Airline commission way off course 'Much wind and little lift'

Robert Kuttner

August 23, 1993|By Robert Kuttner

THE report of the National Commission to Ensure a Strong Competitive Airline Industry, appointed by the Clinton administration last May, could have been the work of Ronald Reagan. The commission did acknowledge that the airline and aircraft industries are in a tailspin, but offered much wind and little lift.

As the commission noted, the airlines have lost $10 billion in the past three years; they are now $35 billion in debt. Meanwhile, the aircraft makers, hit with the treble shocks of declining military contracts, dwindling commercial orders and subsidized foreign competition, have laid off hundreds of thousands of workers.

With the lone exception of commissioner John Peterpaul of the machinists' union (one of two labor representative on the 15-member panel), none of the commissioners seriously examined the flaws of airline deregulation.

Contrary to its advance billings, deregulation has led to a crazy-quilt of discriminatory fares and price wars, greater industry concentration, identical fares by nominal competitors and bribes ("override commissions") by airlines to induce travel agents to steer customers to favored carriers. Average fares have declined slightly during the 15 years of deregulation -- but they actually dropped slightly faster during the regulated era, when airlines could afford to keep buying newer planes.

A commission sincerely committed to the ideal of deregulation might have at least addressed the glaring defects of the current system. The commission might have proposed tougher anti-trust standards, limits on airlines' control of travel agents' reservation systems, a crackdown on blatant price discrimination and on the ability of the major airlines to restrict competition by tying up gates and landing slots at busy airports. But it did none of these.

The commission was liberal with rhetoric about saving jobs and industries, but it offered nothing concrete to help aircraft manufacturers convert from military to commercial production. For the airline industry, it proposed mainly bailouts via various forms of tax and regulatory relief, and bankruptcy reform.

"[The commission] defined the problem as saving the airlines, not as preserving diversified service for the public," says Richard Leone, chairman of the New York Port Authority.

As Commissioner Peterpaul wrote in a stinging dissent, "At the heart of the commission's timidity is its deep reluctance to address the negative effects of airline deregulation. . . . The average reader of the commission's report would get the impression that the airline industry has simply had a run of bad luck (the gulf war, a recession, etc.) and that tax and regulatory relief will correct all of the industry's problems."

In the key area of trade policy, the commission did recommend tougher bargaining in the future to give U.S. carriers greater access to international routes. However, it proposed unilaterally giving foreign investors the right to buy up to 49 percent of any U.S. airline.

Seemingly, foreign investments such as the recent USAir deal with British Air and KLM's partial buyout of Northwest, help replenish industry capital at a time when domestic investors are wary. But such deals also give overseas airlines access to American passengers while denying U.S. carriers comparable landing rights overseas.

A recent report by the Economic Strategy Institute, "The Future of the Airline Industry," notes that U.S. air carriers operate at far lower cost than their European competitors, but are prevented from competing freely in European markets. "The foreign investment paradox," the report warns, is that by gaining access to U.S. domestic markets from protected foreign bases, "The high-cost [European] producers are dominating the low-cost [U.S.] producers." And jobs and passenger revenues flow out of the United States.

By the same token, U.S. aircraft producers fly into headwinds of foreign industrial policies. They not only face competition from state-subsidized producers like Europe's Airbus. They also face escalating pressure by foreign buyers to shift more of their production overseas -- Boeing's 777 will be nearly 30 percent foreign-made. But the commission is largely silent on the matter of how to counter this.

Why did this commission flame out? For one thing, it was heavily influenced by the airline industry, which wants bailouts but not rules. The big carriers, having driven out most upstarts, also want to be free to manipulate fares as they see fit. The commission also reflects the pervasive influence of free-market economists who have an intellectual stake in vindicating the deregulation experiment, however perverse its results.

"No one is for going back to the old system," says Richard Leone. "But deregulation is not the goal; competition is the goal. This is an imperfectly competitive industry, with heavy public involvement. To achieve competition, you need rules."

Indeed, air transport -- regulated or deregulated -- is far from a textbook free market. It has long enjoyed a guiding hand of government, here and abroad, in everything from aircraft production to airport construction. Air transport also has constraints on airport capacity and hence limits on easy entry into the business. Moreover, the public depends on a reliable and predictable air transport system, which cannot be left to a market lottery.

Democrats are supposed to grasp such principles. However, in the case of airline policy, there is an intellectually seamless, non-stop continuity between the Reagan-Bush and Clinton eras. Let's hope for a course correction before the policy crashes.

Robert Kuttner writes a column on economic matters.

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