Thursday, July 10, 2014
Bad business is good business
I'm reading Michael Crichton's "Airframe" (1996) and it contains a passage that has resonances far beyond the airline industry. Here, an accident investigator is telling a journalist about an explosion on an aircraft a few hours before: the operator had bought her company's excellent plane, but installed corroded second-hand engines, despite warnings.
"Super-cheap carriers are a stock scam."
"A stock scam?"
"Sure," Casey said. "You buy some aircraft so old and poorly maintained no reputable carrier will use them for spares. Then you subcontract maintenance to limit your liability. Then you offer cheap fares, and use the cash to buy new routes. It's a pyramid scheme but on paper it looks great. Volume's up, revenue's up, and Wall Street loves you. You're saving so much on maintenance that your earnings skyrocket. Your stock price doubles and doubles again. By the time the bodies start piling up, as you know they will, you've made your fortune off the stock, and can afford the best counsel. That's the genius of deregulation, Jack. When the bill comes, nobody pays.."
"Except the passengers."
Plea bargaining, court and regulator fines that come nowhere near the improper profits made, a couple in jail but hundreds and thousands of others untouched... it's not just banks, it's the way of the world.
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