Did Ending Regulation Help Fliers?
Thirty years ago, airline deregulation was supposed to fulfill two main goals: spurring competition and bringing down airfares.
Now the number of airlines may be shrinking, as the planned merger between Delta and Northwest is likely to encourage other big airlines to pair off. Reduced competition will probably mean higher fares, particularly as the airlines shrink their fleets and cut flights to reduce costs.
All of which raises anew the question: Has deregulation really worked out?
By some measures, it has. By others, not so much.
Before the industry was deregulated in 1978, there were 10 big carriers — referred to as trunk lines, they controlled 90 percent of the American market — and 8 smaller regional carriers. The airlines were tightly controlled by the Civil Aeronautics Board, which regulated routes and set fares that guaranteed airlines a 12 percent return on flights that were 55 percent full.
Service was limited. American, for example, flew to only 39 cities, and Continental had to wait eight years for approval to fly from San Diego to Denver. Discounts were rare, too. When some airlines tried to offer cheaper fares in 1974 for charter flights, the president of the Air Transport Association trade group said it would be “the beginning of the end of the nation’s air transportation system as we know it today.”
It is a much different industry today, but not all of it is better.
Flying is less expensive, as fares have fallen steadily, adjusted for inflation, and there are more flights to more cities. The barrier to entry is lower. Over the last 30 years, more than 150 airlines have sought bankruptcy protection or disappeared, but more keep springing up as investors continue to put hope over experience, said Denis O’Connor, managing director with AlixPartners, a restructuring firm.
“People don’t understand how easy it is to start an airline,” Mr. O’Connor said, because of a ready supply of pilots and other employees, as well as used airplanes. “Why would you put capital in something if you can’t make a go of it? Southwest is an example of why you would.”
But the industry incurred losses of more than $30 billion from 2001 to 2006 and has gleaned only scarce profits since then. Persistently high fuel costs are driving airlines into bankruptcy court, or one another’s arms, something proponents of deregulation did not foresee, said Alfred E. Kahn, who led the air board when deregulation took place.
The Delta-Northwest merger plan, announced Monday, may lead to a deal between United and Continental, which would push other leading carriers like American to pursue partners of their own. Meanwhile, smaller carriers like Aloha and Frontier have sought bankruptcy protection in recent weeks.
As anybody who has flown recently knows, the level of comfort and reliability today bears no relation to that of the regulated days.
The naysayers at the time of deregulation predicted that “jobs would be gone, cities would lose service, and customers would pay higher fares,” said Mark H. Rose, a professor of history at Florida Atlantic University and a co-author of “The Best Transportation System in the World,” which examined deregulation of airlines, trucking and railroads.
They were partly right. After a big industry buildup through the 1990s, more than 100,000 jobs have been lost since the beginning of the decade. Former hub airports like Pittsburgh and St. Louis are now far less busy as hometown airlines have merged with other carriers and their replacements have pulled back service. Fares have fallen, on average, but they often rise when an airline leaves a city.
What the architects of deregulation did not predict at the time was the rise of frequent-flier programs and the hub-and-spoke system. Both have the effect of a kind of regulation, since they create incentives for consumers to stick with one airline, rather than shop solely on price. And fortress hubs, as their name implies, were intended to keep competitors at bay, giving the dominant airline in the city more control over pricing.
Alliances between big carriers are meant to offer bigger route networks, but they also provide another reason for travelers to shop around less.
All that would seem to spell less competition, not more.
But Southwest’s transformation from a Texas puddle jumper to the biggest airline in terms of domestic traffic (at least until the Delta-Northwest merger is completed) would not have happened without deregulation.
That airline’s evolution is what some experts point to as the best proof of why deregulation, for all its troubles, ultimately is better than a regulated environment.
The Free Market at Work
“This is the free market at work, and we’re not used to it,” said Mo Garfinkle, a lawyer and a longtime airline industry consultant. “The idea of deregulation was to allow entry, whether it was successful or not.”
Mr. Garfinkle, who has advised many airlines involved in merger talks, says he believes that the industry is only now winding up the first phase of deregulation, in which industry practices had to be established.
Indeed, the federal government still regulates safety and the air traffic control system, and it steps in whenever either seems threatened, as passengers were reminded when American, Southwest and others grounded hundreds of flights this past month to reinspect aircraft.
On Wednesday, the Transportation Department announced two ideas for solving perennial delays at La Guardia Airport. One would call for the government to reduce the number of flights; the other would have airlines rein themselves in by selling some of the slots that give them the right to fly there.
Both ideas, now up for discussion, are meant to encourage growth by new airlines, which might otherwise have a hard time establishing service from La Guardia, said D. J. Gribbin, the department’s general counsel. “If you block out a market, you block out competition,” Mr. Gribbin said. “This benefits new entries.”
Beyond that, the next phase of deregulation will take place when airlines are truly globalized, flying freely inside other countries’ borders as well as their own, Mr. Garfinkle said. The merger between Delta and Northwest would be a major step toward that end, given their broad American network and extensive list of cities in Asia, Europe and elsewhere, he said.
However, the prospect of American carriers trying to compete against healthier foreign airlines, some of them still government-owned, is daunting to James L. Oberstar, Democrat of Minnesota, who heads the House Committee on Transportation and Infrastructure.
“It’s a very bad idea,” said Mr. Oberstar, whose state is home to Northwest’s headquarters. He said he expected “a cascade of carriers finding partners” if the Delta-Northwest combination is allowed to go forward, leading to fewer choices and higher prices for consumers.
Even if that happens, Mr. Garfinkle says he doubts that Congress will take up any serious re-regulation efforts. “You’re not going to re-regulate fares, and you’re not going to re-regulate service,” Mr. Garfinkle said. “It’s not something where you can be half pregnant.”
But Mr. Rose says members of Congress will have to discuss re-regulation, if only to seem as if they are looking out for their constituents’ interests. No city or state with an airline hub wants to see it vanish.
“It’s like losing a major league ball club,” he said. Airline hubs are “the kind of things you need to be major league, for your corporations and for yourself.”