Links 20130621: Eurotunnel, UK gov't spending, Switzerland vs. US on tax evasion

1. Does Eurotunnel charge too much? The European Commission thinks so.

The EC said both passengers and freight services are paying over the odds for using the track through the tunnel, which is operated by Eurotunnel. 

Eurotunnel is a private company owned by the investors who paid for and now run the Channel Tunnel. 

Eurotunnel said its charges are "transparent and not excessive." 

The EC has formally called on the British and French governments to look into the pricing structure and to comply with European Union rules against excessive track access charges.
The European Commission said the high prices Eurotunnel charges the train companies get passed onto passengers. 

The EC also said that freight companies are put off using the Channel Tunnel because of the "excessive" charges, preferring to send their goods by road, which causes traffic congestion and pollution. 

The Commission claims 43% of the Channel Tunnel's capacity is currently unused. 

... 

The European Commission also said that the regulator which oversees the tunnel, the Intergovernmental Commission (IGC) is weak and far from independent. 

The Commission said the IGC "does not have the power to adopt decisions on its own initiative without a complaint". 

The EC added that the IGC is not an independent body, because it is made up of representatives appointed by the UK and French governments. 

In a statement, the European Commission said: "Lack of independence of a rail regulator can lead to failure by the regulator to address complaints by operators in an independent manner or to adopt decisions to force compliance with EU rules and thus can lead to distortions of competition". 

Reacting to the assertions of the Commission, a UK Department for Transport spokesman said that "it is not accepted that the UK has failed to implement the relevant EU rules regarding the Channel Tunnel or that the IGC is not independent".

My question is: charging too much relative to what? The piece does not get into the discussion of whether the company that operates the tunnel is abusing its monopoly power, or exactly what the European Commission means when they say that it's "charging too much." I would love to see a formal report on the subject, including an analysis of the externalities of Eurotunnel usage on continental railway traffic.

2. UK government spending: shrinking.

By 2018 fixed departmental spending—which excludes variable payments such as social security—will have fallen by some £85 billion, or 21%, from its 2009 peak (see chart). Some 400,000 fewer people are now on the state’s payroll than were on it four years ago. By 2018 1m fewer will be. According to the Institute for Fiscal Studies, Britain will have undergone the fifth-largest cuts programme of 29 advanced economies.

Source: The Economist.

3. Switzerland and the U.S. continue to negotiate an arrangement that would enable the U.S. to obtain information on tax evaders who stash assets in Swiss banks.

FATCA (Foreign Account Tax Compliance Act) was passed in the Senate yesterday. The House will discuss the bill later this year.

Under the Foreign Account Tax Compliance Act (FATCA), the US authorities will, in the future, get banking data of all American citizens (and other people subject to US tax law) who hold assets in Swiss banks.

The law is to come into force at the beginning of 2014.

Under FATCA, the Swiss government opted for a system of cooperation with the US which stops short of an automatic exchange of information, but allows Washington to request information on non-compliant individuals.

Local Swiss banks, pension funds and social security schemes are exempt.

Financial institutions refusing to provide the data risk being excluded from the US financial market.

However, the Swiss parliament has rejected the deal, and thrown the ball back to the government's court to find an alternative deal, presumably one that would infringe less on Swiss sovereignty.

It appears unlikely that the US would accept more years of negotiations to find another solution, while the Swiss government is expected to face legal challenges from bank employees and the Swiss data protection commissioner if it unilaterally allows banks to ignore secrecy laws and hand over information to the US.

In 2010, the Federal Administrative Court ruled the handover of UBS client data to the US the previous year as illegal. A later and larger data transfer was only allowed after winning parliamentary approval.
US bullying?
But this time around, parliament appears determined not to cave in to perceived US bullying – a stance that has some sympathy from Beckett Cantley.

“The use of US power to undermine the sovereignty and laws of another country - especially an ally - is a dangerous precedent,” he told swissinfo.ch. “It seems to me that the US could have located undeclared offshore bank accounts through any number of less offensive means.”

“The US has extensive capabilities when it comes to tracking the movement of dollars through the world, especially those that move in and out of the US banking system.”

But for former Swiss ambassador Blickenstorfer, there is no room for sentiment in the cut and thrust world of international diplomacy. Larger countries have always thrown their weight around with less powerful counterparts, he said.

“My experience of negotiating with Americans is that they are tough but fair,” he told swissinfo.ch. “Switzerland normally has no reason to have a complex about its small size - it is not just about square metres or population figures.”

“The smaller country usually emphasises that it is also of interest to its larger partner, such as job creation or investments in that country. But in this particular case there is not much we can argue to balance the negotiations.”
Teig Lawrence is convinced that US undeclared money could still be stowed away in offshore bank accounts - including Switzerland - despite some 40,000 people owning up to the US tax authorities during amnesties.

The majority of people who have employed his services to come clean have been those with smaller sized assets rather than multiple million dollar stashes.

"Those people with greater resources generally feel that they have a greater ability to weather the storm," Lawrence told swissinfo.ch. "They are more likely to adopt a wait and see approach."

And here's an article from the American side. Switzerland and the U.S. have been talking about this for years, but it seem's like this year's case involving Swiss bank Wegelin has put some momentum on the issue.

How to eliminate flight delays, now

The US Federal Aviation Administration (FAA) is bent on fixing flight delays. To that end, the agency proposes to cap traffic at JFK. The feds say that the New York airport, which has one of the worst records in the country, can’t handle more than 80 operations –take-offs and landings— per hour, 20 percent less than it does now. The FAA has restricted traffic at nearby La Guardia for quite some time now.

Mandatory caps can get the job done, but we would be better served by a cap-and-trade scheme: the FAA should force airlines to buy and sell airport slots in the marketplace.

A reduction of flights would raise air fares; on the plus side, it would ensure that demand didn’t outstrip available capacity. Trade would guarantee that that capacity is used by the airlines that value it most. Flying small, regional jets into and out of busy airports would no longer be profitable; those flights would be directed to secondary fields such as Stewart, about 60 miles north of New York City, instead of JFK.

Down to the nitty-gritty

As I explained in a previous post, there exist two types of over-scheduling: congestion and clustering. Congestion happens when too many airlines, acting independently, try to use installations at the same time. On the other hand, companies that use the hub-and-spoke model –most carriers- cluster their flights on purpose. To fly a customer from A to B, they make her go from A to their hub, and then from the hub to B. In order to offer the maximum number of connections carriers schedule lots of operations at a handful of places (the hubs); to minimize layovers, any given plane is scheduled to depart from the hub within an hour of its previous arrival.

Imposing caps would clearly get rid of both types of over-scheduling. The effect of trading, however, would depend on two things: (a) the initial allocation of slots, and (b) market concentration. Suppose that, initially, the FAA grandfathers the current allocation, that is, slots are given out in proportion to current usage. All six big carriers* are heavily invested in at least one or two airports. (American Airlines, for instance, operates 92 percent of the flights arriving at or leaving from Dallas; Continental drives 83 percent of the traffic at Newark.) A slot in those hubs is worth much more to incumbents than to entrants. Few of those slots would therefore be sold, and trading would have little direct impact.

For the moment, the FAA is focused on airports in the North East. With a selective application, however, the cap-and-trade scheme would turn out a double-edged sword. On one hand, airlines could move operations from restricted to unrestricted airports; this would happen at fields that can function as substitutes of each other, such as Newark and JFK. On the other hand, the beneficial effect of unclogging one airport would ripple through the entire network: one fewer take-off in one place means one fewer landing somewhere else, less clustering at a few airports implies that landings are more spread out over the day at the rest. This would happen at airports that can complement, rather than substitute, each other.

So far the FAA has championed efforts to promote efficiency only at the La Guardia, JFK, O’Hare and Ronald Reagan airports. The agency requires companies to use their slots at least 80 percent of the time, or else surrender them. Unused slots are not sold to the highest bidder, unfortunately, but reassigned by lottery.

Got any other ideas?

The industry hates both caps and slot trading. They claim that variable prices won’t be effective. Bill DeCota, aviation director at the Port Authority of New York and New Jersey, told the Wall Street Journal “There is no price that you could put in effect that would impact demand.” I guess the fundamental laws of economics don’t apply to air travel.

Airlines clamor for an upgrade of navigation instruments instead. Satellite technology will let planes keep shorter distances from each other during take-off and landing, increasing the traffic volume that airports can handle. The diligent Federal Aviation Administration has already proposed a system, “NextGen.” The toy, alas, won’t be on the shelves for Christmas. Not until 2025.

So-called “demand management” would make air travel less appealing to consumers: tickets would be more expensive, layovers more frequent and longer. But consider the alternative: as airlines cram their schedules with more flights to keep up with rising demand, delays will become longer, cancellations more frequent. At some point travelers will not be able to plan their trips at all: planes will take-off, literally, whenever they can. That may suit college students going home for the summer just fine, but I can’t imagine whom else.

A cap-and-trade system should not be a substitute for increasing capacity. In fact, to resort to cutting out flights amounts to an admission of failure. The industry should (and will) invest in new airports, expand existing ones, and adopt technologies that increase the number of slots per airport. Unfortunately, for the next 20 years, efficient rationing is the best we can do.

*American Airlines, United Airways, Continental, Delta, Northwest Airlines and US Airways

Technorati tags: economics, flight delays, air travel, congestion, cap-and-trade

Hubs, spokes and flight delays

Traditional airlines always blame others for their delays. They claim that private jets are taking more and more air space and that antiquated traffic-control systems cannot keep up. In one sentence: the system is clogged. The truth is that big carriers themselves are creating the problem by slotting too many flights at certain times of the day and at certain airports, on purpose. Drawing on a paper by Christopher Mayer and Todd Sinai and a Slate column by Austan Goolsbee, here is the real story.

Transportation congestion happens when too many agents, acting independently, use infrastructure at the same time. At a deeper level, what causes the clot is each individual’s failure to take into account that she is reducing the space available to everyone else.

If the trouble with air travel were congestion, airports dominated by a single airline would never be clogged. A monopolistic company would recognize that it is only possible to operate a certain number of flights per hour, depending on the size of the airport. In consequence, it would spread out flights over the day, and we would not experience delays (other than those caused by weather or technical breakdowns).

But the facts do not support this hypothesis. In fact, the data show that there is no relationship between punctuality and how concentrated airport operations are (see chart). As an example: Logan, in Boston, where the top two carriers represent only 32 percent of all flights, is about as tardy as Dallas-Fort Worth, where the dominant airline’s share is 92 percent. For the 40 largest American airports presented in the graph, the correlation coefficient is 0.09 (in a scale from 0 to 1).

Click on the chart to enlarge.


The real culprit of a large number of delays is the hub-and-spoke model of flight operations, which is used by the six largest American carriers (American Airlines, United, Delta, Continental, Northwestern and US Airways). In order to fly a customer from A to B, they make her go from A to their hub, and then from the hub to B. One or two hubs concentrate most of their take-offs and landings. Moreover, because they want to make layovers as short as possible, they schedule lots of landings and take-offs during a narrow time window. Just like in the case of congestion, there are more flights scheduled than the airport can handle. The difference is that airlines cluster all those flights on purpose.

That this is the root of the problem is exemplified by SouthWest Airlines. In the chart, the light blue markers correspond to airports where that carrier operates more than 50 percent of total take-offs and landings. The red dots correspond to the hubs of the “Big Six.” At those, flights were on time 65.6 percent of the time on average, as opposed to 76.7 percent at airports dominated by SouthWest. The difference stems from the fact that SouthWest runs a “net” of point-to-point routes, instead of a “wheel” of hub-to-spoke flights. Because most Southwest passengers do not connect to other flights with the same company, the carrier can spread out operations over the day.

To be fair to public opinion, congestion is part of the problem too. All airports, not only hubs, experience delays and cancellations. New companies have sprung up, and flights by private jets are on the rise. But a large percentage of all routes depart or arrive at hubs. Moreover, gluts created in the hubs ripple through the entire system.


There are two textbook solutions to a congestion problem. The first one is to give control of each airport to a single company. That would be far too interventionist, and consumers would be hurt in other ways.

The other solution is to fully liberalize the market for take-off and landing rights. If prices fluctuated freely, they would reflect the higher demand for airport space at popular take-off and landing times. Carriers would reallocate their operations and the distribution of flights over the day would be efficient.

But many airports are effectively monopolized by one or two airlines. There is no congestion externality there. Liberalizing the market for landing rights in those airports would have two possible effects, none of which is desirable. First, companies could stick to their model and pass on the increase in costs to customers. Alternatively, companies would spread out their flights over the day and across airports, throwing out the baby with the bath water.

But in a world of point-to-point air trips would take longer hours, longer layovers and more connections. Airports would love it. But I am not sure that travelers are willing to give up the convenience of the mainstream system.

The likely truth is that delays are a built-in consequence of hub-and-spoke operations, and they will not go away as long as companies stick to the model. If you have a flexible schedule, the best options are: (a)stay away from traditional carriers, or (b)make sure not to schedule flights during a peak connection time in a hub. Otherwise, check out the historical performance of your flight on flightstats.com, and adjust your expectations.

Do you avoid hub carriers? Would you choose a flight with a long layover and no delays over one with a short layover and possible tardiness or cancellation? What is the longest delay you would be willing to accept? Does it depend on whether you're traveling for business or pleasure? Please send your comments.

Technorati tags:
economics, airlines, air travel, congestion, hub-and-spoke