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Jon Talton

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

November 4, 2013 at 10:51 AM

Why the American-USAirways case matters

TrooseveltIn 1901, some of the richest men of the Gilded Age formed an entity called the Northern Securities Co. It made peace over the inconvenient competition each faced from the other in railroads, the most important industries of the day.

Among them were the two transcontinental lines serving the Puget Sound, the Great Northern and Northern Pacific, as well as a third transcontinental that served the region via trackage rights, the Union Pacific. In the convoluted “trust” holdings of Northern Securities, former rivals James J. Hill and E.H. Harriman reached a profitable peace.

Using the reasoning of the 1980s onward, this should have been just fine. The “free market” was working and the market never makes mistakes. If passengers, farmers and other shippers faced less choice and high costs, then the market would provide a solution or they deserved it — so the theory goes.

Theodore Roosevelt, although our most intellectual president aside from Jefferson, was not one for theories when the public interest was concerned. His Justice Department sued in 1902 and Northern Securities was broken up, serving as a marker for the next seven decades.

Another marker is before us with the Obama Justice Department’s opposition to the merger of American Airlines — with the wardrobe malfunction new paint scheme — and USAirways.

Or is it? A Wall Street Journal story today implies that the Justice Department wants to avoid the kind of trial that broke up Northern Securities and which set the boundaries against anti-competitive mergers and under-the-table machinations of plutocrats. Instead, it is asking for “broad diversitures,” but apparently that means giving up gate slots and the like.

So the merger could go ahead, with all the lost jobs, diminished competition and price pressures that come along with it, but some of the already-too-big other airlines could grow bigger still.

A Massachusetts Institute of Technology study showed some of the damage the big airline mergers have already caused. Routes are down, prices are up. Smaller markets have fewer choices. In addition, the combinations have closed major hubs, built with public money to keep an airline happy, with devastating consequences. They not only cause the loss of higher-paid jobs, but leave local businesses with fewer flights — and more inclined to relocate elsewhere.

The story of unhealthy concentration across a variety of industries, from telecom to media, helps partly explain the poor job growth, growing inequality and stagnant wages of recent decades. The airlines, which have long benefited from many overt and stealth government subsidies, are only one example.

Flying has become a miserable experience, a combination of being processed into a medium-security prison and packed into a sardine can. Using Southwest and those darned union workers who make a living wage as an alibi for their own poor management, leaders of the biggest airlines have engineered a neat little cartel.

Among the losses: TWA, Northwest, Continental (or United, depending on how one views that merger) and the excellent Piedmont. Remember Eastern, a victim of the destructive speculator Frank Lorenzo? Only luck, independent-minded leaders and a peculiar route structure has kept Alaska Airlines out of the clutches of the consolidators, and a good thing for Seattle.

Through all this, the public good has been mauled. A few private interests have been enriched. The healthy workings of the market and capitalism have been undermined through anti-competitive mergers. Consolidation is also the worst enemy of innovation.

The “creative destruction” identified by economist Joseph Schumpeter is inevitable and necessary. A company runs its course. Investors choose to cash out. New rivals emerge. This is fine when the entire cycle works — and it includes government to act as referee to ensure honesty, competition and that business empires don’t become so big that they control public policy.

But in airlines, especially, entry costs are prohibitive. And in too many industries, the government has allowed dangerous concentration — bad for capitalism, bad for democracy.

Theodore Roosevelt understood this.

[And for railroad nerds, today's BNSF includes major parts of Northern Securities, but not Union Pacific. Nor are railroads at the choke point of the economy where they stood a century before. And I could argue we have too few Class 1 railroads now — but trackage rights have ensured real competition]

0 Comments | More in Airlines | Topics: American Airlines, USAirways

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