What Do Index Funds Have to Do With the Cost of Air Travel?

Photo credit: xlibber, CC BY 2.0.

The Atlantic just posted a longread titled “Are Index Funds Evil?” which is the kind of question that you know will be answered with “although we’ve found one negative aspect to index funds, overall they’re still solid investments.”

And that’s pretty much what the article delivers.

The negative aspect, in this case, is the cost of air travel.

In April 2014, [José Azar, Martin Schmalz, and Isabel Tecu] posted an early draft of a paper titled “Anti-competitive Effects of Common Ownership.” The paper made several astonishing claims. Overall, it said, the high concentration of share ownership had caused serious harm to consumers in the airline industry: Ticket prices were as much as 12 percent higher than they otherwise would have been, because of common ownership of shares.

Wait, what do you mean by “common ownership?”

The paper noted that three mutual-fund families—BlackRock, State Street, and Vanguard—collectively control about 15 percent of the shares of major U.S. airlines, although these funds are by no means the only common owners.

Got it. Is this… like, can you prove that common owners are driving up airline ticket prices?

The obvious question, of course, is how, exactly, common ownership would encourage these ills. Would common owners actually pressure company managers to collude and raise prices? Would those managers, facing less investor pressure, simply stop competing so hard with one another, enjoying fat paychecks and allowing prices to float up and cost-saving innovation to wither? And would any of that plausibly happen when index funds own just 15 percent of an industry?

The article is dense with both detail and technical terms, and it doesn’t draw a lot of conclusions—except that this type of common ownership might lead to higher airfare, although other factors, like airline mergers, might also be involved.

So index funds are probably not evil. Air travel, on the other hand, is getting worse all the time.

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