Time to Re-Regulate the Airline Industry

By Phil Longman

Almost as bad as flying these days is owning airline stocks. According to the industry’s leading trade group, Airlines for America, U.S. airlines have lost $50 billion over the past 10 years. Even as the economy recovers, the latest figures show airlines were still earning less than half a penny on every dollar of revenue in 2011, which is well below the amount needed to replace its aging fleet or maintain current levels of service. Even before the recent bankruptcy filing by American, the value of all publicly traded U.S. airline stocks was less than that of Starbucks.

The industry’s trend toward insolvency would be even steeper were it not for the major subsidies it extracts from taxpayers. These include billions of dollars spent to construct and maintain airports, and $15 billion in grants and loan guarantees airlines received in the aftermath of 9/11.

And they include tens of billions of dollars in unfunded pension liabilities that major airlines, such as United and U.S. Airways, have shoved onto taxpayers by filing for bankruptcy protection. Recently, American Airlines retreated from its threat to dump $10 billion in unfunded pension obligations onto the public, but taxpayers will pay anyway as the reorganizing carrier sheds 13,000 jobs and drastically curtails service. Since 1978, almost all start-ups have either failed or been absorbed.

Dwindling service

The broader consequences to travelers have been starker. Over the past five years, service to medium-sized airports has fallen by 18%. Adjusted for growth of the economy, capacity is at its lowest level since 1979, and the industry has announced plans to cut another 1% of available seat miles in the first three months of this year.

High fuel prices are a factor, but they are not sufficient to explain the erosion of airline service. Nor can we just blame the Great Recession. Throughout decades in which the price of energy has risen and fallen and the economy has boomed and busted, the industry has been barely able to earn its cost of capital. It’s now clear the industry’s problems are structural and deepening, as is the crisis faced by cities and industries that rely on frequent, affordable service to remain competitive in the global economy.

How to fix things?

What’s the solution? Until 1978, U.S. policy viewed airline service as a “public convenience and necessity.” The Civil Aeronautics Board assigned routes, set fares and ensured that airlines remained modestly profitable.

This regulatory regime had problems, but fares did fall dramatically thanks largely to technological innovation. DC-8s and other mass-market jets during the 1960s and early ’70s vastly expanded such popular tourist destinations as Florida’s Disney World and the Caribbean. By 1977, 63% of Americans older than 18 had taken a trip on an airplane, up from 33% in 1962.

Indeed, after adjusting for shifts in energy prices, a 1990 Economic Policy Institute study found that airline fares fell more rapidly in the 10 years before 1978 than afterward. Under deregulation, the government has allowed giant airline mergers, such as Southwest/AirTran and United/Continental, that cause monopolistic prices on many routes.

A new national policy on airlines is in order, as even the industry itself is starting to realize. We need a regulatory regime that provides balanced, reasonably priced service to metropolitan areas that don’t happen to be hubs, while also guarding against monopolistic combinations that harm the public and ruinous competition that leaves the industry financially unsustainable. Americans did this before we fell for the false promise of airline deregulation, and we can do it again.

Phil Longman is a senior fellow at the New America Foundation, a public policy institute.


About Ramón Jiménez

Ramón Jiménez, Managing Editor de MetroLatinoUSA.Com (MLN). Graduado de la Escuela de Periodismo de la Universidad del Distrito de Columbia (UDC). Email: [email protected]

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