Offers they can't refuse

Among its many current woes, United Airlines is under federal investigation for allegedly reinstating a money-losing flight at the request of the chairman of the Port Authority of New York and New Jersey, which builds and operates many of the bridges, trains, and airports in northern New Jersey and New York City. The skies are so unfriendly for United these days that other stories have kept the scandal from receiving the attention it should.

The Port Authority scandal began with a dinner at Novitá, a fashionable New York City restaurant, in September 2011. United CEO Jeff Smisek sought to persuade David Samson, who had recently been appointed head of the Port Authority by New Jersey Gov. Chris Christie, to build a direct commuter rail link from downtown New York to the Newark Airport, a key United hub. After listening to Smisek’s plea, Samson made a surprising request of his own: Why not restore United’s direct flight from Newark to Columbia, S.C.? The Columbia flight had been cut in 2009, and the next nearest airport to Samson’s 4,400-square-foot vacation home in Aiken, S.C., was 150 miles away. Another participant has described Samson’s request as “playful, but not joking.”

Nor did Smisek and United laugh off the request. By the following fall, United had restored its money-losing service from Newark to Columbia. It was known at United as “the chairman’s flight.” This shady sequence of events came to light almost by accident, as federal officials investigated the “Bridgegate” scandal—the traffic snarl on the George Washington Bridge that was allegedly intended to punish the mayor of Fort Lee, N.J., for failing to endorse Gov. Christie’s 2013 reelection bid. Smisek resigned after the Port Authority investigation became public.

The United Airlines shakedown is the most ominous evidence yet of a radical shift in American business regulation. When I started teaching corporate law classes in 1990, our big concern was executives who gave themselves lavish benefits and paid little attention to the interests of the company’s shareholders. In their 1989 classic Barbarians at the Gate, reporters Bryan Burrough and John Helyar recounted the lavish perks enjoyed by former RJR Nabisco chief executive F. Ross Johnson, such as trips on a company-owned jet to RJR Nabisco’s Aspen condo.

Those days are long gone. Self-indulgent chief executives like Johnson have largely disappeared, thanks to today’s much more alert shareholders, who punish laggard executives. But the problem hasn’t gone away. It’s now government officials who seem to have the perks and the power.

This isn’t an accident. American business and financial regulation looks increasingly like a European-style partnership (often called “corporatism” or “crony capitalism”) between the government and the largest companies, especially in industries such as the airlines and financial services that are dominated by a handful of large companies.

The 2010 financial reforms give regulators almost complete discretion and invite the government to use regulation to achieve political objectives. If the government wishes to discourage big banks from lending to energy companies or companies that contribute to pro-life causes, or to encourage them to finance solar energy, all it takes is a hint from a government official. Companies ignore the hint at their peril, since regulators can crack down on anyone they want to.

Four days after David Samson was forced to resign due to the Bridgegate scandal, United Airlines canceled its Newark-to-Columbia flight. But don’t think the shakedowns are over. They’re just beginning.