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The Public Policy
Regulatory Flights of Fancy
Congress renews its effort to kill off the airline industry.
In Washington, D.C., everything old is new again. Keynes is back as the defunct economist our politicians are in thrall to, wind and solar are the power sources of the future, just as they were in the seventies, and, after two decades in which entrepreneurs and industry were freed from the crippling hand of regulation, re-regulation is now the order of the day. The latest target is the domestic airline industry, and if Congress wanted to kill it off, they couldn’t be picking a better way.
In 2008 market imperatives in the shape of competition and economies of scale drove Delta and Northwest Airlines to unite. Those same forces are now prompting United and Continental airlines to merge together. This trend toward market consolidation has sparked concerns in Congress over consumer welfare. A number of Congressmen, led by Rep. James Oberstar (Chairman of the House Transportation and Infrastructure Committee), have gone so far as to call for the re-regulation of the industry. History and economics, however, both suggest that such a move would be disastrous for the industry and for consumers. The result would actually be less competition, higher prices, poorer safety, and fewer choices.
Until the passage of the Airline Deregulation Act of 1978, the airline industry was heavily regulated by the Civil Aeronautics Board (CAB), which restricted competition by fixing prices, determining and rationing routes among favored firms. As the economists Paul Cleveland and Jared Price have demonstrated, these restrictive policies simply prevented new companies from entering the market and kept prices high. Airlines did compete in a form -- on the basis of amenities rather than price, but only when multiple carriers were allowed to serve a particular route.
Deregulation allowed the airlines to compete and adopt the more efficient hub-and-spoke system. By feeding local and regional flights through hubs, airlines are able to do a much better job of filling up their longer flights, resulting in cost savings for both the industry and consumers. All in all, consumers have saved about $19.4 billion per year since the deregulation of the airline industry. Beyond these financial gains, safety has improved as well. According to Cleveland and Price, in the first fifteen years following deregulation, the airline fatality rate decreased by 41%, even as passenger travel increased by 55%. This strongly suggests it would be foolish to re-regulate the airline industry in response to a minor and at this point only hypothetical threat to consumer welfare.
Of course, the airline industry has its own peculiarities that must be taken into account. Due to a shortage of airport slots, it is hypothetically possible that two airlines which cumulatively control 90% of the slots at a particular hub would be able to acquire monopoly power for certain flight routes after a merger. However, this situation is itself an artifact of regulation. The solution would be to increase the number of available slots by removing unnecessary environmental regulations that are currently impeding the expansion of existing airports and the construction of new ones.
Competition in the airline industry could be further revitalized by opening the market to foreign companies. Removing the current 25% cap on foreign ownership, justified only by an archaic argument about national security, would provide airlines with broader and deeper sources of capital. This could help prevent future bankruptcies during economic downturns (and thereby ensure there were still planes in the event of a national emergency). When Australia relaxed its national ownership requirement, it saw only an increase in consumer choice.
In short, if Rep. Oberstar were really interested in promoting competition, he would be fighting for deregulation rather than re-regulation. In reality, the evidence seems to indicate that many Congressmen are far more interested in expanding the public sector by having the government seize control of yet another industry. Re-regulated airlines would certainly fail, and the Federal Government would have to produce yet another bailout or, worse, create an Amtrak of the skies.
Either way, if we did choose to go back to the 1970s in this sector, we would see a corresponding return to the industry conditions of the 1970s -- fewer flights and higher prices. Even Jimmy Carter realized that wouldn’t fly.
About the Author
Iain Murray heads the Center for Economic Freedom at the Competitive Enterprise Institute and is the author of Stealing You Blind: How Government Fatcats Are Getting Rich Off of You, new from Regnery.
Letter to the Editor View all comments (22) | Leave a comment
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ArArAr| 7.2.10 @ 8:00AM
Flying is already a gigantic pain in the posterior, wait 'til there's even more government involved! Reminds me of the Chevy Chase movie line in one of the Vacation flicks, "Think you hate it now? Wait 'til you drive it!"
Petronius| 7.2.10 @ 9:20AM
Over regulated or not, commercial aviation is one of those entities that alienates the passenger by nature.
Being a one size fits all industry, any anomalous departure from the predetermined flow of operations ruins it for everybody. Since they make very little profit when things go well, a weather diversion here, a mechanical delay there, and, heaven forbid, a security breech, translates to miserable experience. This enrages the flying public all the more when flight crews, ground agents, baggage handlers, or whomever care only about their own situations when their job is to satisfy the passengers. Corporate contempt for the customer has been pro- forma since planned obsolescence began in the 50's. But government has no customers. It has subjects.
Leo| 7.2.10 @ 9:58AM
I'd really be concerned about this... if I thought for a minute that new regulations are intended to be enforced. As we see in border enforcement, deep water oil well safety regulation, coal mine safety regulation and oversight of banking and commerce (to name a few items in recent news) the real plan is to make a political splash in media, collect revenues to pay for enforcement and go home smiling about what suckers the people are for paying a vendor (our government) that will never actually enforce regulations, preferring to use the threat of enforcement as a means for extorting campaign contributions from rich corporations or broke corporations with cash flow.
Jet Mech| 7.2.10 @ 1:42PM
The thing missing here is that the airlines have farmed the work of heavy maintance overseas in an effort to reduce costs. They also sell seats at a loss to compete nd keep. All of this has put the safety of the industry in jepardy. Due to the redundancies and caution of the dwindling airline employed mechanics a last line of defence has kept the planes flying. Personally I have seen the work from these overseas facilities. It worries me.
When you have a work force that is under threat of being fired for reporting any deficency the motivation to fix things the right way are not great. Most of these comapnies use unlicensed workers where in the US each mechanic is required to have a license, be drug tested and have a backround check. None of that applies to the forien workers. Add to that the companies doing the work want to do the least amount for the most profit. Envionmental protections are non existant. There is a reason that almost all airlines paint their planes in South America.
Reregulation would return sanity to the industry. Currently the executives are so driven to make quartly profits that safety and customer service take a back seat.
Gar| 7.4.10 @ 9:40AM
Are you a union member Jet Mech? That's one of the reasons foreign MRO's are booming and domestics are floundering. The price of domestic service is more costly by a good margin. I've dealt with foreign MRO's in Canada and Germany and will tell you that they are in fact better by far than anyone in the States. Oh, and by the way, the reason we paint aircraft in South America is not because of a lack of regulation. It's because of the EPA regulations we have now.
David| 7.2.10 @ 4:05PM
Good insights, Leo.
GregA| 7.2.10 @ 5:03PM
The waitresses used to be very nice.
PCC| 7.3.10 @ 2:43AM
Leo makes some excellent points. Maybe the author could pick up and expand upon them in his next article on this subject or related subjects.
Ken (Old Texican)| 7.3.10 @ 11:45AM
I understand that flying lessons are a real bargain right now.
Eric Cartman| 7.3.10 @ 11:55AM
Washington views regulation as a power grab/job program. When was the last time a regulator said "Well, my job is done here, time to move on!" Never - well, may one. Anyone remember the guy who regulated ketchup? Every so often, he would go out and buy ketchup labeled "Fancy". Fancy ketchup must have a certain viscosity. The way they test it is to pour some ketchup into a gated area of a board and adjust the board to a certain incline. Then they would lift the gate and time how fast the ketchup oozes down the incline (sounds exciting, no?) The guy worked maybe an hour a month. He was in his office, but just sat there doing God knows what the rest of the time. He rose to a G 13 or 14 pay grade!
Finally, while sitting there one day in his office (it was only him), he could no longer take it and decided to quit (I'm sure with a nice pension). And this is the problem with regulators - they create the need for themselves. After WWI the British navy actually grew, instead of shrink in relation to the threat.
WEEEEE!
Eric Cartman| 7.3.10 @ 12:08PM
Whoops! It was the Admiralty that grew - the bureaucracy and administrators. Not the whole navy - sorry.
huberthoran| 7.3.10 @ 6:20PM
The authors are profoundly ignorant of the specific context of Oberstar's comments, and the larger industry issues that provoked them. I was testifying before the Committee on those issues that day, and Oberstar's quoted comments occurred in response to questions he had posed to me, so I believe I am better qualified to comment. Deregulation was introduced in response to the industry inefficiency that resulted from years of market rigging by government officials, largely responsive to the large incumbent airlines. The airlines and DOT are fighting to restore that world, and have gutted antitrust enforcement in order to drive North Atlantic concentration from the mid 60%s to the mid 90%s since 2004. Anticompetitive pricing gains solely attributable to artificial market power were over $5bn in 2008. The drive to cartelize trans-pacific competition began last year. Deregulation always assumed minimum antitrust enforcement. Oberstar's comments specifically defended deregulation, and attacked the industry's complete capture of the DOT antitrust immunity process. Murray and Abbott's comments do nothing but lend support for the artificial cartelization of international aviation, and the restoration of a world where marketplace winners are picked by bureaucrats and lobbyists instead of consumers and investors
Hubert Horan| 7.3.10 @ 6:28PM
Should anyone wish to take 5 minutes to understand these issues beyond the crude soundbite level, the National Journal transportation blog hosted a debate on airline consolidation last month that included yours truly, Congressman Oberstar and former AA CEO Bob Crandall on one side, and several merger advocates on the other.
http://transportation.national.....nental.php
Jefferson John| 7.4.10 @ 2:17PM
Oberstar has been doing all he can for many years to puff his own worthless ego at the expense of aviation.
dvd to ipad mac| 7.6.10 @ 3:41AM
thi sis a good post