Flying Through Hot Air


Has airline deregulation failed? That's what certain politicians, union leaders, and pundits are telling us, in the wake of the controversial bankruptcy filing by Continental Airlines.

There is no question that deregulation has caused major changes in the airline industry. And it is those changes that led to the difficulties of both Braniff (in 1982) and Continental (in 1983). But in a free-market economy, new companies are born and others die all the time. Bankruptcies don't constitute a verdict on deregulation. To assess the merits of five years of airline deregulation, we have to take a deeper look, beginning with the specific complaints of the critics.

"The airline industry is going broke." Media reports focus only on the 8 or 10 largest US airlines—most of which have lost money for the past two recession years—as if they were the entire industry. Prior to deregulation, when every airline had its government-protected niche, that might have made some sense, as a first approximation. Today it is ludicrous. In the first four years of deregulation, the number of scheduled passenger airlines in interstate service went from 36 to 98 (after 40 years during which not a single new interstate carrier was allowed into the business!). Some of these 98 are former local or intrastate airlines, but 22 are brand-new firms.

Already the newcomers have captured 8 percent of the market, while former local carriers have increased their share from 9 to 13 percent. And most of the newcomers are making profits, not losses. The 12 publicly traded members of the Regional Airline Association netted $11.4 million last year, a profit margin of 4.5 percent.

"Consumers are being hurt." This charge is leveled for two reasons. One is the often large disparity in air fares between major long-haul routes and shorter hops. Since deregulation, airlines have largely ended cross-subsidies of short, low-density routes by long, high-density routes. The fact is, it can cost an airline three to five times as much per seat mile to run a two-thirds-empty 737 on a short route as it does to fly a two-thirds-full DC-10 on a long haul. So why shouldn't the high-cost passengers be charged more by the airlines?

But observers also worry that small communities are being cut off from air service. The evidence simply does not bear this out. In the 10 years prior to deregulation, airlines ended service at 173 communities. But since deregulation, no community has lost all airline service. What has occurred is a large-scale substitution of commuter airlines flying turboprops for trunk airlines flying jets. In many cases the result has been a larger number of flights, albeit in smaller planes. Overall, there has been an increase in flights at large, medium, and small hub airports, and there has been a net decrease of only 9 percent at the very small "nonhub" airports.

"The big airlines will destroy the little ones." This charge is being made by officials of airline workers' unions and their allies, such as sociologist Stanley Aronowitz. In a recent op-ed piece, Aronowitz claimed, "Like the computer industry, which is in the process of being grabbed by the giants [an incredible claim in 1983!], the innovators like Laker Airlines…are already out of business, and there are talks of mergers and more bankruptcies. Even the limited recovery now under way will not stop the consolidation of the market in fewer hands." Yet the facts, as we've seen, are precisely the opposite. The giants' share of the market has plunged from 91 to 79 percent, thanks to innovators like Jet America, Muse Air, People Express, and Southwest. And in just the first four years!

What deregulation is doing is restructuring what had been a stagnant, producer-oriented industry into a dynamic, consumer-oriented one. Under regulation, airlines accepted union demands for make-work practices and exorbitant wage scales; as government-protected near-monopolists, they could easily pass the higher costs along to consumers. Today, the average worker for major airlines makes $39,000 in wages and benefits—70 percent more than the average working person. For the innovative newcomers, by contrast, the average is only $22,000.

The newcomers have translated their cost advantage into dramatically lower prices—prices the giants have largely been forced to meet. Newcomer Mid-Pacific Air has essentially halved all fares for interisland Hawaii service, despite flying only turboprops. People Express charges extra for stowing luggage and serving meals—but customers love its consistently lower fares.

Other newcomers have specialized in new ideas in service: Muse Air offers exclusively no-smoking flights, while New York Air provides business travelers with more amenities than Eastern's Air Shuttle. And a few newcomers like Air One and Regent Air are competing by offering luxury service. Route structures have changed, too. Expanded "hub-and-spoke" systems make connections easier for passengers, while generating more business for the airline involved.

Overall, the more-competitive environment has dramatically increased airline productivity. And the ultimate beneficiary is the airline passenger. Under the Civil Aeronautics Board's old pricing formula, fares would have increased by 67 percent since 1978. Under competition, however, they have gone up only 48 percent. The difference translates into something over $2 billion in savings each year. Thus, passengers have already saved about $10 billion, thanks to deregulation. And some of that $10 billion, of course, would have gone to the now-disgruntled union workers.

In a sense, airline deregulation offers a test case for "industrial policy." If ever an industry needed an overhaul to shake out poor management, featherbedding, and bloated costs, it was the airlines. What deregulation has done is demonstrate how effective competition can be as an industrial policy.

The angry little coalition of union bosses, politicos, and pundits who want to clamp the straitjacket back on are giving us a preview of their plans for American industry. Instead of the fresh air of innovation and enterprise, their only remedies are subsidies and controls. Fortunately, they're likely to lose this particular battle. If enough people read the right lesson from the airlines' shakeout, they will lose the war over industrial policy, too.