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.
