenger rail service is uncertain, even in light of airport delays. Time will tell; but, if history is a guide, the initial surge in Amtrak's business may be short-lived, as such surges have been in the past when national or regional air service was disrupted or when gasoline prices soared. Nevertheless, Amtrak is likely to receive some federal aid, although not as much as was requested. More worrisome is the fact that, now, policymakers may be reluctant to force Amtrak to drastically restructure its operations or to push for more thorough-going market reforms such as privatizing intercity rail passenger operations.


Prior to the September 11 attacks, industry analysts had expressed concerns about the security of U.S. ports. Those concerns focused on preventing theft, drug smuggling, and illegal stowaways, not possible terrorist attacks against port facilities or cruise ships. Large seaports, by their nature, are located close to major population and transportation centers, are open and accessible, and are designed to process enormous volumes of freight traffic. Many seaports rely on private security guards and, until recently, some did not even bother to issue identification cards to port personnel, limit vehicle access to sensitive areas, or restrict individuals from carrying firearms.

Legislation has been drafted that would address those deficiencies. The proposed "Port and Maritime Security Act of 2001" (S.1214) would require 50 major U.S. seaports to assess their vulnerabilities and to develop security programs. The U.S. Coast Guard would play an even larger role than it does today in ensuring port security. Much of the regulatory focus of the bill is at the local level, and a relatively modest amount of federal aid is authorized for the buying of screening and detection equipment and the provision of loans or loan guarantees for security-related infrastructure improvements.


This article, of necessity, has reviewed only the "first order" effects of the September 11 attacks on certain transportation industries. (The motor carrier industry, for example, was not discussed, although tighter security at the Canadian and Mexican borders has delayed freight shipments and reduced equipment and labor productivity.) Even after September 11, Americans still enjoy unprecedented opportunities to travel and to engage in commerce.

However, to preserve efficiency and competition in the transportation sector, we must guard against those who would justify every new spending proposal, no matter how specious the argument, or any new federal regulation, no matter how much the costs outweigh the benefits, as necessary to stop terrorism. Our economy is under stress. Now is the time to require more stringent review of proposed regulations and new government programs. If not, the economic harm we inflict on ourselves may far exceed that which the attackers have inflicted upon us.

Laurence T. Phillips is a senior policy adviser for the U.S. Department of Transportation. The views expressed in this article are solely those of the author.
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Author:Phillips, Laurence T.
Geographic Code:1USA
Date:Dec 22, 2001
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