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The Airlines: Less Regulation Won't Fly


Economic Viewpoint

The Airlines: Less Regulation Won't Fly

For air passengers, this is the summer from hell. Record traffic has produced record delays, compounded by a dispute between the Federal Aviation Administration and pilots over whether a landing maneuver intended to stretch airport capacity is safe. A compromise was reached in mid-July, but flight delays and airport congestion continue.

This calls to mind another dispute: Is the deterioration in airline service the result of too much deregulation--or too little? For academic cheerleaders of deregulation, government has been too slow to get out of the way. Economists Clifford M. Winston of the Brookings Institution and Steven A. Morrison of Northeastern University credit airline deregulation with saving consumers fully $20 billion a year. They suggest that government needs to further reduce its role so that "markets can work."

But laissez-faire markets can't work in an imperfectly competitive industry that is heavily dependent on public infrastructure. For one thing, big airlines don't really want markets to work. They want to dominate hubs, in order to gain market power over fares. Another inefficient consequence is relatively fewer point-to-point long-distance flights with competing carriers. Morrison reports that competition in the airline business actually peaked in 1985, before the major carriers succeeded in killing off most upstarts. During the few years of real price competition, the big airlines lost billions. According to Morrison, the average air route today has just 2.2 carriers. He further calculates that on routes served by Southwest Airlines Co., the one new airline with economic muscle, average fares are 47.2% less than on comparable routes.

The industry is seeking more consolidation. If the proposed merger of United Airlines Inc. and US Airways Group Inc. goes through, other rivals will defensively combine, leaving just three major airlines and even less head-to-head competition. That can't be good for consumers. Antitrust regulation is largely omitted from the paeans to markets by deregulation advocates.LIMO BOOM. The problem isn't just mergers. The current rules give dominant airlines far too much power over control of airport gates, which are sometimes mothballed rather than being given to prospective competitors. Very crowded airports, such as Chicago O'Hare, Boston Logan, Washington National, and New York's La Guardia, also impose traffic flow limits on takeoff and landing "slots," which further increases the pricing power of incumbent carriers. This summer, there has been a boom in limousine and taxi travel between New York and Boston by frustrated airline passengers. Fares are so exorbitant and service so unreliable that it's actually more economic and prudent to pile four people into a car and take a four-hour drive rather than risk a one-hour flight that may be delayed indefinitely.

This raises another issue of public policy: infrastructure. Any reasonable country would have high-speed rail service between cities just 200 miles apart. That would relieve a lot of airport congestion. Amtrak's Acela train was supposed to cut the Boston-New York run to three hours--still too long--but Acela express service has been delayed for a year because the old track can't sustain the high-speed cars. A long-term solution would require not just the shoring up of existing rails, but the laying of whole new rail lines for dense corridors, as the Japanese, French, and Germans have done. We also need high-speed rail service to "reliever" airports on the fringes of large cities, to increase airport capacity. In short: more public investment.VARIABLE PRICING? Enthusiasts of airline deregulation count as consumer savings the time saved through the increased frequency of flights--but don't figure in the time lost to extensive delays. Market advocates have ingenious schemes to use market incentives to reduce airport congestion. Economists Winston and Morrison, for example, propose variable pricing, so that travelers who fly at rush hour pay for the privilege. Many also have suggested a different system of landing fees to discourage small private jets from clogging highly congested airports.

But guess what! These creative market incentives are a form of government regulation. They override how markets would otherwise price, in order to serve public purposes; likewise for antitrust enforcement and the public investments that private markets won't provide. And none of these incentive schemes that compensate for the market's myopia are handed down by economic philosopher-kings acting in a pristine market realm purged of politics. In a democracy, the rules of commercial engagement are inevitably set by the rough-and-tumble of public debate.

Less government involvement per se does not necessarily produce more efficient markets. If airline deregulation can take credit for some cheaper fares, it can also take the blame for price-gouging and deteriorating service. The choice should not be markets or government but a more effective blend of both.By Robert Kuttner


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