Regulating Flying Hours

Recently, I watched the Frontline story called “Flying Cheap”. The PBS documentary details the tragic case of the Colgan Air Flight 3407 crash on February 12, 2009. Everyone on board was killed. The main point the documentary was trying to make was how regional airliners aren’t as safe as commercial airliners. The documentary also describes the atmosphere at Colgan Air when it came to safety. Regional airliners have contracts with major airliners and some like Colgan Air are paid for every flight that they complete. This arrangement can lead to some perverse incentives for pilots. I am not a pilot but I would assume flight safety would be the number one priority when it comes to flying. Former Colgan Air pilots were interviewed and described how Colgan was interested in completing flights with very little concern for what condition the pilots were in. One pilot at Colgan Air reported an incident of another pilot trying to fudge the numbers when it came to reporting how many passengers were on board (even though reporting an overweighed plane could increase the chances of disaster) In the crash of Flight 3407 the first officer Rebecca Shaw had commuted a long distance, and was sick the day before the crash. In addition to this it seemed she had little sleep and yawned during the flight. The documentary points how regional pilots have less flying experience than commercial pilots. At Colgan Air some pilots got promotions from First Officer to Captain within 9 months.

Proposed legislation wants to increase the number of hours co-pilots must have from 250 hours to 800 hours. The family members of Flight 3407 wanted co-pilots to have a minimum of 1,500 hours. The proposed legislation would not have stopped this fatal accident considering both the pilot and co-pilot each had over 2,200 hours of flying experience. This legislation will of course of unintended consequences. The legislation did not mention how many hours of flying time captains would be required to have. What if the co-pilots have their required hours but the captain isn’t experienced? Increasing the number of hours is a burdensome cost for people that want to become pilots. From what I understand pilots in training have to pay per hour for flight instruction. This legislation will triple the cost for pilots in training.

Although tragic the cause of Colgan Flight 3407 was the Colgan’s corporate culture and not the number of hours the captain or first officer had. I would imagine less people would be willing to fly Colgan Air after people learn of the company culture. No piece of regulation could ever do this because the market itself is a regulating mechanism. I often wonder why there is not more competition within the airline industry. For instance why is the TSA in charge of security? Why can’t airliners have their own line for security and different airliners could have different standards. Another thing I wonder is why airliners don’t post online which pilots are flying, how much experience the pilots have, and perhaps a customer feedback of passengers that have flown with them before. The airline industry is heavily regulated by the FAA but we must remember that flying statistically is still one of the safest forms of transportation.

Blockbusted: An Era Over?

Recently, Blockbuster announced that it lost $435 million dollars in the last quarter. Blockbuster also has close to $1 billion in debt. Competition from companies such as Netflix and RedBox have put enormous pressure on Blockbuster. Netflix and RedBox primarily rent movies through online and kiosk DVDs. Netflix has $320 million in cash with only 6% debt. Clearly, Netflix is in a better financial position than Blockbuster.

A lot of people especially those born in the 1980’s and 1990’s grew up with Blockbuster. Blockbuster has a nostalgic feel to it. Memories of Friday’s and weekends staying up late renting VHS (in the 1990’s) while eating pizza, having sleepovers, and spending time with friends is what this generation will remember. However, all we will have are these memories especially if Blockbuster goes out of business.

People should remember though that when a company goes bankrupt it doesn’t always go out of business. Sometimes other companies can purchase the bankrupt company and try to turn it around. Also bankrupt companies can try to reorganize and restructure their company and try to come back, but I doubt this would apply to Blockbuster given their dire financial situation

In understanding why Blockbuster is bankrupt it is important to realize that the company did not satisfy enough customers to cover their costs. People sometimes forget that it is the profit and loss system that markets operate under. The main reason however I believe Blockbuster went out of business is they didn’t keep up with the times. The digital media for DVD’s has changed in the past 5 years. Netflix allows people watch movies online and also transmit movies to televisions provided the user has the proper equipment. Equipment to transmit Netflix movies from the internet to the television can be purchased for only $80. Netflix also allows users to rent movies through the mail. One problem I see with Netflix is the selection of movies you are allowed to watch on the computer isn’t very wide. Hopefully, this will change in the near future. Perhaps, if Blockbuster really does go out of business it will allow Netflix to purchase content at a very cheap price.

RedBox is another service that customers to go to various kiosks usually at grocery stores, McDonalds, or various drug stores. RedBox allows people to rent movies through the kiosk but is only limited to the inventory that the kiosk provides. Also bringing back the movie to the location might get some people turned off. Maybe RedBox will allow people to watch movies online like Netflix.

At the end of the day, I think Netflix might come out as a major winner given they customers can get movies not only online but also through the mail. If Blockbuster really does go out of business this will increase Netflix’s moat and allow them to increase their profits. I don’t know what the future holds for RedBox for the reasons mentioned above but it will be interesting to see what the future holds for both companies. Although, I could be completely wrong and there could be an entirely different company that comes along and gives both Netflix and RedBox a run for its money.

Biotech Bubble

In the 1990’s the internet bubble came and left. Hundreds of technology companies were created for inventors, venture capitalists, and investors to try to cash in on the “next big idea”. The internet bubble was filled with different companies coming up with often creative and interesting ideas on how to make money through the internet. Some of the ideas were really good and some were really bad. I remember Kozmo.com in the early 1990’s that promised to deliver goods to people within an hour. This service was mostly for people that lived in New York and had busy lives. Although, in theory this sounds like a good idea in practice it was much harder to execute and ultimately led to the company’s failure in 2001 (only three years after being founded). Many of dot.com companies were like this in the early-mid 90’s. Companies had extremely high price-earnings ratios without making a penny of profit. A strategy like this leads to disaster. However, we did have some successes from the dot.com era including Amazon, EBay, and Google. These companies are still around and making profit. This type of creative destruction is good because the market rewarded the companies that did something right. The companies that weren’t prudent went out of business. This brings me to what I predict will be the next bubble…

For years the drug and biotech industry has been on the rise. One key area I see becoming changing rapidly is the genomics area. The Human Genome Project was a government project that was created to untangle the human genome. It is estimated that humans have more than 25,000 different genes. From my understanding mutations of these genes are what cause cancer, illnesses, and diseases. Since the human body is made up of millions if not billions of cells one tiny change can change these genes and cause a mutation. For instance, eating chocolate cake could “mutate” a gene. Obviously, just doing everyday activities could cause mutations in these genes. Another example is smoking. Smoking just 15 cigarettes a day mutates genes. Environmental factors also can play a role in gene mutation. What I think is really interesting is figuring out what genes cause what cancers. I think once biotech companies understand the patterns of the genes and can accurately figure out what mutations cause what cancers people will be rushing out to get tested to see if they carry certain genes. Many people talk about personalized medicine. I don’t think that personalized medicine will be taking a pill customized for a particular person, but rather having a genetic test in order to figure out how different medications and treatments could affect you. Right now the genetic testing is still in the early stages, quite expensive, and hard to tell if it is accurate. Over time the technology will improve, the quality of the results will increase, and the cost will decrease. However, this will provide and interesting situation for insurance companies. If someone were to get a genetic test and understand what they are predisposed to a certain condition would they be required to share it with their insurance company? Current law does not allow insurance companies to discriminate against people who get a genetic test performed. However, this leads to a problem because if someone gets a genetic test performed and they don’t have to share it with the insurance company it could lead the person to make certain lifestyle choices without informing the insurance company. This is also known as asymmetric information where one party has more information than the other party leading to an unfair advantage to one side.

One company Myriad Genetics sells testing equipment for doctors to test for certain things such as breast cancer, colon cancer, and most recently prostate cancer. One legal battle that Myriad has faced has been trying to get a patent on certain genes. For instance, Myriad owns the patent to the BRCA gene which a test to determine if a woman has breast cancer. If a woman wants to get tested for the BRCA gene she has to have the test done by Myriad Genetics since they own the right to the gene. This offers and interesting intellectual property battle between Myriad and other biotech companies. Could Myriad really own the right to a gene? It would seem as if they own the right to a gene it might induce other companies to enter the market and try to patent other genes for other cancers. It should be noted that the genetic tests from Myriad run in the thousands of dollars. However, I would assume insurance companies would pay for the test since it gives them a better idea about the true condition of the patient. I am excited though that we are at the infancy of this biotech process and truly believe breakthroughs will come within the industry that will help consumers and doctors. Right now tests can only show if we are predisposed to one gene. Just testing for one gene can cost hundreds to thousands of dollars. In the future, I could see testing for all genes (once scientists decode all 25,000 genes which could take a decade or more). After this is done, people can get a genetic test and see what they are predisposed to. This could maybe give the person incentives to change their lifestyle or behavior and see what clinical options are available to avoid trouble in future years. Hopefully, doctors can introduce this more preventative medical approach. Maybe in the future we could have experts on certain gene mutations. Even if drug companies stopped producing drugs tomorrow with the help of genetic testing doctors and scientists could figure out who responded better to certain medications and treatments which could greatly improve the quality of the diagnoses and deliver better results when compared to conventional processes. Time will only tell though which of companies in the biotech industry are here to say and which ones will be left in the dust.

Michael Lewis on 60 Minutes

Michael Lewis talks about the Wall-Street bailout, the culture, and executive bonuses. Update: "The Big Short" went from #11 on books on Amazon to #1 on books after the 60 Minutes interview aired.


Watch CBS News Videos Online

Nip and Tucked

More than a week ago marked the 100th and last episode for one of my favorite shows Nip/Tuck. I believe I started watching the show in high school and continued on throughout my college years. The show actually started in 2003. I was a little late in the game watching it but really didn't miss much. Although, the show was always edgy, interesting, and somewhat dark I think the thing I will miss most are the characters. I have to admit however the show did seem to get bizarre and weird after the second season. I will miss tuning in every Wednesday night to watch what Dr. Troy and McNamara are up to. What I think really drew in the viewer was looking at how two plastic surgeons and their lifestyles. I loved how Christian's has no concern for money. He always bought Ferrari's, Lamborghini’s, expensive houses, and having idea if he was broke or rich. Of course this is a fantasy world created by TV writers and does not mirror reality (or if it does to a very small degree). One of my favorite episodes was this past season where they showed Sean and Christian in their college years. I wonder however, what is ahead for both of these actors. Will they just be remembered for their appearance from one show or be known for other roles?

Nip/Tuck spawned off many reality shows such as Dr. 90210. What is really interesting is how much people spend a year on plastic surgery. According to the American Society of Plastic Surgeons 12.1 million cosmetic procedures were performed. This number does underestimate the total amount of surgeries since there is another board just for just facial plastic surgery. I have a feeling that the popularity of Nip/Tuck increased not only the awareness of plastic surgery but made it more socially acceptable. Hopefully, people realize that plastic surgery is a serious procedure and understand that there are risks with any surgery. Also finding a board certified surgeon either by the American Society of Plastic Surgeons or American Board of Facial Plastic Surgeons is important. Many doctors can take a weekend course and be an “expert” in plastic surgery. For example, Dr. Robert Rey and Dr. David Matlock (seen in Dr. 90210) are not board certified in plastic surgery. Although, they perform plastic surgery procedures they are not certified to do them which should make wonder about what kind of quality they can provide. Plus, you have to wonder about the doctors you see on television. Usually, you people that have to advertise because they “aren’t” good doctors or surgeons. Maybe their commercials should discount their quality by at least 25%. People have to remember you get what you pay for.

EconTalk

I am very fortunate to have discovered EconTalk. EconTalk is usually a one hour podcast with Dr. Russell Roberts, professor of economics at George Mason University. Recently EconTalk celebrated its 200 episode. I must confess I have listened to nearly half of these podcasts. The podcasts usually focuses on an economic issue, current book, or current issue that can be related to economics. Some podcasts can be technical but nearly all of them can be listened to by the average learner. I say average learned because I don't necessarily think that the average person always wants to learn. What is really interesting is how Dr. Roberts has a clear and concise way of shorting out the information and making it digestible to the listener.

When I was trying to research information about Dr. Walter Williams I came across an old EconTalk podcast and immediately became hooked. One of my favorite EconTalk guests has been Richard Epstein. Epstein has the ability to talk for very long periods of time in complete sentences and paragraphs. Other fun guests have included Mike Munger, John Cochrane, and Bryan Caplan.

Some guests I would like to see on EconTalk would be Niall Ferguson (history of money), Jeffrey Miron (legalization of drugs), and John Lott Jr (crime and economics). The show does a great job of applying economics to many categories and is very informative. I could see very practical application of EconTalk to any economics class. Let’s not forget knowledge is power!

CEO's and The Tradeoffs

Many people complain about how much CEO's or "fat cats" make. According to the AFL-CIO "A chief executive officer of a Standard & Poor's 500 company was paid, on average, $10.9 million in total compensation in 2008". The same article talks about how CEO's are paid 10 times more than the average full-time worker. Let's examine this statement. Yes, CEO's are paid 10 times what the average full-time worker is however the average CEO is most likely 10 times more productive than most employees in the company. Goldman Sachs in 2009 doled out $700,000 in bonuses to the average employee. People demonstrated public outrage when they learned how much people at Goldman Sachs were getting paid. Anywhere between 1,500-2000 MBA students interview for a first round interview at Goldman Sachs. Usually there is between 4-6 interview before someone is offered a job. Out of this pool of candidates around 200 people are hired. Clearly, this shows a very small percentage of candidates are accepted into the Goldman Sachs culture.

When people hear about executive payouts they hear the rewards, but never hear anything about the costs. Being a CEO does have costs. An executive works long hours, is usually away from his/her family for long periods at a time, and generally has a high stress level. CEO’s and executives also process traits that very few people have. Often times CEO’s are very great communicators, good at delegating, and can take complex situations and simplify them. Since only a small percentage of people have these characteristics it makes them highly valuable. People don’t understand that CEO’s and paid so much because of their productivity. Companies have alternatives when hiring CEO’s. The board of directors or some type of committee is placed in charge of what executives and CEO’s are paid. These groups have a vested interest since they usually own stock in the company.

What seems to be evident is that CEO’s are paid the market value for their services. Board of directors and committee members are not stupid. The excuse that people are greedy doesn’t make any sense. Since greed has existed since the beginning of time and since greed can’t increase an executive’s salary it’s hard to say greed is the reason. If a CEO’s job pays so well why doesn’t everyone want to be a CEO? Clearly, there are costs and benefits to everything.