Airline deregulation wasn’t cure-all
by David Morris
Originally published in Minneapolis Star Tribune, August 28, 2005
Two weeks ago I was searching online for a nonstop flight from Albany, N.Y., to Washington, D.C. United’s flight was full, but a direct flight was available from a company called Independence Air, and it was $100 cheaper. I was intrigued.
Never having heard of that airline, I did what any seasoned traveler would do — I Googled it. A story from USA Today, dated the day before, reported that Independence Air’s CEO had notified the securities community the airline might file for bankruptcy, perhaps even before my flight was to take off.
The low-fare carrier, launched in 2004, is struggling to stay aloft just a year later. It’s a remarkably common corporate history in the era of airline deregulation.
This July, the Government Accounting Office issued a report discussing the dismal financial state of the industry. “While the airlines industry was deregulated 27 years ago, the full effect on the airline industry’s structure is only now becoming evident,” it concluded.
In the 27 years before airline deregulation, no airline had gone bankrupt. Since 1978, 130 airlines have come and gone. In the past quarter-century, the rate of bankruptcy among air carriers has been as much as 10 times higher than among the general business community. In 2005, most major airlines are either in bankruptcy (United, US Air) or on the verge of bankruptcy (Delta, NWA).
How did we come to this pass? In the late 1970s, the airline system was straining under an inflexible and cumbersome regulatory system. A long, drawn-out proceeding was needed simply to get permission from the Civil Aeronautics Board (CAB) for employees of two affiliated airlines to wear similar uniforms.
Something needed to be done. The liberals in control of Congress, the White House and the CAB opted for revolution rather than evolution. Rather than mend the existing system, they blew it up. By the early 1980s, federal controls over the entry and exit of airlines, over flight schedules and over airfares were abolished. Quality-of-service requirements ended. Only airline safety remained under federal regulation.
An unqualified success?
Today conservatives control Congress and the White House, and they fight even the tiniest move to reestablish some federal control over airlines. A near-consensus exists that airline deregulation, in the words of the Economist magazine, has been a “virtually unqualified success.”
From my perspective, the cost-benefit analysis of airline deregulation depends on how wide a lens one is using.
Advocates of deregulation point to the fact that the number of air passengers has soared since 1978; but it soared as fast in the years before deregulation. They note that airline fares have dropped significantly since deregulation for most (but not all) passengers; but they dropped just as fast in the 27 years before deregulation.
Indeed, the use of price alone as a measure of success is looking increasingly suspect. In the past four years, airfares have dropped more than 15 percent. In the same time frame, 20 airlines have gone bankrupt. United and US Air have walked away from their pension obligations. Northwest has just imposed a 25 percent unilateral wage reduction on its machinists. The industry as a whole has lost $25 billion.
The most ardent proponents of airline deregulation argue that as much as half of the price decline since 1978, or about 20 percent, resulted from deregulation. Others argue that the figure is wildly exaggerated. For example, the advent of Internet booking alone has had a substantial impact, all but eliminating the 10 percent commission that travel agents earned for booking most flights.
So let’s split the difference and say deregulation has resulted in a 10 percent ticket-price reduction. That’s the benefit. What’s the cost?
In 1978, when you bought a ticket, it was fully refundable. You could change flights without penalties. There were no requirements for Saturday stay-overs.
Cheaper fares, more hassles
Today most people who receive steep discounts spend more time on the road, either staying over extra days or traveling from more distant airports. People fly into Baltimore or Dulles airports rather than Washington National. They save money on the ticket, and spend another hour or so and $30 more for the cab.
Airline passengers have saved 10 percent, but hundreds of thousands of people have either lost their jobs or lost their job security or their pensions.
From the perspective of 2005, some of the horror stories bandied about by those who argued for deregulation seem less, well, horrible. One deregulation proponent noted that CAB approved less than 10 percent of airline applications to open new service routes between 1965 to 1978. But in the 1970s, the load factor — the percentage of seats filled on planes — was about 50 percent. Why should new routes have been approved?
In 1973-74, oil prices quadrupled. But there were no bankruptcies in the airline industry. The operational cost increases were passed through to the customers.
Yes, we paid a price for airline stability and continuity and for job security (and for pretzels, and pillows and meals and movies). But the price was modest. And overall, if we take into account the full costs to employees and customers and communities, the regulatory era might have had a far more positive cost-benefit ratio than the one under which we now live.
David Morris is vice-president of the Minneapolis and Washington, D.C., based Institute for Local Self-Reliance (www.ilsr.org).