Economist 6/10/16

  1. Even without the drag of state ownership, other South American airlines have recently either lost money or made only meagre profits.The region’s airlines don’t lose money because flights are cheap. Air fares are eye-wateringly pricey—an internal flight in Brazil can cost as much as one to Europe. Travellers have not benefited from the ascent of low-cost carriers (LCCs) because budget airlines are thin on the ground.This is partly attributable to a lack of infrastructure. There are few secondary airports of the sort frequented by LCCs in Europe or specialist low-cost terminals at bigger airports that are common in Asia.In some countries, budget carriers have been kept at bay by state-run incumbents.In Bolivia and Venezuela state-owned airlines are virtually the only means of domestic air travel.The standard of service on state airlines is often woeful. Aerolíneas cancels three times more flights than the industry average, and loses roughly twice as many bags.
  2. Elsewhere publicly listed airlines provide much better service but are just as hard to dislodge. LAN Chile set up subsidiaries in Peru, Argentina, Ecuador and Colombia before merging with TAM, Brazil’s biggest airline, in 2012. LATAM is now the largest airline across swathes of the continent. In smaller markets such as Peru, Chile, and Ecuador LATAM and Avianca, a Colombian carrier, already have big networks that leave little space for LCCs to operate domestically. Barriers to entry are high: dealing with a slew of differing regulations makes setting up new cross-border routes expensive.LATAM lost $219m in 2015; Avianca lost $140m. As passenger numbers grew during the commodities boom, most airlines ordered lots of expensive new planes. But just as they arrive on the tarmac, demand for air travel is stumbling.Some of the continent’s politicians have woken up to the industry’s structural problems.Brazil is negotiating with the EU for an “open-skies” deal that would boost competition by allowing airlines from those countries to serve any airport in Brazil.
  3. WHEN the Federal Reserve’s Open Market Committee (FOMC) decides whether to raise interest rates at the meeting starting on June 14th, representatives of the Fed’s regional branches will cast half of the ten votes.That America’s central bank is more complex is the result of a series of political compromises struck in 1913, when the Fed was formed, and then again in 1935, when it was reorganised. At the time, politicians had to win over bankers who were sceptical about centralising monetary authority in Washington, DC.Commercial banks would themselves capitalise each regional Fed and appoint two-thirds of its directors. In turn, the directors would elect a president who, on a rotating basis, would assume one of five voting seats on the FOMC, which sets interest rates for the whole country. The system was designed so that the governors in Washington have a majority on the FOMC. But politicians have been getting slower at filling governor vacancies.
  4. Membership in the Fed was voluntary until 1980. To encourage banks to join—which meant investing capital in the Fed—banks were compensated with a risk-free return of 6%. The payment endured when Fed membership became compulsory; in 2015 the Fed shelled out $1.7 billion. At the end of the year, Congress voted to cut the dividend for the 70 largest banks, which have assets exceeding $10 billion. These big banks, who own the majority of the Fed’s capital, now get only the ten-year Treasury yield (currently about 1.7%). But roughly 1,900 smaller banks still receive the full 6%. Banks holding shares issued before 1942 receive their dividends tax-free.In 2010 the Dodd-Frank law stripped the three bankers on each board of the right to vote for a regional Fed’s president. But banks also appoint three outside directors who can still vote (the remaining three directors are appointed in Washington, DC). And bankers can still take part in a vote to dismiss a regional Fed president. This is worrying from a monetary policy as well as regulatory standpoint, because banks are thought to profit from higher interest rates.
  5. A RAMPAGE by gun-toting Islamists in a provincial city has exacerbated an already tense situation in generally peaceful Kazakhstan. Since the Soviet Union broke up a quarter of a century ago, Kazakhstan has been ruled by Nursultan Nazarbayev, now 75, who was re-elected president last year with 98% of voters supposedly giving him their approval. Though independent monitors said the ballot was rigged, most Kazakhstanis have accepted his iron-fisted rule in exchange for rising living standards—thanks mainly to high oil prices. But the oil-price slump has burst the economic bubble, and the social contract with Mr Nazarbayev is eroding.A series of protests that began in April were ostensibly against land-reform proposals that would, among other things, have extended the length of leases available to foreigners. This conjures up the unpopular prospect of large-scale acquisitions by Chinese incomers. Though Mr Nazarbayev issued a moratorium and his officials heralded a public debate, the protests have continued sporadically. On May 21st thousands of people in cities across Kazakhstan took to the streets.The slogan “Shal ket!” (“Old man out!”) has proliferated on social media.

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