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.