After 9/11, government got together with the airlines to revamp security and offer subsidies. Airlines largely went along with TSA thinking there’d be government money for them in it that never really materialized. But the process of figuring out what security and subsidy programs would look like was a case of regulatory capture – with the different airlines conspiring against each other, looking for ways to do in their competitors.

Former Northwest and Delta Air Lines CEO Richard Anderson went on Airlines Confidential this week for a conversation with retired Wall Street Journal airline reporter Scott McCartney and ex-American Airlines CEO Doug Parker. And he walked through some of the angling that different CEOs did as part of their work with the government over what rules to impose on the industry.

Doug Parker lays out how Southwest’s CEO Herb Kelleher put himself into the group working on this, because he was afraid the other CEOs would put him out of business. Southwest Airlines didn’t give out boarding passes back then.

• They had reusable colored plastic boarding cards (tokens) which functioned as the boarding pass. You’d stop at the gate to get yours and they had a number on them for boarding.

• In January 2002, Southwest announced it would phase out its plastic boarding cards in favor of paper boarding passes, and did so in June 2002.

And so we as an industry ask a triumvirate of people, Richard, Herb Kelleher, and Bob Baker, who is the CEO of American, to go work with the US government and develop what became the security systems that we put in place right from 9-11. Everything that you see now, none of it was in place. There were all sorts of ideas, many of which would have been just horrible, you know, for the ability to process passengers. Herb in particular was really worried.

Back then, you know, Southwest didn’t even give boarding passes. So he wasn’t sure how he was going to get customers into the secure area, because he had no way to prove that they had a ticket. So that’s why Herb was there. Herb wasn’t a huge operating guy, but he made certain he was on that task force with Richard and Bob, who understand operators really well, because Herb lived terrified that the big guys were always trying to figure out a way to put him out of business.

Richard Anderson describes the finagling over what kind of taxes would be imposed on travel to cover the new costs of security – because different tax regimes would benefit some airlines and disadvantage others. So they each tried to ensure the tax model that protected their own business would be in the final legislation, while hoping it would harm their competitors more.

Meanwhile, Southwest’s Herb Kelleher tried to fight airline subsidies not out of a belief that subsidies are bad for the country, for taxpayers and for the industry as a whole (though they are) but because some of his competitors were vulnerable and he thought they’d go out of business without them.

Remember that 9-11 spawned the creation of the TSA. And we knew there were taxes coming on the industry. And depending upon what your business model was, different tax regimes could harm you more than the other. And so Herb at the time was still point to point, although subsequently became very much a hub and spoke carrier in my view.

And of course, the hub and spoke carriers like Northwest and America West even at the time, So, we needed an equitable tax system, we needed the loan program, and there were compromises that had to be made, and we needed the grant program because the government shut our industry down. And then fourth, little known fact, we needed war risk insurance because we couldn’t get war risk insurance and you couldn’t get back flying again without war risk insurance. And so that meant going to the White House and OMB. Mitch Daniels was the head of the OMB at the time. And we needed that not just for us, but we needed it for our fuel farms and vendors and the like. So it was those really key four issues. And the TSA, we were going to get the TSA whether we wanted to or not. And so it was just a matter of making sure that we saw as many of the policymakers as possible. I think Norm Mineta was the Secretary of Transportation at the time.

…Herb didn’t want the loan program. …[W]e thought we’d need the loan program. So there was a little bit of a back behind the scenes battle with Herb who didn’t want the loan program. because he thought that put Doug [and America West] out. I mean, Herb was this wonderfully nice guy publicly, but he was tough and mean.

1982 Nobel laureate in economics George Stigler said, “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.” That was certainly true in the airline industry after 9/11. Then-Congressman Jim Moran (D-VA) famously said at the time about the opportunity for pork, “It’s an open grab bag, so let’s grab.”