Why airline reregulation is no longer taboo

For three decades now, two things have generally been accepted as truisms in the airline industry: 1) Every airport bar overcharges and 2) deregulation was a good thing.

Why airline reregulation is no longer taboo

For three decades now, two things have generally been accepted as truisms in the airline industry: 1) Every airport bar overcharges and 2) deregulation was a good thing.
Since the Airline Deregulation Act took effect in 1978, it’s been an article of faith within most airline circles that this development was a positive change. And there has been compelling evidence to support such a thesis:

• According to the Air Transport Association, 275 million passengers were enplaned by U.S. carriers in 1978; that figure had nearly tripled to 769 million last year

• Overall, the cost of air travel became more accessible for millions of Americans

• Despite generating concerns such as the current maintenance outsourcing crisis, commercial aviation has steadily become statistically safer over the last three decades

On the other hand, there’s no denying that airline service has rapidly deteriorated in recent years. By every measure reported by the U.S. Department of Transportation (DOT), things have gotten worse: There are more delayed flights, more mishandled bags, more involuntarily bumped passengers and more consumer complaints. Yet despite all this evidence, the airline industry has displayed shockingly little concern, by chronically denying blame and balking at any and all forms of passenger rights legislation.

What’s more, we now face a fuel crisis that has ushered in higher fares, airline bankruptcies and widespread cutbacks in service. Consider the following:

• According to data released last week by American Express, in the second quarter domestic fares rose by 10% and international fares by 11%, year-over-year

• In just one gruesome week earlier this year, three U.S. airlines shut down, another ceased flying as previously announced and yet another announced a later shutdown

• One analyst estimates capacity has already been cut this year by 9% nationwide, and it’s still only August

The end is nowhere in sight, and the term “staycation” seems to have permanently entered the lexicon. Because of all these factors, it’s clear we’re now in an era in which it’s no longer a given to chant the mantra, “Of course deregulation was a good idea, stupid.”

Two years ago, the Government Accountability Office looked at reregulation, and recommended against it. But then the “R” word came up again earlier this year in a Senate hearing about airline consolidation, and there’s been no turning back. Since then, it’s become one of the hottest topics in airline circles, with interested parties as diverse as labor organizations and investment banks calling for some form of reregulation. And recently other voices have begun weighing in as well.

Players from the past speak out

One observer with a unique perspective is Robert Crandall, the former chairman of American Airlines and a recognized industry leader — for better or worse — during his tenure in the business. In a speech before the Wings Club in New York City in June, Crandall noted the following: “The consequences (of deregulation) have been very adverse. Our airlines, once world leaders, are now laggards in every category, including fleet age, service quality and international reputation. Fewer and fewer flights are on time. Airport congestion has become a staple of late-night comedy shows. An even higher percentage of bags are lost or misplaced. Last-minute seats are harder and harder to find. Passenger complaints have skyrocketed. Airline service, by any standard, has become unacceptable.”

Then, in what came as a surprise to many but really should not have, Crandall advocated — just as he had in the 1970s — against complete deregulation. He stated: “Three decades of deregulation have demonstrated that airlines have special characteristics incompatible with a completely unregulated environment. To put things bluntly, experience has established that market forces alone cannot and will not produce a satisfactory airline industry, which clearly needs some help to solve its pricing, cost, and operating problems.”

Crandall summarized his views by stating, “Modest price regulation, slot controls at congested airports, more stringent standards for new carriers, revised labor laws, amended bankruptcy statutes, and a more accommodating stance towards industry collaboration are a far cry from the inclusive regulatory regime of [Civil Aeronautics Board] days. However, these few steps — in my view — would have a dramatic and favorable impact on the financial health of our airlines, the usefulness of our airline system, service levels in the airline business and the welfare of airline employees.”

A counterpoint of sorts was put forth the following month, in a speech before the International Aviation Club in Washington, D.C. It came from Michael Levine, currently a senior lecturer at New York University’s School of Law but at one time a key player at the Civil Aeronautics Board, as well as a former executive at several airlines, including Continental and Northwest.

Levine stated: “We are beginning to get calls to stop this movie and to write a new script, with the stopping and writing done by government…Those who offer these arguments have been skeptical from the outset that a liberal market economy can be made to work in the airline industry. Their theoretical argument is an old one: that an industry with substantial fixed or common costs will be unsustainable as competition drives prices to levels that don’t allow the common costs to be recovered. This argument proves much too much: If we really believed it, we’d have to regulate virtually every industry, because virtually every industry has some fixed and common costs.”

Here are links to the full text of Crandall’s speech and Levine’s speech.

Double standards?

Even in the quiet of summer, aviation blogs and websites are buzzing over these two speeches. It seems those who would advocate for stronger governmental control of such a vital national asset as commercial aviation should be prepared for counter-punching from some within the industry who are eager to attribute all forms of stricter oversight to Karl Marx. But then, airline executives are quick to invoke the hymn of “let the marketplace decide.” Except, of course, when they don’t want the marketplace to decide.

Throughout the years, on a broad range of issues — from airport slot controls to labor settlements, bailouts to predatory pricing, code-sharing approvals to the infamous perimeter rule at Love Field Airport in Dallas — this industry’s executives have been more than eager to welcome government intrusion when it works in their favor. I believe the economic term for this is “hypocrisy.”

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In the meantime, carriers will continue looking for alternative means of making money, from charging for checked bags to charging for sodas to inventing new charges we haven’t even heard about yet. Consider that a press release making the rounds last week pointed out that credit cards co-branded with airline frequent flier programs generate more than $4 billion annually for seven of the nation’s largest airlines — Alaska, American, Continental, Delta, Northwest, United, and US Airways. None of this ancillary income would seem to be enough, however, to offset the rising cost of fuel in the long run.

But in a strange paradox, a sudden decline in oil prices could provide temporary relief while only exacerbating the long-term dangers the airline industry will inevitably face. As Dan Reed noted in USA TODAY last week: “Another $10 to $15 drop in the price per barrel, which some oil experts now say is possible, will have most [U.S. airlines] back in the black. Analysts at both Morgan Stanley and JPMorgan Chase even are suggesting that the haggard industry could be profitable in 2009.” Such a short-term reprieve would only delay the systemic changes America’s carriers will need to implement to remain viable for years to come, particularly for an industry critically dependent on foreign oil.

Fewer seats and missing flights

In this climate, nothing can be taken for granted, and every airline seat is being judged under the harshest economic terms. When I worked for the Pan Am Shuttle — an operation that subsisted on bookings from business travelers in the busy Boston-New York-Washington corridor — our average fares were much higher than on flights of a comparable distance between other points. That was due in part to our guarantee of available seating every hour throughout the day; some flights were full, and others carried only a handful of passengers, but when all those revenues were tallied, they supported the vacant as well as the crowded airplanes.

Now airline executives are analyzing every route, every flight, and every seat in a way they never have before, and capacity continues to be cut. That’s a compelling reason the marketplace is not always the best decider for the interests of consumers. Millions of Americans are dependent on frequent air service to conduct business, maintain family ties, secure affordable vacations and remain in touch with other communities. If airline executives determine that certain routes are not lucrative enough, they can’t be faulted for acting in the best interests of their shareholders. Even if protecting stock prices means rolling back air service in hundreds of regions throughout the country.

That’s why deregulation included the Essential Air Service clause, so the DOT can subsidize flights in rural regions. However, even a government subsidy won’t help if an air carrier ceases to operate. And a rash of airline bankruptcies this winter could have effects far beyond rural regions.

Consider Hawaii, for example. Earlier this year, Aloha Airlines suddenly ceased flying and went bankrupt after serving the islands since 1946. There was momentary panic and then Aloha’s chief rival, Hawaiian Airlines, announced it would step in to fill the gap in intra-island air service. But now imagine if Hawaiian were to succumb to rising fuel costs and shut down as well — and these days it’s not inconceivable to consider the grounding of just about any carrier. There would be no meaningful intra-island airline service without Hawaiian. Well, sure, the marketplace will have decided. But for the vast majority of citizens who can’t afford private jets, does commuting within the islands by outrigger canoe constitute a victory for the marketplace?

How much profit is enough?

So what does the Father of Airline Deregulation say to all this? Alfred Kahn, the chair of the Civil Aeronautics Board under President Carter, has heard that nickname hundreds of times (once he even joked that he wanted a paternity test). In an interview published just last month, Kahn maintained that deregulation was and is a good idea, and expressed disappointment over Crandall’s speech. Yet he also said there is no reason to believe that airlines will ever match the profitability of other industries.

Perhaps that’s the crux of this issue: Within the movement for a financially secure aviation industry, there are many competing interests and those interests don’t always dovetail. Shareholders, airline management, airline labor and passengers themselves often are at odds over what constitutes success. And it’s not a given that what is good for one sector is good for all.

What’s more, long-term profitability in the airline industry has proven elusive. In a famous letter to shareholders a few years ago, investor Warren Buffett stated: “Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” And Richard Branson, the founder of Virgin Atlantic Airways, is fond of telling an old joke: “The easiest way to become a millionaire is to start with a billion and go into the airline business.”

Take the issue of airline maintenance outsourcing: Several months ago I spoke at a conference in Washington about my research into this topic on behalf of Consumer Reports. That conference was co-sponsored by the Business Travel Coalition, an advocacy group for corporate travelers, and its president, Kevin Mitchell, describes the airlines as being engaged in “a mad race to the bottom on maintenance costs.” Clearly passengers are not served by such aggressive cost-cutting, though shareholders may be (in the short run only).

Mitchell offers some perspective on a topic we’ll be hearing a lot more about in the months to come, as more and more domestic airlines face the specter of bankruptcy filings: “The debate has focused solely on the airlines’ profitability, but the debate should be focused on the country’s long-term energy independence.” Mitchell adds, “Unless you want to make a religion out of the free market, you have to agree with Crandall.”

The coming debate

Within a short time, both houses of Congress and the new president may very well be confronted with bailing out a failing U.S. airline industry. Before they act, they would be wise to recognize that airline executives and many Wall Street aviation analysts are biased parties to such a discussion, and other voices should be heard — voices that speak on behalf of consumers and communities. And voices that speak of the bigger picture and how a viable commercial aviation system supports America’s economy, security and defense. What’s good for airline management may not be what’s best for the taxpayers funding such a bailout.

The reregulation debate could well be upon us soon. It’s certain the specifics of these arguments will be hotly contested. But it’s critical that legislators, journalists and the traveling public understand just what is at stake. If the nation’s airline industry enters into full-blown crisis mode, those who waited to learn more may find they’re too late.

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