Consolidation is one of the consequences of deregulating the interstate transport industry — some good, some bad
By Herbert Rothschild
On Dec. 3, Alaska Airlines announced its plan to acquire Hawaiian Airlines for $1.9 billion. Both corporate boards must approve the plan.
More important, so must the Department of Justice, which shares civil antitrust enforcement with the Federal Trade Commission and which lately has signaled resistance to further consolidation in the airline industry. A federal judge in Boston is currently deciding a DOJ suit to block acquisition of Spirit Airlines by JetBlue, its low-fee competitor, for $3.8 billion.
Whatever the outcome of these cases, the industry already has become intensely consolidated. The four largest U.S. carriers — United Airlines, American Airlines, Delta Airlines and Southwest Airlines — control 80% of the domestic market. Since 1960, they have absorbed 38 other carriers — Delta 15, American 11, United seven, Southwest five. Alaska currently is an amalgamation of five airlines.
Why did this happen? A tendency toward monopoly is built into capitalism. Over the same period of time, as the FTC became more friendly to proposed mergers, we’ve witnessed enormous consolidation in other major sectors of the economy. What happened in food processing and retailing, oil production and refining, and drug stores directly affects household budgets.
Interstate transport, including commercial airlines and bus lines, were somewhat different than other sectors because their fares and routes were federally regulated until the administration of President Jimmy Carter decided to end regulation. Federal regulation of interstate transport began with a response to price gouging, especially of farmers, by railroad monopolies in the 19th century. The Interstate Commerce Act of 1887 required that railroad rates be “reasonable and just,” although it didn’t empower the Interstate Commerce Commission to fix specific rates. The Civil Aeronautics Board was patterned to a large extent on the ICC. Its primary function was to manage airline competition by setting minimum rates on passenger fares and allocating the routes each airline would serve.
This arrangement, which created a stable industry but limited competition, lasted until 1978, when Congress, at the urging of the Carter administration, passed the Airline Deregulation Act. The person primarily responsible for this major policy shift was Alfred E. Kahn (1917-2010), whom I knew slightly because his daughter was married to a colleague of mine, Dan Fogle, in the English department at Louisiana State University (LSU). Both Dan and his wife were children of Cornell University faculty members. Kahn was associated with Cornell during and after his time in public service.
Unquestionably, Kahn was brilliant. He graduated from high school at 15, then from New York University summa cum laude at 18. He held a doctorate in economics from Yale. Before moving to Cornell in 1947, he worked for various governmental agencies, including the antitrust division of the Justice Department and at the Brookings Institution. In 1974, he became chairman of the New York Public Service Commission and later served as chairman of the Civil Aeronautics Board — ironically so, because it was disbanded four years later thanks to Kahn’s success in deregulating the airlines.
Kahn was the nation’s preeminent authority in the economics of regulation and deregulation. He was convinced that the airline industry would flourish and better serve the public if barriers to competition were removed. He never lost that conviction despite acknowledging, among other consequences, a deterioration in the quality of airline service, conflicts with airline employee unions, and industry consolidation.
The indubitable benefit of deregulation was a drop in fares. According to a study commissioned by the airline industry, a basic domestic round-trip airfare in 1979 averaged $615.82 in today’s money. By 2016 that average fare had dropped to $344.22. Even taking into account the various fees the airlines keep adding, air travel is considerably more affordable than it was. But it’s also true that fares are now highly unpredictable. The less competitive routes are expensive, and if a ticket must be bought right away because of, say, a family emergency, its cost may be exorbitant.
Further, lower airfares have been achieved in part at the cost of airline workers. Between 2000 and 2008, the domestic industry cut its workforce by about 100,000 jobs — 20% of the workforce. Pay cuts became commonplace after deregulation. Since 2001, the average wage has been cut 18%, and every regularly scheduled airline has shifted its pension obligations to its employees.
Deregulation eased entry by new carriers, but over time the airlines that sprang up were absorbed by the major carriers and some, including established carriers like TWA, Pan Am and Braniff, simply disappeared. In that regard, the consequence of deregulation was even worse for the interstate bus industry. In 1987, Greyhound Bus Line bought Continental Trailways, its only major competitor, and many smaller lines went out of business. An unhappy result was that many of the small towns for which bus had been the only public transport were dropped from service.
I know from experience that Greyhound and Trailways didn’t treat their customers — poor people for the most part — with respect, but originally airlines were different. After deregulation, passenger dissatisfaction mounted to the point that Congress finally intervened again. In 2011 it passed an “Air Passenger Bill of Rights” specifying what must happen to air passengers in certain conditions. Among other items, the rule includes raising the minimum “denied boarding compensation” to customers with valid tickets yet still not allowed to board the aircraft. It also penalizes airlines up to $27,500 a passenger if they are left stranded aboard an aircraft on a tarmac for more than three hours.
So, the consequences of deregulating interstate passenger services have been mixed. My takeaway will sound familiar to readers of this column — namely, that an ideological approach to public policy formation is misguided. Some activities should be completely free of government regulation, some should be thoroughly regulated and some should be partially regulated. For legislators, case-by-case judgment is the helpmeet of wisdom, dogma its nemesis.
Herbert Rothschild is an unpaid Ashland.news board member. Opinions expressed in columns represent the author’s views and may or may not reflect those of Ashland.news. Email Rothschild at [email protected]
