The Pin Factory Blog

With all the bankruptcies in the airline industry over the last few years, companies blame high fuel prices, the war in Iraq, the industrialization of China and India, and several other factors for their difficulties. But Southwest Airlines, based in Dallas, Texas, took a different approach that is paying dividends as oil prices rise. In 2000, the company realized fuel prices could rise dramatically and hedged their gas price.

As Moira Herbst wrote,

For 2008, 70% of its fuel needs are hedged at $51 a barrel. That means that while competitors have to contend with spot prices hovering around $120 a barrel, Southwest can buy oil at less than half that... For 2009, the company is covered about 55% at $51 a barrel; for 2010, 30% at $53 per barrel; and for 2011 and 2012, at more than 15% at $64 and $63 per barrel, respectively.

Although continuing this strategy will prove more expensive as fuel prices continue to go up, Southwest has continued to make profits while other airlines have failed. Former CEO of American discount airline JetBlue David Neeleman hoped to follow a similar strategy, but the company rejected his Idea.

As airlines continue to fail and the number of bankruptcies continues to rise, it is not difficult to imagine the Federal Government following the same path it did in the 1980s with Chrysler and recently with Bear Stearns. But Southwest proves that innovative thinking and sound strategy can carry a company through the most difficult times. Government intervention allow less wise companies to unfairly take away Southwest's business, once again rewarding incompetence and penalizing intelligence.
 

Apparently Boris Johnson had just one glass of champagne at his victory celebration, and spent most of the night with advisers planning his first hundred days. It's good that Johnson knows he has to hit the ground running, because being London Mayor from 2008-2012 is not going to be the simplest job in the world.

The new mayor has two major projects to oversee. The first is preparing for the 2012 London Olympics. The budget has already spiralled from £2.4bn to over £9bn, but officials are said to be working to a £12bn target.* Johnson will need to do everything he can to control spending and ensure that Londoners do not end up shouldering more of the burden than was originally agreed (£300m). He is also going to have to make sure that London's dodgy transport system is ready for the influx of visitors.

The second big project is Crossrail, the long-awaited train line linking Heathrow with the City and the Southeast, for which the Mayor has direct responsibility through Transport for London. Keeping Crossrail on time and on budget is going to be a major challenge.

Apart from good management, voters are going to want Johnson to deliver tangible benefits in their everyday lives. More police on the streets and a reduction in violent crime, so people feel safer. Less delays and disruption on the tube and less congestion on the roads, so people can get around more easily. More housing so that London life becomes a little more affordable.

All of this is possible with the right policies (and Johnson has some good ones) but it won't be easy – especially when the new Mayor's every move is going to be scrutinized by a hostile central government who would love to see him slip up. London is going to be seen as a testing ground for Conservative government, so the stakes are undeniably high.

* Is it too late to send it to Paris?
 

So Gordon Ramsay seems to think that Africans are expendable. How kind of him.

Especially when he is calling for regulations and fines against something which the market patrols and punishes already.

Guido wins an award and some are not happy. Good, nice to upset the right group of people, isn't it?

The effects of the crazed drive to ethanol in the US: consuming 31% of the entire US maize crop!

An elegant way of looking at it: the euro is great for the UK just as long as we stay out of it.

Yes, it's true: recycling is based on the slave (ie, unpaid and mandatory) labour of the citizenry.

And finally, perhaps not the best marketing offer ever. Three for two on shoes?

A clash of titans: In corner one, we have Google. The company was founded in 1998 by two Phd students at Stanford University. The initial investment was $1.1 million and the company was launched in a private garage. Eight years later, at its first public offering, it was worth more than $23 billion. In corner two, we have the French Government. France invested £75 million in 23 different technology companies for their QUAERO project, aimed at creating a European Google-Killer.

Who will win the battle? Turns out, this clash of the titans is little more than a scrawny schoolboy trying to compete with seasoned professionals. As Business Weekly recently reported, the project "will swallow £75 million of European taxpayers' cash and vanish."

The French Government will learn the sad lesson once again: government cannot take the place of private industry and entrepreneurship. An introductory book to economics or a quick glance at history would have saved Europeans £75m and the French Government a lot of embarrassment. At least we can thank France for providing further proof that free-market economics is the best way for industry and commerce to function.
 

Healthcare is going to feature prominently in upcoming debates in the exhaustive race for the US Presidency. Despite their war of words, Senator Obama and Senator Clinton differ only in rhetoric in their disastrous plans to provide government-run healthcare. However, between Democrat and Republican the difference between the two candidate's healthcare plans will be stark. Either Democrat would likely create an inefficient and improvident behemoth, while McCain suggests innovative market based solutions, putting individual choice at the centre of healthcare.

In Fortune, Shawn Tully extrapolates the essence of what it is that makes the McCain’s healthcare plan so good. McCain's system will ultimately separate employment and healthcare by taxing the previously exempt corporate benefits. This extra tax will be covered by a federal tax rebate of $2,500 for individuals and $5,000 per family. With employers no longer paying for healthcare, the benefits will be passed on to the employees in higher wages. Individuals would then be free to invest in Health Savings Accounts (HSAs), allowing bespoke insurance plans that suit their stage in life. As Tully remarks: "In essence, McCain wants to create a kind of national insurance market that shoves more decision-making power into the hands of consumers."

Reading McCain's speech inspires confidence in the Arizona Senator. He rightly believes that the "key to real reform is to restore control over our health-care system to the patients themselves." The whole plan is modelled upon opening up competition: Millions of Americans would be making their own health-care choices. Politicians in the UK are also talking of patient choice, freedom and competition. However, such talk is disingenuous given the near unanimous defence of the NHS. Is it too much to ask for a bit of joined up thinking over here too?

I'm used to the idea that we'll get economic lunacy from the World Wildlife Fund and the like but when the head of that plus the DG of the CBI and other luminaries get together to argue in favour of the hypothecation of green house taxes I start to despair. The CBI is at least supposed to have economists around the place somewhere. The background is that they've noted that the new cap and trade system for CO2 emissions will raise money, therefore:

But this is still a substantial, additional transfer of funds from business and consumers to government (perhaps £300m-£400m per year from 2008-2012, and several times that in subsequent years). This represents a tremendous opportunity for the government to demonstrate its real commitment by announcing an equivalent-scale investment in securing the transition to a low-carbon economy and in adaptation.

While we accept there may be some technical difficulties in ringfencing the revenue, it should be perfectly possible to announce a similar investment in low-carbon technologies and adaptation equivalent to the revenue raised by auctioning.

There's only four things wrong with this, although they do seem to be four rather important things.

1) The revenues from cap and trade auctions are not supposed to be an increase in taxation. Rather, they are a transfer of such: overall they are supposed to be revenue neutral. One idea might be to do as is done with the landfall tax: the revenues are compensated by a reduction in employers' national insurance charges. But other taxation should be cut in lock step with the new revenue raised: thus there is no pot of money to spend in such a manner.

2) Hypothecation of taxes is a bad idea in principle. There is no link between how much can be raised from the auction of said permits and the amount that we want to spend on low-carbon technologies, just as there is no link between the amount that smokers cost the NHS in direct health care costs and what can be and is raised by the taxation of tobacco. To ring fence such revenues is nonsense: tax where you can and spend where you must rather. [Click 'Read More' to continue]

So who is winning? Schumpeter or Galbraith? An introduction to an excecllent essay on the subject.

What an idea: we see the baying for a windfall tax on the oil companies: but farmers too are making massive profits so where is the call for the tax upon them?

What is old is new again: At least one of Adam Smith's truths was known in the Babylonian Talmud.

Netsmith thinks it was Somerset Maugham who said that training to be a doctor was an excellent preparation for being a writer. A certain Dr. Paula Gosling demonstrates that well here.

News just in! Changes in prices do lead to changes in behaviour!

This banning of booze on the tube: not very liberal, is it?

And finally, news from the American election cycle.

A leader in last week's Economist summed up the case against farm subsidies perfectly. It started by noting the absurdity of farmers using world foot shortages – and consequent high prices – as an excuse.

For years the farm lobby have justified their subsidies on the grounds that low food prices meant farmers couldn't make a living and that the countryside would be left to ruin without government money (ignoring that fact that their "subsidized overproduction" was partly responsible for low prices).

But now prices are high, the same farm lobbies say they need subsidies to ensure 'food security'. Which is nonsense. The point of rising prices is to encourage higher production, so that supply catches up with demand. Indeed, as The Economist notes, high food prices present a perfect opportunity for subsidies to be removed – any hardship for rich-world farmers will be far less keenly felt. But it's not going to happen. Franco-German pressure means the EU's common agricultural policy (CAP) is here to stay:

This is bad news for European consumers and taxpayers, who were promised a proper debate on CAP reform later this year. They will have to continue paying (€55 billion last year) for this wasteful and wicked system. It is terrible for poor-country farmers, who have long suffered from being shut out of rich-world markets, and having rich-world products dumped on them. Now they can hear the gates of fortress Europe clanging shut just when world prices should be triggering an export boom. And it is dreadful news for the hungry poor, because restricting trade in food exacerbates shortages.

Frankly, I don't see any real chance of reforming the CAP – EU politics is too dominated by special interests for that. This doesn’t mean we should stop trying, but the UK needs to be ready to take matters into its own hands. If we have to, we should unilaterally abolish agricultural subsidies and tariffs, and withhold part of our EU budget contribution – encouraging other trade-friendly countries to do the same.

Certainly, Old Europe would make a fuss, but what's the worst that could happen?