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Flying In The Face Of Reason: Why The Skies Need Reregulating


Economic Viewpoint

FLYING IN THE FACE OF REASON: WHY THE SKIES NEED REREGULATING

It is time to reregulate the airlines. But the Clinton Administration, with the best of intentions, could actually make things worse by pursuing the fantasy of purer competition.

Airline deregulation was supposed to bring more consumer choice, more price competition, and lower fares. At first, dozens of new airlines entered markets, forcing down prices. But the established carriers responded by selectively undercutting cheap fares, setting up "fortress hubs," and forcing the upstarts out of business. The airlines also used computerized reservation systems to complicate fare structures mercilessly. Today's airline cartel uses the same predatory practices that the railroads used in the last century.

But despite all the manipulation, this is a cartel that can't shoot straight. Last year, notwithstanding tacit collusion, predation, gouging, cheaper fuel, and declining labor costs, the airlines collectively lost $7 billion--their third straight money-losing year. Airline bonds have been downgraded to junk. Service is eroding. Hundreds of jetliners have been mothballed, and the slack demand for new planes has in turn created a recession in aircraft

production.

The system today oscillates between ruinous competition, opportunistic overcharging, and selective deep discounts. Over time, the fuel-adjusted cost of air travel actually declined faster under regulation.

fare market value. I often fly between Boston and Washington. No matter how far in advance I book, the fare is $662.50 coach round-trip, and identical on all airlines. However, if I were flying for a corporation that buys tickets in bulk, the fare would be about $300. And--fasten your seatbelt--if I were flying as a federal bureaucrat, the fare would be just $140 round-trip. The government has negotiated a bulk contract with Northwest Airlines Inc. that provides cut-rate prices for federal officials. In effect, private air travelers subsidize government travel.

The reason the airlines can charge me $662.50 for a short flight is because takeoff and landing slots are restricted in the busy Northeast corridor, artificially limiting competition. But at that price, fewer people fly. So the airlines then try to fill up the seats by flying bureaucrats at steep discount. If fares were regulated, with one basic coach price and perhaps a modest discount for advance purchases, the airlines could fly you, predictably, between Boston and Washington for well under $300 round-trip and make money.

Evidently, despite the mistaken theories of the deregulators, a highly capital-intensive industry with a standard product, such as airlines, cannot stand pure price-competition--for all the profits would soon be competed away. Airlines dwell not in an Adam Smith world but in a world more reminiscent of economist Joseph Schumpeter's model in which "efficiency" depends more on technical advances than on price wars. Technical advances--better airplanes--in turn require deep pockets, and deep pockets require predictability.

Blowing in the wind. Transportation Secretary Federico F. Pea recently announced a commission to study the airline and aircraft industries. But will this commission still fly by the old dogmas and try to purify deregulation? Two straws in the wind are the recent resurrection of antitrust enforcement (a decade too late, but never mind) and the conditional approval of USAir Inc.'s proposed joint operating deal with British Air PLC.

Last year, an upstart airline called Reno Air Inc. (no relation to the Attorney General) began flying to seven cities out West, using leased planes. Northwest, following more than a decade's standard tactics, began selectively underpricing seats on the same routes. Perhaps Reno's name caught the Justice Dept.'s attention. The antitrust division warned Northwest that it was courting trouble. Northwest took the hint.

Allowing upstarts back in will restore some temporary bargains, but in the long run it will create a more fragmented and money-losing industry. To compensate, Northwest will probably jack up my Washington fare to $1,000--and I will stay home or take Amtrak. The Administration also thinks it can increase competition by allowing foreign carriers into domestic U.S. markets, if U.S. carriers can get greater access overseas. Most of those carriers, however, are subsidized. And the proliferation of airlines flying domestically would only add to the ruinous cycle of price-cutting, gouging, and bankruptcy.

Instead, we should reregulate. The same computers that let airlines manipulate fares would allow regulators a much more nuanced brand of regulation. Discriminatory pricing should be prohibited. While regulation should not dictate prices, it could establish "zones of reasonableness," requiring fares to roughly reflect distances and costs. This would give airlines flexibility to compete on price within limits and give the traveler greater predictability. The airlines would be assured a moderate return, the most efficient carriers would enjoy the greatest profits, and aircraft makers, whose products are the real source of cheaper air travel over time, would again be able to sell planes. The deregulators should admit that their experiment went down in flames.ROBERT KUTTNER


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