Air War

Why Congress wants to re-regulate airlines

Rep. Bud Shuster (R-Pa.) is mad as hell at the airline industry--and he's set to teach them a lesson as only the chairman of the House Transportation and Infrastructure Committee can. In February, when nasty contract negotiations between American Airlines and its pilots temporarily shut the carrier down and left thousands of passengers stranded, Shuster loudly declared "a pox on both their houses" and then unveiled the legislative equivalent of a plague blanket: an "Airline Passenger Bill of Rights." Divining that airlines "don't give a damn about the traveling public," he observed, "I think that you need to do whatever it takes to get their attention."

Sens. John McCain (R-Ariz.) and Ron Wyden (D-Ore.) similarly want to get the industry's attention. Like Shuster, they have sponsored legislation--and held highly publicized hearings in March--aimed at "improving" airlines' customer service. The McCain-Wyden bill would require airlines to warn passengers if a flight is oversold and give them 48 hours after buying a ticket to ask for a refund. Shuster's Passenger Bill of Rights would go further, requiring airlines to compensate passengers for twice the value of their ticket if they are kept waiting on the runway for more than two hours, with compensation increasing proportionately for each extra hour. Shuster's bill would also prohibit airlines from using a single flight number if they know passengers will have to change aircraft and require the Department of Transportation to track flight cancellations to determine whether they are being made for economic rather than mechanical reasons.

While the proposed rules are mostly petty on their face, they signal an important, worrisome shift in Washington with regard to regulation. If the airlines--which have delivered demonstrably safer, cheaper, and more plentiful flights since deregulation--can come under such an attack, what industry is safe? It's also more than a little ironic that Republicans are leading the charge on the issue: Since airfares were deregulated by a Democratic Congress and president two decades ago, there have been consistent calls for re-regulation, typically from left-of-center pols who simply dislike anything smacking of free enterprise. Republicans have traditionally been the major supporters of leaving airlines to their own devices. Now, still reeling from the Clinton impeachment proceedings and the negative poll numbers they generated, the GOP sees "passenger protection" as a feel-good, populist way of showing they're in touch with what "really matters" to voters.

There's little doubt that the Shuster and McCain-Wyden bills are extremely photogenic: The March Senate hearings, for instance, were a parade of teary-eyed passengers recounting bad experiences and incensed travel agents and industry analysts lambasting supposedly unresponsive airlines. There's also little doubt that increased governmental involvement will do little to remedy the airlines' reputedly rotten customer service or increase the industry's overall performance record (after all, enforcing good customer relations and workplace efficiency are hardly public-sector strong suits). Indeed, it's unlikely that the pending legislation will accomplish much more than opening the door to greater regulation down the road.

But the bills are misdirected in another, more insidious way: They fail to even address those parts of air travel that are still under federal control--including the air traffic control system and the assignment of airport landing rights--and how those aspects contribute to consumer dissatisfaction by limiting the competition that generates new and better ways of doing things. Instead of passing legislation aimed at punishing airlines for things that are largely out of their control (such as snow-related delays), Congress should instead be taking a serious look at finishing its deregulation of the industry.

In 1978, President Jimmy Carter signed the Airline Deregulation Act, relieving the government of its role in deciding everything from airfares to the sizes of sandwiches served during flights. Since then, by virtually all accountings (including the government's own), things in the airline industry have gotten progressively better. Safety, which skeptics predicted would immediately take a backseat to profits once airlines were no longer under the government's thumb, has improved dramatically. 1998 marked the first year on record without a single life lost on a scheduled U.S. airliner. As stunningly, air travel, once out of reach of the average American, has gone mainstream. According to Northeastern University economist Steven Morrison, between 1978 and 1997, airfares dropped by 40 percent in real terms, leading to a doubling of passengers. In 1995, reports the General Accounting Office, departures were up by 50 percent for small airports, 57 percent for mid-sized ones, and 68 percent for large ones.

The major hook for the Shuster and McCain-Wyden bills is last year's reported 28 percent rise in passenger complaints. But that increase is not necessarily a bad sign, says Brookings Institution economist Clifford Winston. "The increase in complaints actually speaks to the success of deregulation," argues Winston. As many more people have started flying, he says, planes have gotten more crowded and people have gotten testier. Winston believes that if the airlines are guilty of anything, it is being too timid in expanding capacity--buying more planes and adding more flights. The carriers are still adjusting to deregulation, he says, and they are worried about the possibility of a recession that would leave them with empty seats.

If increasing capacity is the key to improving the flying experience, then it's unclear what the government can do in terms of customer service mandates, Winston contends, adding that airlines already compete on the basis of meals, frequent-flyer promotions, friendly service, and the like. The easiest way to boost capacity, he points out, is to throw out restrictions on foreign investment in U.S. airlines--restrictions that date back to the days before deregulation.

Currently, foreign investors cannot own more than 25 percent of the voting stock of a U.S.-based carrier, and foreign-owned airlines cannot fly passengers between U.S. cities. This effectively shields domestic carriers from a major source of competition and has thus prevented innovation in the domestic airline industry. Last year, for instance, Richard Branson, the British owner of Virgin Atlantic Airways, wanted to invest $200 million in a low-fare airline based in New York. Since he is not a U.S. citizen, however, he was blocked from entering the market. That result may have helped domestic airlines, but it clearly did nothing for U.S. passengers.

There are two other major ways in which the government continues to regulate air travel. The first involves terminal and gate assignments at airports. Airports are operated mostly by municipal governments and are run on a break-even basis, required by federal law. Prior to deregulation, cities locked in tenants with long-term leases to guarantee a source of revenue to pay off airport bonds. Airlines agreed to 30- or 40-year leases in exchange for things like veto power over terminal expansion, which gave them the ability to keep potential competitors out or, at least, limit the number of gates they could use. Despite deregulation, airports still operate in basically the same way. The result is that airlines that are already ensconced in a given airport have effective control both over expansion plans and over who gets to use what gates at what times. Under such a system new airlines, when granted space at all, are typically leased gate space at off times and high prices.

An obvious way around such problems is to privatize airports. Turning airports into for-profit enterprises would foster far greater competition and efficiency in local markets. Airports might allocate gates based on day-by-day, if not hour-by-hour, demand. In 1987, Britain privatized two major airports, Heathrow and Gatwick, with great success: Those airports' landing fees and gate charges are lower today in real terms than they were 12 years ago; passenger and cargo volumes are up, as is commercial revenue. At the same time, operating costs for the private operators are significantly lower. For similar reforms to happen in the United States, Congress needs to ease federal restrictions on municipalities trying to sell or lease their airports.

The air traffic control system, which is run by the Federal Aviation Administration, is similarly stifled by government oversight. John E. Robson, chairman of the Civil Aeronautics Board from 1975 to 1977, dismisses the Shuster and McCain-Wyden bills as wastes of time. "If they're going to fix every service-level imperfection," suggests Robson, who helped conceptualize and implement airline deregulation, "they might as well get into car rentals…drug stores, dry cleaners, and everything else." Robson thinks Congress needs to overhaul the air traffic control system. Problems in the air, he says, lead to many, if not most, of the delays that have passengers so riled up.

While the number of passengers has more than doubled, from 275 million to 600 million, since deregulation, the numbers of computers and air traffic controllers have not increased proportionately. In 1998, roughly one-quarter of all flights by major carriers were delayed, mostly because of the sluggish air traffic control system. In its current condition--relying on obsolete computers and radar systems--the system simply cannot move passengers any faster while maintaining safety. New, proven technologies that would allow planes to safely take off and land closer to each other--and, hence, allow more flights--have gone begging for takers.

Canada, New Zealand, and Germany all provide models of how modernization can cut costs and increase efficiency. In each country, government air traffic control systems were transformed into corporations that are operated and funded directly by the airlines that use them. Germany corporatized its system in 1993 and reduced air traffic delays by 25 percent by 1997. New Zealand corporatized in 1987 and reduced user fees by 30 percent during the next 10 years.

Switching to such a system would eliminate the major air traffic control bottleneck: landing slots assignments. At crowded airports, the FAA arbitrarily allocates a certain fraction of landing slots to large, national airlines, another fraction to smaller, regional airlines, and the rest to private planes. The FAA also determines the fees planes pay to land based on the weight of the aircraft. For instance, a four-person private plane landing at the busiest hour of the day will pay only a fraction of what a 375-passenger Boeing 747 would. That creates delays as scarce landing resources are used inefficiently. Recalculating fees--and allowing for-profit airports wider latitude to assign gate slots based on peak-pricing principles--would both make better use of scarce resources and allow carriers to crack new markets.

However much such reforms might help make air travel safer, cheaper, and more pleasant for consumers, they are not even on Congress's radar screen. In their place are feel-good proposals such as the McCain-Wyden bill and Bud Shuster's Passenger Bill of Rights (which, given its provision penalizing carriers for delays, actually gives airlines an incentive to put planes in the air even when there are safety concerns). Indeed, Vice President Al Gore, whose interest in transportation issues led to his recent call for a national traffic hotline, is already on board as a way of furthering his own chances for the White House in 2000. Given all that, it seems likely that some version of a "passengers' bill of rights" will be one of the few laws passed by Congress in the period before the presidential race gets fully under way.

More's the pity. Such legislative activity does not simply obscure the larger, overwhelming success of airline deregulation and direct attention away from where deregulation is still needed. By cracking open the door to more expansive regulation of an industry that has boomed without old-style government oversight, it suggests that few battles for limited government ever stay won for very long.

Ryan H. Sager ([e-mail]) is a sophomore at George Washington University and an intern in REASON's Washington office.