Come Fly With Me!

Return with us now to those thrilling days of yesteryear! I think that Phillip Longman and Lina Khan of Washington Monthly have been watching Pan Am too much. Today they have a lengthy jeremiad on the problems faced in markets for air travel other than the major markets, e.g. New York, Los Angeles, Chicago, Atlanta. The Cincinnatis, Memphises, and St. Louises. Their prescription?

Transportation in all its forms is not much different, as most people can see easily when it comes to highways. If we had a “deregulated” private interstate system, we’d have lots of high-quality toll roads running straight and fast between the largest population centers—indeed, probably far more than we need. And from time to time, exuberant entrepreneurs might try to make a profit by constructing a new artery road here or there as well. But the high fixed cost of building roads would mean that most smaller cities either would remain off the network or would have to pay such high tolls that they would never stand a chance of growing. Either way, owners of major highways, seeking to avoid competition, would gradually buy up owners of lesser highways, and then each other, until everyone was paying outrageous tolls and the whole economy suffered.

That was the lesson previous generations learned from railroads; the current generation has to learn it all over again, from our experience with deregulated airlines. Why have we become so passive and reluctant to face up to the hard task of governing ourselves and our markets? We don’t need to recite “The Serenity Prayer.” We need to get out from under the thrall of the false prophets of deregulation, conservative and liberal alike, and make the benefits of true capitalism work for us once again.

Let’s briefly consider why the airline industry is in the state it’s in. Basically, the industry has suffered from the following problems: bad airport management, bad airline management, business model collapse, and fuel prices.

Most major airports are owned and operated by cities, counties, or regional authorities. Chicago owns O’Hare. St. Louis owns Lambert-St. Louis. The city of Los Angeles owns Los Angeles International Airport. The number and timing of landing and takeoff slots is determined by the FAA and, essentially, assigned by lottery. Airlines treat these slots as assets and buy, sell, and trade them among themselves.

The governments that own and operate the airports are incentivized always to increase the number of runways and the size of terminal facilities without consideration of the number of slots available. That’s where their fees come from and it’s the part that’s under their control. Chicago has been expanding O’Hare over the objections of its carriers for decades. Some time ago Chicago attempted to add a third airport, again over the objections of air carriers. That ultimately failed.

If this sounds like a “tragedy of the commons” situation to you, you won’t be far off. More to the point does this sound like inadequate regulation?

The airlines, too, have their management problems. One of my early posts was on this very subject. Rather than going into more detail, I’ll just ask a question. Who created the airlines’ employee pension problem discussed in the article?

Moving on to my third point, I think it’s clear that the business model that has dominated the major air carriers for decades has run into serious problems. Mention problems with the hub system in the post linked above. It renders the carriers who’ve adopted it unresponsive to change (as does our entire allocation system). Southwest Airlines is dismissed in the article as a low-cost carrier without considering how Southwest is able to keep its ticket prices low while maintaining higher levels of employee satisfaction than the major carriers.

Basically, Southwest is arbitraging the overcapacity in major markets and the cost differentials between facilities within those markets. Buying slots is cheaper at Midway than at O’Hare.

Consider the graph at the top of this post. Other than the seasonal nature of the airline business the thing that I think that graph makes clear it’s that the airline industry is not a growth business. The number of revenue passenger miles has been pretty flat since 2005. It’s not just the recession. Things have changed. See also this interesting post from Mark Perry. This presentation from the Regional Airline Association is interesting, too, if not completely on point. Does it refute the authors’ underlying claim?

However, there’s another way in which the business model of the major carriers is failing. This isn’t the 1960s. Big companies just aren’t what they used to be and nowadays businesses have alternatives other than physically sending their worker bees around the country and around the world.

When the number of slots has peaked, your revenue passenger miles have plateaued, and you can’t wring any more costs out of operations than you already have done, it leaves the airline industry at the mercy of oil prices which is basically where they are now.

Note the recurring theme: how will more regulation improve any of the problems the airlines are having? What it will do is provide a smokescreen for increasing prices which I gather is what the authors want.

What will the future look like? If it will be of a handful of megalopolises, the airlines are doing exactly the right thing and we shouldn’t get in their way. If it will be of a great flattening and the disappearance of cities with increased telecommuting and teleconferencing, there is no future for the airline industry.

Detroit, Memphis, St. Louis, and Pittsburgh’s problems were not created by the airline industry and re-regulating the industry won’t solve those problems. Regulation is not good at dealing with change. Move over for the 21st century. If you don’t like change, you won’t like it at all. What were great cities in 1950 won’t be rebuilt with more regulation, however benign and effective. Embrace the future—that future means change.

16 comments… add one

  • steve

    I am not sure why we should get involved with this at all. Let the airlines sort it out. If some people do not get air service, too bad.

    Steve

  • I can only speculate. I think their answer would be that the lack of adequate air service is injuring the economies of cities other than the major markets.

    My answer, in my somewhat stream of consciousness post, is that a) change is permanent; Pittsburgh may not be and b) however well-intentioned or brilliant, inherently retrospective regulation cannot solve Detroit’s problems.

  • TastyBits

    Southwest uses (or it did) the Futures Market to hedge its fuel costs. In the last oil price spike, they were able to remain profitable because of this. Also, Southwest flies profitable routes, and therefore their service is limited. In the past, Southwest priced its fares against Greyhound bus service.

    One thing that has not helped the airlines is the removal of the Saturday overnight requirement. (This would be prior to 9/11.) Business travel was a fairly pleasant experience. It cost more to fly, but that cost was passed on to the client. Those were the days. Or, my memory is failing, and I have forgotten how much it sucked.

    The thesis of the linked article seems to be: The decline of large cities is caused by the airlines, and de-regulation is bad. I suspect that the Chiquita move to Charlotte has little to do with air travel. I liked the NASCAR dig. The rest of it is a muddle of nonsense. The comments are interesting, and I think @Charlie gets it right.

    “For the Snark was a Boojum, you see.”

  • The thesis of the linked article seems to be: The decline of large cities is caused by the airlines, and de-regulation is bad.

    I think the thesis is subtly different: de-regulation is bad and maybe we can blame the decline of large cities on it.

    My own view is that deregulation is largely irrelevant to the decline of Pittsburgh, that what has been deemed “deregulation” was in fact nothing of the sort, and that regulation, far from being a solution to the problem they’re pointing out, will just produce a different set of problems. The airline industry is still massively regulated and tremendously subsidized and the reason the industry’s top management can’t make things work is incompetence.

  • TastyBits

    @Dave

    Make it: “Regulation is good”, and I think you are correct. I could not read anymore after St. Louis, and I started skimming.

    I have never been able to figure out why the airlines can not make money or why anybody would buy their stock. They should have gone the way of Pets.com, but somehow, they keep going. They may have a successful business model, but we are not looking at it correctly.

    (My dogs assure me that online pet stores are a “public convenience and necessity,” and they view airline service as inconvenient and unnecessary. Of course, they also think carpet fiber and cardboard are delicacies.)

    As a business traveler, higher prices meant fewer tourists. The airlines may be able to make money with the a’ la carte pricing, but that is causing a call for new regulations.

    “For the Snark was a Boojum, you see.”

  • Icepick

    Don’t forget that airline travel is just simply unpleasant these days. Too much stupid security and too much time wasted in the airports. not to mention that the last couple of times I was on a plane it was similar to riding a bus, even including the last time I flew, when thanks to a gift from a friend we got to fly first class.

    The only reason my wife and I fly these days (and we haven’t in a coupple of years) is because going from Florida to California just takes too long otherwise. Plus, Amtrac’s lines got busted up by the hurricanes of 2004 and 2005, so rail travel across the southern part of the nation was badly disrupted for a while. (It might still be, I just don’t know.)

  • steve

    Flying in the regulated era was much, much nicer. Cost more too.

    Steve

  • I flew American to Oregon to visit a sibling last year. My flip-down tray was duct-taped up.

  • Icepick

    My flip-down tray was duct-taped up.

    I wouldn’t worry about that. Now if they had MacGyvered the wings….

  • PD Shaw

    I flew out of StLouis to Orlando last year on SouthWest. Yes, there are fewer flights because of the loss of hub status, but there was probably a flight going my direction every two hours. In fact, the fewer people hanging around waiting for their transfer made the airport a little bit nicer. The hub system is important for the community’s employment and tax base, but I don’t see how its important to the traveler.

  • Now if they had MacGyvered the wings….

    There’s a man out there! I know I had a mental breakdown. I know I had it in an airplane. I know it looks to you as if the same thing is happening again, but it isn’t. I’m sure, it isn’t.

  • Icepick

    There’s a man out there!

    Wanna see something really scary?

    [Cue the CCR]

  • Brett

    @Dave Schuler

    Big companies just aren’t what they used to be and nowadays businesses have alternatives other than physically sending their worker bees around the country and around the world.

    Good point. Those business travelers were hugely important to the major carriers (at least according to my mother, who worked at Delta for 17 years). Losing lots of them probably hit the airlines hard.

    Hearing the authors’ view of a privatized road system had the opposite effect of what they were intending – I’m curious now as to how it might have turned out. People have always had alternatives to cars to travel, and a company that bought up the highways and jacked up the tolls might lose a lot of its business to a hypothetical privatized railway system.

  • Brett

    To add-

    I love how the authors cite the regulation of railway pricing as a good example of government regulation. That’s the same system that almost killed freight rail in the twentieth century vis a vis the trucking business, at least until the requirements were removed in the 1980s (at which point freight rail began to thrive).

  • lee

    I read their article and had a hard time with “willing suspension of disbelief” after reading how fares “skyrocketed” after deregulation. My gut feeling was that that was not true. So, I went to one of my favorite web sites, Measuring Worth, where you can calculate present dollar values. First, I happen to have an old travel guide from 1969 for Israel with an ad for flights in it on El Al at about $450, round trip, for economy (“student”) class. So then looking up economy NYC-TA flights on El Al, it’s currently about $1100 round trip for economy. In 1969 dollars, that would be somewhere between $81 and $250, more likely around $202. Okay, so that is an international flight involving a nationalized carrier….

    How ’bout…

    So, I plugged in what I generally paid to fly Southwest from SFO to Indy, about $450. And used 2010 as the start year. Well, I went ahead and stuck with 1969 as the destination year, and $450 2010 dollars was the equivalent of $30.50 to $90.60 in 1969. And if flight fares were really that low, my parents would’ve been flying us a lot more on family vacations than driving everywhere for them.

    My point is, I don’t really think flight fares have skyrocketed as a result of deregulation, but rather deregulation caused them to drop as airlines had to find new ways to compete for money.

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