Posted by Pete Davis
Airlines are a classic case of free market versus regulation, competition versus monopoly, and consumers versus business. Thursday's Senate Judiciary hearing on the pending United-Continental merger laid out the issues. Airline executives touted lower costs, better travel options under "an unparalleled global network," and more stable employment for its workers. The Consumers Union charged consumers would face less choice and fewer flights, loss of service to smaller cities, higher fares, reduced quality of service, and the creation of another "too big to fail" corporation. My recent travel experiences -- fewer available and more costly seats plus annoying extra charges for my first bag, for poor food, and for an Internet connection -- support charges of growing monopoly power for the four major U.S. carriers that would remain if this merger goes through. We're awaiting a Justice Department decision.
The airline execs said they face plenty of competition from low cost carriers, particularly Southwest, but GAO's "
analysis of 2009 ticket data showed that combining these airlines would result in a loss of one effective competitor (defined as having at least 5 percent of total traffic between airports) in 1,135 markets (called airport pairs) affecting almost 35 million passengers while creating a new effective competitor in 173 airport pairs affecting almost 9.5 million passengers (fig.). However, in all but 10 of these airports pairs there is at least one other competitor." GAO also noted that, "Although the airline industry has experienced numerous mergers and bankruptcies since deregulation [in 1978], growth of existing airlines and the entry of new airlines have contributed to a steady increase in capacity, as measured by available seat miles." Since
deregulation in 1978, airline fares have declined 36% after adjusting for inflation. So deregulation worked, sort of.
Warren Buffett famously quipped in 2002 that "if a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You've got huge fixed costs, you've got strong labour unions and you've got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: "My name is Warren and I'm an aeroholic." And then they talk me down."
Speaking of Kitty Hawk, with no outside support,
Orville and Wilbur Wright beat numerous foreign government funded competitors to fly the first practical airplane on December 17, 1903. They tried to sell their airplane to the governments of the United States, Britain, France, and Germany, but they were turned down because they insisted on a signed contract before any demonstration flights. Like inventors to this day, they feared their ideas would be stolen. The U.S. Army had just spent the enormous sum of $50,000 for Samuel Langley's
Aerodrome, only to watch it plunge into the Potomac River on October 7, 1903. The Wright Brothers' initial U.S. patent application of 1903 was rejected, but an attorney secured their patent on May 22, 1906. Then, in August and September of 1908, demonstration flights by Wilbur in France and by Orville at Fort Myer, Virginia captured world attention. After Orville's crash on September 17, 1908, which killed the first ever military passenger, the Wright brothers sold their first airplane to the Army for $30,000. Almost immediately, a patent war erupted with Glenn Curtis, who had invented ailerons in place of wing warping. The Wright's won that legal battle in 1914. During World War I, the U.S. government stepped in, forced cross-licensing agreements, and paid $2 million each to the Wright Brothers and to Curtis to clear the way for war production. After the war, the first fledgling airlines survived on airmail contracts from the U.S. Postal Service. Herbert Hoover's Postmaster General W. F. Brown changed those contracts to encourage the use of passenger aircraft, and the rest is history.
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Everything else isn't constant
In terms of the 36% decrease in fares, I suspect that's not nearly all due to de-regulation as technology and efficiency have improved quite dramatically since 1978. I guess that it's possible that all of the efficiency increase might be held as profit or some such, but there's no particular reason that I'm aware of to presume that would happen.
Warren Buffet? I am missing
Warren Buffet? I am missing something? Would you call the largest fleet of private jets in the world an airline?
http://www.netjets.com/default.asp
But I suppose if you charge 5k an hour and up labor and fuel costs really don't apply to his pessimistic outlook on airlines! Why would Mr. Buffet allow NJASAP to exist? By the way I am one of the due paying proletariat masses who cannot afford a private plane.
Legacy and ATC
Legacy airlines (airlines who began before deregulation) are the main culprit in the huge losses. Because of labor contracts, they have never been able to fully adjust to the new environment. Because of the Chapter 11 bailout process, these airlines live on in perpetuity. The only way to eliminate them is by merging and allowing more nimble airlines to fill the gap. Airlines like Southwest, JetBlue, AirTran, Allegiant, and Alaska are much more nimble. And this is what is needed domestically.
This is how the market, and the world work. The strong survive, and the weak need to be allowed to die. Right now the Chapter 11 process doesn't allow weak airlines to die.
On another point, ATC needs to be updated desperately, it is currently using 1960s technology. NextGen (the satellite system which is the replacement) will save fuel and delays, but because it is run by the government, it has taken over two decades to begin to be implemented. Alfred Khan, who was the head of the CAB (airline regulatory authority) at the time of deregulation said that airlines were only the first step, and for best results, ATC needed to be privatized.
Regulation made for a stable industry, but not an efficient one. To the poster who said that the reduction in fares was due to efficiency, this is absolutely untrue. Any efficiency gains have been offset by the rise in fuel prices. During regulation, airlines were bloated and wasteful because the government would not let them compete on price. So they had high prices and completed for the wealthy. Because of price competition, practically anyone can fly today.
Consumers need a stable industry, and a stable industry needs to shed the weak. Consumers want low prices, low prices need price competition. Just as in nature (evolution) everyone wins by competing, and the strong winning and the weak dying.
ATC needing to be privatized
ATC needing to be privatized is not the answer. There are physical constraints on the system called runways! You cannot land more airplanes per hour at EWR or ATL. When weather moves in SFO and they go to single runway operations delays are felt in ORD, DFW, and SLC. You still need 5 miles when a 737 follows a 767... well except at EWR maybe.
ADSB and Nextgen are needed and will reduce delays and separation minimums but not more than 10%. Most gains will be realized through better point to point navigation and maximizing arrival rates at airports.
Lastly do we really want some corporation with so much control over civil aviation? 9% of GDP (unverified). Corporations by definition will put profits above all else.... They are responsible to shareholders not the American people. I think Reagan drove this point home when he fired PATCO and would not let any group hold the American people hostage. Well, if were are gonna privatize ATC we might as well go big. I say we give the contract to BP or Lehman. Did you know Lehman was leveraged 35:1? Wow, who better manage the intrinsic risks of ATC? Besides ask any professional pilot how Lockheed flight service is doing.
Do we always want "best results"? Yes, but not at the risk or expense of the American people. I will side with the inefficiencies of government when it comes to national security and the overall well being of the American economy.