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March 13, 2012 11:03 AM Is It Time to Re-Regulate the Airlines?

By Ed Kilgore

If there is anyone bullish about the airline industry—or the experience of commercial air travel—these days, it’s exceedingly rare. As prices go up, service goes down, and news from the industry is a mismash of bankruptcies and mergers (or attempted mergers) that in turn become excuses for even poorer service.

But as New America Foundation’s Phillip Longman and Lina Khan argue in “Terminal Sickness,” an important new article in the March/April issue of the Monthly, it can and almost certainly will get worse, and already is worse than is generally realized for people and businesses in a variety of cities recently hit by massive merger-driven cutbacks in flights and fare hikes. The problem, they suggest, is inherent to the industry, and the solution is to reconsider the country’s thirty-year experiment in airline deregulation, which has failed.

Longman and Khan’s tale of airline woes will be familiar to most regular travelers, but you probably have to live in one of the cities like Cincinnati, St. Louis, Pittsburgh or Memphis they cite as particularly hard hit to understand how devastating airline instability can become to economic activity not directly connected to the industry. Such cities staked a lot—including vast public subsidies for airport improvements—on hub status and/or convenient and relatively inexpensive access for business travelers, only to become airline backwaters with limited and prohibitively costly flights once the industry’s merger-mania took hold.

St. Louis, for example, has seen “available seat miles”— an industry measure of capacity—fall to a third of their 2000 level, following the American Airlines takeover of TWA and Lambert International Airport’s subsequent downgrading as a mid-continental hub. Two of Lambert’s five concourses are now virtually empty, and another, which housed the TWA hub, is only partially used. A third runway—the building of which required demolishing hundreds of homes and cost local taxpayers a billion dollars to finish in 2006—is now redundant. “This scenario,” notes Alex Marshall, a senior fellow at the Regional Plan Association, “can be likened to states building highways and then having General Motors, Ford, and other auto companies suddenly telling their drivers to use different roads.”

The only beneficiaries of current trends are Wall Street speculators who have driven these structural changes. It’s time, say Longman and Kahn, to start over.

The authors of “Terminal Sickness” consider such commonly cited excuses for airline malaise as rising fuel costs and deem them less important than the built-in disconnect between the fixed costs of airline travel and the inability, without government intervention to manage cross-subsidies, to maintain adequate and affordable routes. But the shortcomings of deregulation were hidden after it was inaugurated in the 1970s by short-term fare cuts that over-sold the new policies:

What both policymakers and the public generally missed, however, was that any positive effects that occurred would be temporary, and that many of them would have occurred without deregulation. The price of energy, for example, cratered in the mid-1980s, making it possible to cut fares and even expand service on many short hauls. But that wasn’t an effect of deregulation; it was the result of a temporary world oil glut. Indeed, after adjusting for changes in energy prices, a 1990 study by the Economic Policy Institute concluded that airline fares fell more rapidly in the ten years before 1978 than they did during the subsequent decade.
A study published in the Journal of the Transportation Research Forum in 2007 confirms that the pattern continued. Except for a period after 9/11, when airlines deeply discounted fares to attract panicked customers, real air prices have fallen more slowly since the elimination of the CAB [Civil Aeoronautics Board] than before. This contrast becomes even starker if one considers the continuous decline in service quality, with more overbooked planes flying to fewer places, long waits in hub airports, the lost ability to make last-minute changes in itineraries without paying exorbitant fares, and the slow strangulation of heartland cities that don’t happen to be hubs. Moreover, most if not all of the post-deregulation price declines have been due to factors that cannot be repeated, such as the busting of airline unions, the termination of pension plans, the delayed replacement of aging aircraft, the elimination of complimentary meals and checked baggage, and, finally, the diminution of seat sizes and legroom to a point approaching the limits of human endurance. (Eliminating seats altogether, however, remains an option.)

With every negative trend in the industry now intensifiying for the foreseeable future, and the economic impact of mergers now becoming impossible to ignore, some form of re-regulation, say Longman and Khan, is now essential. It won’t be neat or easy, they concede, but putting it off just delays the inevitable:

[A]irlines— just like railroads, waterworks, electrical utilities, and most other networked systems—require concentration both to achieve economies of scale and to enable the cross-subsidization between low- and high-cost service necessary to preserve their value as networks. And when it comes to such natural monopolies that are essential to the public, there is no equitable or efficient alternative to having the government regulate or coordinate entry, prices, and service levels—no matter how messy the process may be.

They could have added that despite the past bipartisan support for deregulation, and the certainty that today’s GOP would fight re-regulation, such a step would undoubtedly be popular. The meager benefits of deregulation have declined far past the point of diminishing returns, and with the industry drifting towards two or three mega-carriers offering poor service and limited routes at ever-higher prices, it’s hard to make the case that any vibrant competition is going on.

Whether or not you ultimately agree with the recommendations made in “Terminal Sickness,” it’s a subject ripe for debate, and well worth examining next time you are sitting at the airport waiting with your expensive airport food and drink under the baleful eyes of unhappy gate attendants, in hopes that you will eventually be able squeeze yourself into a tiny seat on a delayed flight that could land you in a strange destination.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • Gandalf on March 13, 2012 11:50 AM:

    Oh gawd! You want to see the present day republican party have a collective head explosion? Just try and bring up the idea of some kind of sane regulation of the airlines and we'll see republican brains slattered all over the country in a mass explosion of outrage.
    wqe used to have all sorts of airlines with good service.free drinks,meals and dare I say it good service. All this befor deregulation. for a group of people who don't put any stock in the ideas of Darwin i. e. suvival of the fittest they love to practice it in business no matter what the reults are for the people.

  • Gorilla Meek on March 13, 2012 11:53 AM:

    Southwest manages to turn a profit, so what are they doing that the others aren't?

    I'm not a big fan of any uncompetitive industry consolidation, but that's what we have in regulated (cellphones, cable tv, etc.) and unregulated industries alike across the country.

    It also would be nice to have regulators who actually regulate and unbought politicians who don't think a handful of companies owning 90-100% of an industy is a good idea.

  • Sean Scallon on March 13, 2012 12:01 PM:

    "It also would be nice to have regulators who actually regulate and unbought politicians who don't think a handful of companies owning 90-100% of an industy is a good idea."

    Which is why national regulation is not the panacea everyone thinks it is.

  • Andrew J. Lazarus on March 13, 2012 12:04 PM:

    So, let's make Southwest Airlines shrink back to a Texas intrastate carrier?! No thanks!

    What even Longman and Khan admit, in passing, is that air travel today is generally much less expensive than under regulation, which involved massive hidden subsidies through anti-competitive measures. (How much do you think United would charge for airfare to Hawaii if, as under regulation, it was the only airline permitted to fly there from most of the mainland? Sure, they would serve free meals. BFD.)

    Under regulation, air travel was the province not of the 1 percent, but, say, the 3 percent.

    Nor do I see any reason why ethanol subsidies to Iowa farmers are bad, but airfare subsidies to Iowa travelers are good.

    Airlines are, in fact, conspicuously different from railroads. Railroads require eminent domain and have high entry cost; indeed, prohibitive if it involves building new trackway. Air travel has low entry cost. That's why we see startup airlines come (and, yes, fold) with regularity.

    Frankly, restaurants come and go even more often than airlines. And there are entire neighborhoods without good restaurant service. However, I don't see this as a reason government should "regulate" restaurants be picking a few and sending them to various locations to charge officially-set prices. That's the model for pre-deregulation airlines. Indeed, it's not that easy to think of better places for a generally free market than air travel—Longman and Khan's arguments work just as well for a planned economy in any other market.

    My recollection—it's been a long time—is that the Monthly strongly supported airline deregulation when it happened thirty years ago. If so, you were right the first time.

  • Amezuki on March 13, 2012 12:20 PM:

    Nor do I see any reason why ethanol subsidies to Iowa farmers are bad, but airfare subsidies to Iowa travelers are good.
    And there are entire neighborhoods without good restaurant service. However, I don't see this as a reason government should "regulate" restaurants be picking a few and sending them to various locations to charge officially-set prices.

    This is a truly appallingly inapt pair of analogies.

  • TCinLA on March 13, 2012 12:21 PM:

    What's wrong with the airlines is what's wrong with every other industry in America. Rather than being run by people who are actually interested in the industry, they're run by MBA bean counters who, as the old saying goes, "know the price of everything and the value of nothing." Look at the guys who founded all the original airlines: they were alrline guys, they wanted to be successful, and they knew that making the experience good for the customers was the way to do that, and that's what they did.

    Those of us old enough to remember when airline travel was actually enjoyable (i.e., up to about 35 years ago, when the wingnut revolution got underway) remember airlines that had union crews, were strongly regulated, and as a result worked as they were supposed to. Once the assholes were allowed in, the ones out to line their own pockets and screw everyone else (almost all airline executives are Republicans), things went to hell in a handbasket, as they have in every other business these scum have been turned loose in.

    I was just talking the other week with a friend of mine who used to fly the SR-71 when he was in the Air Force. Still the most advanced airplane ever made, designed by Kelly Johnson at Lockheed back in the days of slide rules and chalkboards, by guys who loved what they were doing - they were airplane geeks. Today, Lockheed-Martin can't make an airplane (the F-35C) that can land on an aircraft carrier, because they put the tail hook somewhere besides the tail! This is not rocket science! People have been putting tailhooks on airplanes successfully now for 100 years, it's not something new and unknown. But Lockheed-Martin did it, and they now answer the criticism the way these corporate scum answer it everywhere: get a congressman to rewrite the rules for them. As my friend said, were Kelly Johnson alive to day, he would go in the design office this morning and shoot the idiot who did that for being an embarrassing fool. The joke going around aviation circles now about the rumors of a "Top Gun-II" movie (groan!) has a L-M executive talking to a Paramount executive about how they can support the film. The movie guy says "so we'll have all kinds of stuff about landing and taking off of carriers, right?" the L-M moron says "Well, um, it can't really do that, but you've got CGI, right?"

    The problem with American business today, whatever business it is, is that places like the Wharton School, the Harvard Business School, the Yale Business School, and all the others are allowed to exist.

  • winner on March 13, 2012 1:03 PM:


    "The problem with American business today..."

    Good point. What b-schools, even the top ones, mostly teach is by case method, and the lessons they instill revolve around valuation and leveraging, not creating value.

  • jjm on March 13, 2012 1:42 PM:

    Airline travel today is ABOMINABLE. I heartily vote for re-regulation.

    What did de-regulation actually get the airlines, rather than Wall Street? Nothing but a slow, sure decline.

  • Anonymous At Work on March 13, 2012 1:44 PM:

    I have to agree that there is no going back unless/until the industry formally asks Congress for such. And yeah, going back would significantly raise the cost of tickets. What's happening is infrastructure-directed growth, where growth of a city moves around the infrastructure, not vice versa. Does this place rural areas at a disadvantage as a result of sporadic or non-existent air travel? Yes, but this is the least worst option, sadly.

  • Kathryn on March 13, 2012 2:25 PM:

    The last thirty years have been devastating for airline employees. I worked for 37 years as a flight attendant with United Air Lines before retiring. Wages, work rules and pensions have been decimated during that time. United went into bankruptcy in the early 2000's, the pension plans were terminated and taken over by the PBGC, which I'm grateful does exist. However, one can't help but worry that it will continue to exist. Pilots who were scheduled to get much larger pensions than flight attendants lost considerable amounts by the transfer to the PBGC. The wages now have been drastically cut for all groups, they work many more hours and many employees who have quite a bit of seniority will get very little when they retire due to the terms of the pension transfer to PBGC.

    Wage stagnation for working stiffs started in the 70's, all you have to do is look at your yearly social security statement to see that. Now the snail's pace of wage increases we experienced since the seventies has been replaced by repeated cuts in wages and working conditions. These jobs, by and large, are union jobs but that has not prevented good jobs from turning into crummy jobs.

  • POed Lib on March 13, 2012 2:38 PM:

    I live in a small town (Sioux Falls, SD). We pay the price of tickets for Chicago passengers. Chicago is a competitive market, so carriers charge very little there. They make their money gauging us in small cities. To fly to St. Louis from here, it costs 600. To fly from Omaha (3 hr drive), it often costs

  • zandru on March 13, 2012 3:00 PM:

    Mr Lazarus opines "Under regulation, air travel was the province not of the 1 percent, but, say, the 3 percent."

    Not entirely correct. When I first boarded an airplane (to go to college), my family was firmly in the bottom 50%. I don't know how far down, but we were barely "comfortable."

    Anonymous at Work (probably a good idea) is concerned that the rural areas and small cities will be left out, as airlines and routes continue to merge. Good point - and another reason to create/restore an efficient, viable, and hopefully low-cost PASSENGER RAIL service.

  • Roger the Cabin Boy on March 13, 2012 3:02 PM:

    Why don't we just accept the inevitable and have a national airline? What's the point of having multiple airlines if they're getting progressively more expensive to run, are merging into fewer airlines anyway, are degrading their service over time, and are not really competing with each other? How long before airliners start dropping from the sky because the airlines can't afford to maintain them properly? Not to mention our antiquated air traffic control system.

    And while we're at it, get serious about high-speed rail. And work out a national transportation policy. With millions of jobs created to build the infrastructure needed to carry it out.

    Wow, this is some really good reefer!

  • Don Brown on March 13, 2012 11:14 PM:

    Hallelujah! Finally! Somebody else gets it. I've been in the airplane biz since I was 16 years old. Never a pilot, mind you. I never got "the bug" -- where I had to fly at all cost. I was in the aviation industry. Deregulation devastated the aviation industry. It's taken 30 years for us to figure out the obvious. But here is one thing Longman and Khan didn't mention. The day before deregulation, the Federal Air Regulations were the *minimum* safety regulations for a healthy, well-financed aviation industry run by seasoned, committed professionals. The day after deregulation those same Federal Air Regulations became the *maximum* -- and the race to the bottom of the barrel was on.

    That's what deregulation has been for 30 years -- a race to the bottom. It's high time we turned it around. Regulation can't come fast enough for me.

    A million thanks for the blog and such an excellent article. I will be sending all of my readers here to read them both.

    Don Brown
    http://gettheflick.blogspot.com/

  • President Lindsay on March 14, 2012 4:33 PM:

    Roger the Cabin Boy, your last line was both hilarious and somber.

  • President Lindsay on March 14, 2012 4:38 PM:

    Those among the commenters here who maintain that regulating the airline industry will result in high ticket prices might have trouble explaining how airlines from other countries—those that are either nationalized or otherwise regulated—often have far better service than US carriers yet are nevertheless competitive with our carriers. Whenever I fly overseas I always try to fly Lufthansa, Air France, KLM or others like that because the service is so far above what I'd get flying the same route with a US airline. Generally the prices are pretty much the same, sometimes cheaper.