It's Time for More Airline Deregulation
Jun. 12, 2015
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The late Alfred "Fred" Kahn, the intellectual father of airline deregulation, was able to persuade Congress in 1978 that the airline industry was never a natural monopoly in need of a regulator to protect consumers from excessive prices.
The 1978 Airline Deregulation Act unleashed competition that has saved consumers billions of dollars in airline ticket costs, Brookings Institution scholar Clifford Winston (sometimes with colleagues) has shown. But the deregulated fares and routes applied only on American domestic routes, not overseas travel.
For international routes, the U.S. has negotiated bilateral "Open Skies" agreements with a number of countries that effectively say, "We'll let you fly here if you let us fly there."
Recently, Mr. Winston and Jia Yan of Washington State University calculated that the Open Skies agreements have saved international travelers to and from the U.S. about US$4 billion annually. More importantly, their research shows that travelers on U.S. international routes could save another US$4 billion a year if we reached such agreements with all countries.
These findings come at an especially important time as U.S. trade and transportation negotiators are trying to nail down Open Skies agreements with certain Middle East countries. Some U.S. airlines oppose the talks on the ground that foreign carriers from these countries benefit from subsidies from their governments - arguments that ignore the large defense-related investments that the U.S. government has made in our own airline industry over multiple decades, and the continuing public investments in airplane security.
However controversial, Open Skies agreements are limited to international travelers. Meanwhile, some of the benefits of airlines deregulation in our market have been eroded by the growing concentration of our domestic airline industry through successive rounds of mergers. Now, just six airlines control 94% of the domestic air traffic, putting them in a position to jack up fares in all kinds of ways.
You know the drill: US$200 for a change fee on a non-refundable ticket, extra charges for seats near the front in coach, cramped leg room in the back of the plane, and of course those baggage fees. As a long-time supporter of airline deregulation, I don't need a lot of fancy statistics to explain what I can see with my own eyes and pay out of my own wallet.
Living in Wichita, Kan., (ironically, the one-time U.S. "Air Capital" before Boeing left town and Cessna and Beech were both bought by Textron), I frequently travel to the East Coast on business. Over the past two years, I have noticed base air fares on every airline climb by at least 30%, and that's without all those extra fees. I read the media, and I know many Americans are just as frustrated, even angry, as I am - especially about those change fees.
The temptation for some may be to return to regulating fares and routes of airlines. But that would be huge mistake. Even with only six major competitors, the industry is still not a natural monopoly, the market characteristic that justifies such intrusive oversight.
It's also impossible to break up the Big Four through antitrust action, because no single airline has a monopoly and there is no evidence of any kind of antitrust abuse that would warrant such a step.
There is one remaining step that could be taken: Bring international competition to our domestic market in the same way imported goods have kept a lid on so many other U.S. prices. In international airline lingo, this would mean giving "cabotage" rights -- the ability to fly domestic routes -- to foreign carriers in countries that already have Open Skies agreements with us on international routes. This would really crack the lock the Big Six now have on the U.S. market.
Sure, U.S. airlines would scream, as nearly all of them did back in the 1970s when domestic airline deregulation was being debated. No doubt they would point out that no other country's domestic market is as large as ours, so our airlines couldn't benefit from cabotage abroad. This wouldn't be the case, however, if we reached an Open Skies-Cabotage agreement with the EU. So, why not try there first, and extend the idea over time with other countries?
American air passengers deserve a break, and the best way now to give it to them is to think bigger about Open Skies deals.