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A Tale of Regulation

August 20, 2001

The most visible recent example of an industry using government to destroy its competitors is the Microsoft suit brought forward by the Department of Justice. This high-profile case shows how jealous competitors will revert to government force to kill consumers' choices in an attempt to gain market share.

While government abuse and destruction does not usually garner enormous media attention, government's fervor to regulate is alive and well. A typical example is happening in the relatively low-profile case of shared business airplanes.

Business jets are much more than a tool for travel; they are symbols of speed and status that can make corporations look fast and powerful. While many of the richest companies purchase planes for their travel, corporate aircraft are becoming increasingly expensive as they fly higher and faster. This is necessary because a business jet needs to be much slicker than an airliner in order to carry the requisite cachet.

As a result, many cost- and status-conscious business execs have to decide between paying for an expensive jet that mostly will sit inside some hangar, not being seen by anyone, and hiring on-demand charter flights in slower, less-svelte planes. Since neither option is terribly appealing, this has left a perfect opening for an innovative new option—fractional business jet ownership.

A fractional ownership business is set up like a co-op. A member will buy a share of a group of planes and pay a periodic fee to a management group, which usually allows him to use a plane for a specified amount of time. Additional use can be obtained by paying additional fees. Imagine keeping a limousine company on retainer instead of buying the entire car and hiring a full-time driver. With expensive business jet downtime minimized, the industry has become a huge success, drawing peripheral celebrity Warren Buffet and corporate-heavy United Airlines as major players.

Enter the Federal Aviation Administration and its lexicon for us when we are above the ground, the Federal Aviation Regulations. It seems there are special rules for airlines, charter services, business aircraft, flying clubs, and general aviation, but there aren't any special rules for these fractional ownership groups. To the FAA the problem was obvious: How would they tell the new businesses how to run themselves? Which section of their book should they look in to do that?

So new rules have been drawn up and, as it turns out, these proposed rules are intentionally designed to make the industry less competitive. The FAA was pushed into action by the on-demand charter companies, who officially helped create the new rules.

Does the FAA have any tangible safety reasons for creating new regulations? Would its new rules simply codify existing practices? No and No. It turns out the fifteen-year safety record of the fractional ownership industry is exemplary. Perhaps it would be surprising to some, but people selling rides on their $40 million jets don't want them to crash, and, therefore, they tend to keep them in top shape. As for the cost of the proposed rules, an FAA spokeswoman says, "It's not an inexpensive rule, and a higher level of regulation is required."

Currently, charter companies are forbidden from landing at some of the smaller airports, while the fractional planes can go anywhere they feel safe. New rules would ban fractional planes from landing on shorter runways. Fractional planes would also face new weather restrictions on when they may take off, where currently they determine their own margins of safety.

All fractional planes would be required to carry certain expensive instruments, including black boxes, weather detection equipment, and instruments designed to keep the pilots from running into things—like the ground, for instance. Why would you want a black box in your plane? For the same reason you'd want one in your car, of course.

When a fractional group introduces a new type of plane to its fleet, it would be required to fly and test it for twenty-five hours before incorporating it into normal operations. Here the government has determined that the industry's near-perfect safety record when making these decisions on its own is not sufficient to ensure public safety.

Pilots of fractional planes would be given work restrictions that would keep them better rested than commercial airline pilots. And of course, the usual antidrug cacophony pervades all mention of employees in the proposed regulations.

A spokesman for the charter operators actually said of the fractional owners, "They were getting a free ride, if you will." He was speaking about an industry that receives no government money, gets no special favors, and is merely running its business by the rules of aircraft owners instead of charter operators. But it's hard to blame the charter companies for not wanting to be held by the government to a competitive disadvantage. Given a choice between lobbying to free themselves and shackling their competitors, they chose the battle they had a much better chance of winning.

In reality, the charter operators made out quite well considering their previous plight. By pushing the convening of a rulemaking committee for their competitors, and getting themselves onto that committee, they were able to influence the easing of many of their own rules as well as the imposition of many new rules on the competition.

It's a fairly typical tale of regulation. An innovator eventually becomes so successful as to attract the jealousy of competitors and the meddling hand of government. The competitors organize themselves and lobby the government to stifle others' innovation through arguments of fairness and, perhaps, safety.

This is where the regulatory process diverts a little from the norm. Throughout this entire imbroglio, there was never any talk of safety. As mentioned earlier, the safety of fractionally owned planes was never in question, and it certainly leaves a conspicuous dearth of drama. After all, in the recent confirmation hearings for Sheila Gall to head up the government's main consumer safety group, who among us didn't secretly love hearing senators expound upon flaming toddlers and yell about deaths that could have been prevented with a proper rule on bathtub floaties?

In most regulation stories, there's a bevy of do-gooders roaring about public safety; but as we see here, it isn't a necessary ingredient. The FAA merely justifies the proposed regulations by stating that they are designed to continue the safe practices of the industry, as though the planes weren't crashing in spite of the absence of these rules.

In deciding to impose new regulations on a successful industry, the FAA appears to have considered the Microsoft case and asked itself how the Department of Justice might handle the situation.  The FAA is creating new restrictions, in the name of safety, for an industry with a top-notch safety record for its entire fifteen-year existence. The lesson for industry is clear: Competitors can petition the government to rein in the free market and thereby undermine their rivals.

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Erik Bauman is a pilot and a Fellow in California Tax Studies for the Pacific Research Institute.  You can reach him by EMAIL.


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