Economists Are Still Right About Airline Deregulation!

By Cliff Winston of the Brookings Institution.

"Airplanes are crowded and uncomfortable, and what used to be viewed as routine amenities like blankets, snacks, checked baggage service — and even preassigned seats — are now seen as paid extras. What outrage will be next? 

How about Southwest Airlines’ recent miserable performance in winter weather, cancelling some 17,000 flights after its antiquated technology tanked? Or the Federal Aviation Administration’s follow-on fiasco, grounding all U.S. flights for hours thanks to a computer safety glitch? 

The New York Times thought enough of those maddening events to publish not one but two essays suggesting that the chickens have finally come home to roost from America’s grand experiment with airline deregulation and urging a return to kinder, gentler air travel under the guiding hand of Washington. If you’re convinced the Times is right — if you see regulation as the antidote for cramped seats, lost luggage, maddening delays on the tarmac and, if you’re lucky, Cinnabons for breakfast, lunch and dinner — give me a few minutes to dissuade you. 

Start with Elizabeth Spiers, the founding editor of Gawker, who wrote in the Times that the benefits of airline deregulation have been undermined by the drip, drip, drip of profit-maximizing policies that reserve amenities for full-fare business travelers and write off the rest of us as Spam in a can. For his part, William McGee of the American Economic Liberties Project is eager to catalyze a national conversation about regulating the airline industry as part of a broader conversation about taming the excesses of capitalism. 

Economists, especially those who have long been immersed in debates about the deregulation of trucks, intercity buses and railroads, as well as airlines, are inclined to go back to the numbers. Think flying is too expensive? Turns out that inflation-adjusted airfares were 60 percent lower in 2020 than in 1980. Indeed, flying is no longer a luxury. It’s cheap enough to allow most Americans to fly — by 2020, 87 percent of the U.S. population had taken a commercial airline trip. And low fares have cost us nothing in terms of safety: no major airline has been involved in an accident in the United States since 2009. 
Such evidence is likely to be lost in the cacophony of complaints. As in, there is little choice of carriers, so airlines can charge sky high fares … airline seats are torture, and the cabins are noisy and claustrophobic … employees are grumpy and never tell it straight. But is there a good reason to believe that regulation would reduce the frustration of flying without raising its cost and creating other frustrations?  

Suppose regulators appeased those who claim that flying costs too much by putting a cap on air fares. The airline industry has periods of fat profits, but those profits are notoriously fickle. And if they’re expected to stay in business in down times, airlines can’t be expected to sacrifice revenue generated when demand is high without trying to make it up elsewhere.
Note, too, that their options to make up for lost revenue would create other problems. 

Paying employees less would mean more of that much-evident grumpiness, not to mention employee turnover and less competence. Raising the price of checked luggage would turn cabins into hand-to-hand combat zones for overhead space. Jamming more passengers into cabins would require narrower seats with (even) less legroom and longer boarding times.
What about service reliability? Suppose policymakers force an airline that cancels a flight to immediately provide a cash reimbursement to all affected passengers – as the European Union requires in many circumstances. All airlines, not just Southwest, scratch thousands of flights every year, sometimes due to human or equipment error — but mostly because of bad weather. If airlines are forced to incur all the financial risks of delayed flights, something else must give — back to amenities and/or fares. 

I can continue the exercise of proposing a regulation intended to make flying a more felicitous experience — and then making the obvious point that there’s no free lunch here. Indeed, if you look closely, you’ll notice that air carriers are constantly experimenting with amenities, separating charges and rebundling them, offering fare “sales” in lean times, adding intermediate seating classes to catch those willing to pay a bit more for a bit more. And often, they’ve decided that what most passengers value most is low fares. 

What, then, could be done to improve air travel without robbing Peter to pay Paul? Consider policies that would increase airline competition. One sure bet would be to allow foreign airlines to serve domestic routes. The entry of foreign carriers would regenerate the sort of competition enjoyed in the early days of deregulation, when the big established carriers had to look over their metaphorical shoulders to see who was chasing them. Imagine flying Ryanair or easyJet to Las Vegas — think lower fares, greater flight frequency, more experimentation with (and without) amenities. 

U.S. policymakers should insist, of course, on the quid pro quo, giving American carriers access to other countries’ domestic markets. One bonus: seamless international travel on a single carrier from, say, Des Moines to Vienna, reducing connections and waiting time when connections were necessary.; 

Another constructive policy would be to privatize airports and let them compete for passengers and airlines. It does not make sense for travelers in sprawling metros like Atlanta, Las Vegas and Denver to be served by a single monopoly airport, especially in cases where the single airport serves to funnel much of the traffic to an airline that is a legacy, not a low-cost carrier.
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The media and politicians take an active interest in the airline industry because they are frequent fliers and have the points to prove it. They see the government involved in ensuring safety, providing infrastructure and raising antitrust concerns, and then leap to the conclusion that government also should be involved in fares and amenities (which excite them most) when those are best left to markets."