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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

April 3, 2012 at 10:15 AM

Does the airline industry need re-regulation?

As everyone knows, Jimmy Carter’s 1978 deregulation of the airline industry has led to lower fares and more choices for travelers. Oh, you thought Ronald Reagan did that! In fact, deregulation brought a host of troubles, too. While new players did emerge, such as People Express, they didn’t last. The Reagan administration’s look-the-other way approach to antitrust encouraged destructive anti-competitive mergers, exemplified by Frank Lorenzo’s acquisition of five airlines and aggressive union busting. Venerable Eastern Airlines was destroyed, Continental badly wounded, Lorenzo got richer.

Dismally run USAir bought good airlines — Pacific Southwest and Piedmont — and ruined them. In the process, USAir shut down the Piedmont hub in Dayton, Ohio, which the city had spend millions upgrading. In addition to the jobs killed, the city lost a critical asset for its businesses. After this loss, its business community dwindled. In recent years this also played out in Cincinnati, where Delta Air Lines, after merging with Northwest, radically downsized its once huge Cincinnati hub, costing thousands of jobs. It’s really not a hub at all now. Meanwhile, USAirways CEO Doug Parker, who has been wanting to sell his airline for years, is still preaching further consolidation.

In a USA Today column, Phil Longman, a senior fellow at the New America Foundation, reminds us that fares were actually falling more rapidly in the decade before 1978 than the decade after. And the legacy of deregulation continues to plague the industry.

Noting the many communities losing air service to mergers and calling for a new approach to airline regulation, he writes:

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.

I’m not sure Alaska Airlines needs re-regulation. It already serves dozens of places that would otherwise lack air connections. But Longman’s larger points are important. One big difference with Alaska is that it avoided big, self-destructive merger mania. So whatever form deregulation takes, it must be accompanied by strong antitrust enforcement.

Would Cincinnati be worse off if Delta had simply liquidated? No. If the barriers to entry were low, another airline would have taken its place. Of course, Delta wouldn’t have liquidated. It would have been forced to, uh, actually serve customers rather than being focused on consolidation. But the deeper problem is America’s 1970 transportation system. Many air routes should be taken over by high-speed rail. Rebuilding our conventional rail system to provide faster, higher-speed service would also help. The trouble is that all the big lobbying money is committed to the status quo. Have a nice flight.

And Don’t Miss: What’s the most highly educated city in America || GOOD (Hint: It’s not Seattle, and we will fall further if the Legislature keeps cutting funding)

Today’s Econ Haiku:

Heads they win, tails too

Our hometown monopoly

No wonder the smile

Comments | More in Airlines

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