A tale of two debacles

In December, a winter storm grounded Southwest Airlines for nearly a week, despite major carriers quickly resuming service. In January, all flights were temporarily suspended due to a Federal Aviation Administration (FAA) system failure. The consequences of these debacles illustrate accountability in markets and politics.

A winter storm in the northern United States hampered holiday air and ground travel. But days after Christmas, Southwest was still canceling close to half its flights, almost ten times as many as any other airline.

So the Southwest outage must have involved additional factors. One appears to be Southwest’s point-to-point routing structure in contrast to the hub-and-spoke systems of other airlines. This apparently left many planes and crews stranded in weather-stricken cities. The failure of an outdated crew tracking system is a second culprit, as it prevented available crews from being used.

The FAA’s Notice to Air Missions (NOTAM) system collapsed on January 11, causing 7,000 flight delays and 1,000 cancellations. NOTAMs send safety messages to flight crews before takeoffs, prompting the FAA to suspend takeoffs until the old computers come back online.

None of the debacles were unexpected, as outdated technology was bound to eventually crash when stressed. Timely investment in new systems could have prevented the debacle. Why didn’t this happen and what consequences have Southwest and the FAA faced?

gary kelly he was CEO of Southwest from 2004 until early 2022 when the current CEO bob jordan took over Mr. Kelley’s background was in accounting and he was reportedly unconvinced of a sufficient return on investment to modernize crew communications. An alternative interpretation here is that the December crash potential was too hypothetical to record in a cost analysis. The new CEO, Mr. Jordan, was talking in November about overhauling outdated systems, but it was too late.

The FAA’s failure combines the government’s long-standing lack of investment in infrastructure with pointless bureaucracy. NOTAMs have been called useless. An aviation group described them as presenting “information in a coded, all-caps format, incredibly unfriendly to humans” and “overloaded with irrelevant information.” NOTAMS included items such as mowing at airports, resulting in reports of more than 100 pages. Reason‘s Christian Britschgi reports how two Air Canada pilots in 2017 missed a notice about a buried runway closure in a report and nearly collided with four other planes.

Now let’s move on to the consequences. Disorders cost companies customers and share value. Stock markets look to the future; Investors evaluate everything about a company, its competitors, and the economy to project future profitability. Once all the current information is digested, changes in the stock price should reflect new information.

Not surprisingly, Southwest’s stock price fell 11 percent between December 23rd and 27the, throwing a loss of $2 billion based on market capitalization. Shares of American, Delta and United have fallen only 2 to 3 percent over these days. A formal event study would be needed to confirm attribution, but markets punish companies for mistakes.

Politics produces criticism. Transportation Secretary Pete Buttigieg it has been torn apart by the NOTAM failure and will likely face a congressional hearing. A poor performance as transportation secretary could degrade Buttigieg’s political prospects. But how many FAA bureaucrats will lose their jobs and pensions over this? Furthermore, history shows that failures in the public sector frequently lead to budget increases to “fix” the problem.

Political “accountability” has produced continued technological obsolescence at the FAA. In the 1990s, the computers that ran America’s air traffic control system still used vacuum tubes, prompting the FAA to search the former Soviet bloc for replacement parts. The FAA today tracks planes with paper flight strips instead of electronic tickets like other developed nations; a partial transition may be completed by 2031. As cabling The magazine noted: “Modernization, a struggle for any federal agency, is virtually the antithesis of the FAA’s operational culture, which is risk-averse, methodical, and bureaucratic.”

Every organization will make mistakes. Economic freedom necessarily implies the freedom for companies to make mistakes. But because private companies, unlike government bureaucracies, face financial penalties for their mistakes, companies must improve or eventually face bankruptcy.

daniel suter is the Charles G. Koch Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are those of the author and do not necessarily reflect the views of Troy University.