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Is It Time to Re-Regulate the Airlines?

 
 
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 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 theMonthly, 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.

Washington Monthly / By Ed Kilgore

Posted at March 13, 2012, 5:48am

 
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