The Snow, the Airlines, and the Budget

As everyone who tried to travel on or to the east coast this weekend knows, the snow that hit the Mid-Atlantic and Northeast states Friday night and all day Saturday wreaked havoc with the airlines schedules as airports closed and flights were cancelled.

So it won’t be surprising if, as markets reopen tomorrow, one or more analysts and perhaps even the airlines themselves talk about how much they lost because of the cancelled flights. There may even be some call for federal support for the airlines given the impact of the storm.

But this is not a post about the possibility of some type of government financial assistance for airlines. Instead, it’s a post about how, if this discussions occurs, the airlines and analysts may well be doing something that the private sector likes to say only happens in Washington on the budget: the use, or misuse, of the baseline.

Once you take away all of the political melodrama surrounding them, a baseline simply is a point of comparison. You may think that’s it’s cold today and, compared to what you expected or yesterday’s temperature, it may well be. But it may not be cold compared to the average temperature recorded on this day since records started to be kept or compared to where you were yesterday.

Or if you have gotten a $10 raise every year for the past decade, is a $5 raise this year an increase or decrease.

In other words, the question always has to be answered in context. It’s never simply “cold” or an “increase.” It’s always colder or warmer or more or less compared to something.

The same baseline question constantly arises in federal budget debates. Is $10 more in spending this year for a program an increase or a decrease. It’s clearly an increase compared to what was spent the year before, but it may well be a decrease compared to what will be spent under current law or compared to last year plus inflation The same is true with revenues. Collecting more this year than last is not necessarily an increase in taxes even though revenues are higher. Both questions depend on the baseline being used.

The perennial budget debate about the baseline used to be over whether spending should be compared to the previous year. Office of Management and Budget Director Dick Darman used to insist that was the case and, using that baseline, often said that only in Washington could a proposal that would allow spending for Medicare to be higher than it was last year be classified as a cut. But using a different baseline rather than the prior year, others pointed out that Darman’s proposal would reduce spending compared to what would be spent under existing law.

Interestingly, both answers were correct. It just depended on which baseline was being used.

Back to the airlines. Did they lose money over the weekend? Using one baseline the answer absolutely is yes because, compared to the revenue earned had every flight flown, fewer dollars were collected.

But no airline assumes that 100 percent of its flights will fly all the time because it knows better. Because of weather, mechanical, and other delays, each airline has to assume that some percentage of its flights every year will be cancelled. In addition, some percentage of the passengers that didn’t fly the past two days will be re-booked on other flights that might otherwise have had more empty seats.

Just like the budget, therefore, if the issue of federally provided financial assistance for the airlines is raised over the next few days, someone needs to ask the private sector equivalent of what budgeteers constantly have to ask: what baseline is being used to calculate the supposed losses.

• Become A Funded Futures Trader