Tuesday, November 01, 2005

The bad old days of airline regulation - now in Europe

Bill Virgin of the Seattle Post-Intelligencer gives reader feedback to the question "Was it really better in the good old days of airline regulation?" He does a journeyman's job of reciting what readers wrote. But he lets some light-weight analysis stand without comment. In the good old days the airlines could print money: the fares were high; service was limited; the Civil Aeronautics Board set the fares. They treated their customers pretty well, because there were few of them. But look at how high fares were then. When I was doing job-interview trips in 1968 a round-trip ticket from Seattle to New York City was $300. That was a lot more money in 1968 than the fare now. The job I got that year with a BS in mathematics paid me $9,000. A similar graduate today would get at least $35,000 and pay $450 for that trip. He makes 4 times more but pays only 50% more. That means the fare is 3/8 now compared to 1968. That's 37%. Because deregulation allowed competition and fares to drop to less than half, the number of people traveling sky rocketed. I haven't seen an informed calculation of how many more people travel how many more miles. But it's at least a doubling or tripling due to deregulation. That is a lot more of us going on more trips every year. He gives [his readers give] short shrift to this huge advantage. Oh, one reader likes that everyone paid the same. Monopolies are so nice; everything is so ordered. Ignore the fact that they stifle competition and cause all the airlines to provide the same service. And different people pay different fares because the trip has different values to them. Of course the airlines found a way to take advantage and make some money from it. The gas station would charge the Mercedes E500 driver more if they could. But, again, he is giving reader feedback. He covers some of the very real problems of bankruptcy giving airlines huge advantages: they can walk away from lease commitments (Northwest has permission to return 210 leased aircraft!!); they can abrogate employment contracts. The competition is hugely unfair when a few players can violate their commitments to their huge advantage. This is a case of government interference causing problems. Now it is his column, so I assume the conclusion is his own, even though he puts the words in a reader's pen.
And this closing thought sums up the thorniness of the issue: "The U.S. airline industry has been allowed to mortgage its future through destructive competition and unrealistically low fares. Reregulation isn't the answer, but finding a competitive model that protects the consumer and allows the industry to achieve growth sustaining profits must be found. Otherwise, the U.S. domestic industry will die."
Come on! It is naive to assume that all the airlines will respond to the structural problem of bankruptcy undercutting competition by all dying! One or two will close or merge; they should. This will reduce the overcapacity we now have and cause fares to rise. But not to triple! More like 15 to 25% And the stronger lines will survive and thrive. American Airlines has controlled its costs. Continental has done pretty well. And we will travel almost as much as we do today. Europe If you want regulation go to Europe. Aviation Week's October 17, 2005 issue "Agenda Acrimony" covers one new regulation and several proposed ones that make the industry sick and angry: - Required compensation for denied boarding, long delays or cancellations is already in place. The airlines have to compensate their customers for these inconvenience. But if the air traffic controllers cause the very same problems by going on strike they don't have to provide compensation. - The airports, not the airlines will be in charge of provisions for handicapped passengers. I have seen airlines give good and poor service. But I've never seen an airport provide any service that I noticed. - The EC is proposing an emissions-trading scheme that is not described. But the low fare carriers claim it would cost 4 billions Euros per year and 60,000 jobs. - And the best for last: Both European nations and the EC are proposing to tax airline fares to provide poverty relief to Africa. Michael O'Leary, CEO of Ryan Air, proposes that, instead, France should tax cheese. Instead, the airlines want the European governments to concentrate on getting a new "Open Skies" agreement with the United States - a deregulation the will increase flexibility for the airlines and lead to more travel. (I don't know an on-line source for this article.)