Is the airline industry for the public good?

I found a column in the Philadelphia Inquirer today that discusses whether the airline should or should not be considered for heavier regulation.  You can read it in its entirety HERE

We regulate the airline industry on safety matters (but not without a lot of groaning from the industry at times) and we definitely have found that it is appropriate to regulate interstate commerce on some level.  However, a return to the days of pre-1978 deregulation would, in my opinion, be a mistake. 

People often long for those days in the perception that things were better all the way around and that really isn’t true.  Today, we really do have more choice in most cases when it comes to travel on a particular route.  In the so-called golden years, the CAB decided who got to fly what routes and at what price.  We often forget that those prices were regulated as well and an airlines profit was determined on their costs.  However, so was the price.  Airlines often made a justification for raising prices on routes based on their costs and an appropriate profit level.  Not unlike how many electrical utilities are still regulated today.

Airlines are, if anything, far more safe today than 30 years ago as well.  That’s despite the drum beating going on about airlines sacrificing safety for profit and it is a product of our regulation in that area and its influence on both manufacturers as well as airlines themselves.  I do also believe that safety remains a top concern with airlines today despite the competitive environment because of how much impact on profit there can be as a result of a crash or safety incident. 

But airlines do use a variety of public assets and as a result of that, they should, in my opinion, be subject to some regulation.  For instance, airports are a public asset and, yet, we allow airlines to dominate airports by leasing/purchasing terminal space and holding on to underutilized assets.  In a sense, we allow airlines to bully both airports and other airlines who would make use of those public assets.  I wouldn’t propose that we tightly regulate terminal space but I would propose that these assets should periodically be subject to some sort of competitive bid for them.  That shriek you just heard is the airlines.

The airways are a public asset as well.  How much traffic a particular part of our airspace can withstand is determined by our infrastructure and our airports both of which are public assets as well.  There is, in my opinion, a duty on the part of the government(s) to see that these assets are used as efficiently as possible.  Where airports are slot controlled, those slots should also be subject to a periodic competitive bid for use.  When airlines find it “profitable” in a competitive sense to hold on to those slots by using them for high frequency and/or small regional jet routes, they are potentially being underutilized. 

That means that when there are 20+ frequencies between two cities among 2 or more airlines, there is some indication that those assets (i.e. slots) are being underutilized and with just a few less frequencies, slots could be opened up to provide new or improved service to other destinations and also improve competition on routes being “dominated” by a couple of airlines who are controlling prices via frequency.  If you think this doesn’t happen, just look into how major airlines respond to new competition by “small” competitors on these and non-slot routes.  They add capacity via larger aircraft and or additional flights to “buy” the business.

But does the consumer really benefit from that?  In short term spurts, yes they may benefit.  In the long term, no, they don’t.  If you control the route, you have some influence on the price and losing control of that route could quite possibly mean it turns unprofitable very quickly. 

In pre-deregulation days, it was thought that the nation’s infrastructure couldn’t withstand the loss of a trunk airline via bankruptcy and/or strikes.   So the government regulated price on their behalf and assured a stable system.  During that time, that made sense since those trunk airlines held much more regional segments of the United States.  For instance, in those days Delta might have been perceived as “essential” to the south east and its removal from the system might have meant a major economic loss to the area. 

We think there are fewer airlines and to some extent that is true.  However, our system is also vastly more flexibile today than it was 30 years ago.  A loss of a major legacy airline doesn’t mean the nation’s airline infrastructure becomes paralyzed.  We have enough airlines who are already serving those routes and who already have the flexibility to either serve them with more frequency or more capacity or both.  A correction via the remaining airlines would take days in some cases and mere weeks in others.  Not months and years.   Deregulation has provided that flexibility.

One argument many legacy airlines make for being allowed more dominance at hubs is that they serve the public good with flights to small, outlying areas in regions that no one else would serve if they were gone.  In a few cases, they’re telling the truth.  In most cases, they serve those areas with very high prices and very low frequency and they do little to stimulate commerce in those areas.  This is because those airlines serve those areas inefficiently with the wrong aircraft and schedules so that they may “feed” their hub systems.  Hub systems have to grow to remain profitable.  They are the animal that simply grows hungrier every year.

Should a place like Abilene, Texas have 3 or 4 direct flights to hubs like Dallas or Houston?  I’d argue that it isn’t really justified.  However, you could justify it as a whistle stop on a multi-city route being served by a turboprop as opposed to a regional jet.   Does service suffer as a result of that?  In most cases, no.  Airlines would earn more profit, service the same number of passengers or possibly more due to lower prices and the cities themselves wouldn’t suffer any economic impact.  

Abilene, Texas is served by no less than 7 flights a day to DFW all on ERJ-140 aircraft.  2 pair of those flights have departure times that separate them by less than an hour.   Does an isolated city in West Texas with a population of 120, 000 really justify that kind of frequency?  Probably not.  There are larger city pairs that don’t have that kind of frequency.  Could the 5:50am and 6:35am departures be combined into a single 6:00am flight?  Absolutely.   Would those passengers be impacted if the flight originated in Midland-Odessa at 5:50am and made a simple whistle stop in Abilene on its way to DFW?  No, not at all.  Would the Midland-Odessa passengers be impacted by a flight that was, at best, 20 minutes longer?  No, they wouldn’t.

We hurt the public by not regulating the industry for more competition and by the public, I mean the greater good for all, not just the 2 bankers in Abilene who get in a snit if they don’t have 4 morning flight choices.  Promoting competition by regulating access to our public assets isn’t a bad thing and there are decades of evidence to show that this is an area where the government can regulate very successfully and profitably. 

Do I think the airlines service levels should be regulated?  Let’s take a look at that tomorrow.

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