Airline deregulation should be scrapped

Robert Kuttner

February 12, 1992|By Robert Kuttner

A SIMPLE round-trip coach airline ticket Boston-Washington-Boston, a distance of less than 400 miles, now costs $600.50. Remarkably, it costs that identical sum on USAir, Northwest, American and Delta, too.

If you can book seven days in advance, the fare drops to $510.50 -- on USAir, Northwest, American and Delta. A real bargain. As recently as two years ago, the basic unrestricted round-trip coach fare was $280. Deregulation, how can we ever thank you?

According to airline industry sources, an airline can fly Boston-Washington-Boston round trip with about 60 percent of seats sold and break even for about $150 per paying customer. With a $600 fare, the airline is enjoying a profit of 300 percent.

When airline routes and fares were deregulated in the late 1970s, economists forecast a new day of cheaper fares, more consumer choice and new, efficient airlines that would give the established carriers a run for their money. They also forecast a world of simplified fares, where the price of a ticket would closely reflect an airline's actual costs.

For a few years, new airlines like People Express and New York Air jumped in with cut-rate fares. But the big airlines selectively offered just enough cut-rate seats to undercut the upstarts, and either drove them out or bought them out.

With the recent financial collapse of TWA, which followed Eastern, Pan Am, Continental, Midway and America West into bankruptcy, there are now just three major airlines that are healthy -- United, Delta and American, and two that are surviving but wobbly -- USAir and Northwest.

Fares did drop for the first few years after deregulation, but once the major carriers used their market power to drive out the newcomers, fares started going up again. Actually, prices dropped more rapidly during the era of regulation, if you take into account changes in the cost of fuel, and airlines enjoyed more stable profits to boot.

Why, after all, do airline tickets become cheaper over the long run? Not because flight attendants outdo each other to serve coffee. Airline costs drop over time for technological reasons -- because successive generations of planes become more fuel-efficient. Under the more stable system of regulation, customers enjoyed predictable and falling prices, while airlines enjoyed predictable profits that they could invest in new, fuel-efficient aircraft. But under deregulation, the fleet is growing steadily older because airlines can't afford many new planes.

The airline business today offers the worst of both worlds. For the consumer, fares are unpredictable; for the airline, profits are unreliable.

Prophets of deregulation simply overlooked the ability of big airlines to use computers to manipulate fares and drive competitors out of business. They underestimated the willingness of free-market romantics in charge of antitrust under Reagan and Bush to wink at practices that were plainly uncompetitive. As if by some invisible hand, all four airlines on the Boston-Washington route have identical fares.

Even in cities where there is nominal competition, congestion limits the number of gates and "slots" available for take-offs and landings. Under free market principles, take-off and landing slots are supposed to be bought and sold, but it is more valuable to keep a competitor from flying than it is to sell him an unused slot. At O'Hare in Chicago, United has more slots than it can use, but it would rather leave them idle than sell them to a potential competitor.

Textbook economics makes certain assumptions: New entrants can challenge established firms; competition occurs on the basis of price; consumers have adequate information. None of this describes the airline business.

When Congress first regulated interstate commerce, in 1887, to prevent railroads from gouging passengers and freight shippers, the idea was that there was a public "convenience and necessity" served by reasonable and predictable rail fares. Congress acted in part because rail magnates had a nasty habit of conspiring to raise prices, against the public interest.

Nearly a century later, economists convinced Congress that airlines were not like railroads. There was plenty of room for competition, and no need to regulate. The free market would police itself.

They could not have been more wrong. In a large industry, with limited access and few competitors, aided by computerized systems for tracking each other's fares, it is child's play to manipulate prices. Competition thrives, paradoxically, only when government polices it.

Even if markets did work better than they do, there is still a public convenience and necessity in having fares that are reasonably predictable, and that bear some relationship to the distance traveled. Right now, I can travel from Boston to FTC Washington more cheaply if I go via London.

Congress needs to scrap the deregulation experiment, force airlines that dominate particular routes to let in competitors and put a ceiling on fares that exceed more than, say, double an airline's costs. And the economists who brought us deregulation need to go back to school and learn a useful trade.

Robert Kuttner writes regularly on economic matters.

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