State monopolies are kept alive by power of unions to control policy

YESTERDAY’S announcement by the Government of its rejection of the Ryanair offer to buy and take control of Aer Lingus has been based largely on the belief that the creation of a monopoly would be anti- competitive and bad for consumers.

Few would disagree. It seems pretty obvious, doesn’t it, that fares at both airlines would rise if both were owned and managed by the ruthless profit-oriented Ryanair, under the management of Michael O’Leary? Surely all that keeps most prices down at reasonable levels at both airlines at present is the competition between the two parties? In addition, as an island nation it would be seemingly crazy to let one airline have almost total control over what routes are served, with just a few of the best routes served by other airlines.

However, in another transport sector, Dublin Bus isn’t allowed to face competition on existing routes because apparently it would result in reduced services and higher prices to customers. Last year, passenger numbers at the company fell and, despite hefty government subsidies, losses are being incurred. The response has been to increase prices, bucking the trend of the private economy. The idea is that this will help cover rising costs and otherwise falling revenues. Costs are to be cut too, with 120 buses withdrawn and about 250 redundancies sought. The company says routes will not be lost, but will be provided with different services. Presumably this means that Dublin Bus will stay on some of the new routes created by private competitors — which was all they were given licences for — and which Dublin Bus then flooded with buses to knock out the competition.

Bus Éireann does face competition from private operators on various routes. It too has entered new routes only because it has seen how well new competitors had done on them. Bus Éireann too is struggling financially. It lost €7 million last year and is projected to lose another €28m if costs are not cut. It intends to remove 150 buses from service — which will affect both routes and frequency — and remove 344 people from employment. Bus Éireann claims its subsidy on the basis of providing a public service that would not otherwise exist, but you can bet that it will cut its unprofitable routes and concentrate on those that a private sector competitor would chose.

So why is it that a potential private sector monopoly in the airline industry is treated as potentially disastrous but a public sector monopoly in the bus industry is considered essential? None of these are black and white issues of course, with easy solutions to the problems posed. The idea of an Aer Lingus/Ryanair link up may appear dreadful, especially as we could not trust any regulator to monitor price gouging effectively or, where it was found, to do anything about it. However, Ryanair has been clever enough to see that the way to attract customers has been to keep prices low (for most seats, with the exception of those booked late). Michael O’Leary would never react to falling passenger numbers by increasing fares. Aer Lingus may have plenty of cash and other assets at present but it may be a dangerous experiment to assume things will look nearly as good for it by the end of a lengthy recession. One major airline operating out of a small island on the periphery may be the best we can hope for realistically. That’s why the European Commission may not block a Ryanair takeover of Aer Lingus, if the shareholders of the latter agreed to it against the wishes of directors and management.

Meanwhile, it is easy to see why public sector bus operators are fearful that private competitors would select only the profitable routes to serve — and just as easy to see why the private operators would do this in the absence of subsidies to operate unprofitable routes. The answer may be to offer subsidies to private operators to run unprofitable services alongside their profitable ones but it is hard to see the public sector unions agreeing to that.

And policymakers also have to consider that competition does not always deliver in practice what it offers in theory. For example, we were promised better banking services and charges over the past decade because of competition provided by new banks entering the Irish market. The duopoly of AIB and Bank of Ireland was threatened first by the suggestion that Ulster Bank could lead a “third force” of significant size. Then the hope was that domestic mergers of smaller financial institutions and the arrival of overseas giants would stimulate competition in providing banking products and loans.

It is now clear that the rivalry between banks to get business contributed to their insane lending policies and inflated the bubble that has bust now with such appalling consequences. One-upmanship was the name of the game at some banks, as they sought desperately to make the loans for major high-profile property speculations to the discomfort of rivals. The desire to be seen to be “growing the loan book” faster than others led to the reckless lending to home purchasers and apartment investors who were given loans six, seven and eight times their annual incomes, pushing up the price of new property to insane levels. Banks outdid each other in the name of competition to throw bigger and riskier loans at a bigger number of customers. Cheques even came in the post from banks without you asking for them. The financial regulators sat on their hands, despite all the evidence being right in front of them.

The energy regulator has lots of questions to answer about the prices it allows the ESB and Bord Gáis to charge for energy, not just to hard-pressed householders but to companies who find their competitiveness further eroded by the second-highest energy charges in Europe. Admittedly, there were none of the expected price increases at the start of this month but surely the 17.5% increase allowed in August should have been overturned.

UNITE trade unionist Brendan Ogle — who this week defended the payment of a 3.5% pay increase to ESB workers, possibly the best paid in the country on an average of €78,000 — has an explanation for prices that he admits are excessively high. He blames competition. The ESB has lost its monopoly as the generator of all electricity in this country, with 60% now coming from private sector operators. Ogle claims that the regulator allows high prices to end users to guarantee these new operators a decent return on their very big capital investments in generating plant. If he’s right about that then competition is actually increasing rather than decreasing charges.

It’s all very confusing but one thing is consistent: the power of the trade unions to dictate government competition policy, even if there are times when they cannot stop members from losing their jobs. It’s why the state monopoly has remained in all domestic ground travel and is unlikely to be broken.

The unions agreed to the sale of Aer Lingus to the private sector only after they were sold shares in the airline on excellent terms. But it is the unions more than anyone else who are determined to veto the purchase of the company by Aer Lingus. This is ironic, as Aer Lingus management has forced through almost as many cuts as Ryanair would have dared had it already got control.

Ryanair appears to have walked away from the fray rather than testing the Government with a larger offer. I suspect it realised that such is the union antipathy to O’Leary that the rejection of the Ryanair bid had become a precondition of the trade union movement to the mere discussion of job losses and pay cuts in the public sector. Some sectors more than others hold a monopoly on government opinion.

The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.