Posted by: Doug Henwood | June 4, 2012

Airline dereg: more a failure than Matt Yglesias says

Years ago, I wrote a piece on deregulation of all kinds and developed a mini-obsession about the absurdity of the airline sort. It had produced bankruptices, savage wage-cutting, union-busting, awful service, and the abandonment of marginal cities while not producing any improvement in affordability. It’s hard to get people to believe this, but it’s true.

Matt Yglesias is out with a post (“Passenger Aviation in the United States: 40 Years of Failure”) on how the airline industry is a “stunning business failure.” Is it ever. But he doesn’t mention deregulation.

The industry was deregulated in 1979. Though it’s forgotten now, dereg—even though it’s destroyed unions—was a project of Democrats. Their initial base was in Teddy Kennedy’s office (as a wit once remarked, this shows Kennedy’s merchant origins, since merchants—bootleggers in the case of the Kennedy family—always want to reduce transport costs). Dereg’s intellectual guru was Alfred Kahn of Cornell, an advisor to Jimmy Carter, who signed dereg into law as president. Route and fare regulation was replaced by a free-for-all. The result has been disastrous.

A few numbers to make the point. Good stats on the industry (Annual Results: U.S. Airlines) begin in 1948. These tell us that the entire industry has cumulatively lost money since then. Add up all the gains and losses between then and 2011, and you get $37.7 billion in total losses. Adjust that for inflation, and you get $12.9 billion in total losses (2011 dollars). But what a difference deregulation has made. Between 1948 and 1978, the industry made $5.5 billion in total (or $28.7 billion in 2011 dollars). Between 1979 and 2011, it lost $37.7 billion (or $41.6 billion in 2011 dollars). Of course, I’m not here to defend corporate profits, but it’s hard to see how an industry can survive under capitalism in a chronic state of loss.

Ah, but fares are down and ridership has grown faster, right? No.

First prices. Between 1963 (when the figures begin) and 1979, the airfare subindex of the CPI grew 25% more slowly than the overall CPI. Since 1979, it’s growth 2.4 times as fast as overall inflation. A major reason for this is that there are many fewer nonstop flights than in the regulated days, and far tighter advance purchase restrictions. To the Bureau of Labor Statistics, which computes the CPI, such quality decreases are the same as price increases. (This is the opposite of the logic prevailing in computers, where rapidly increasing power is the same as a price decline.)

And then ridership. Between 1948 and 1978, annual passenger miles flown grew 12% a year; since then, they’ve grown less than 4%.

And, man, are flights ever more crowded. From 1948 to 1978, planes were an average of 57% full. Since 1979, they’ve averaged 68% full. Over the last three years, they’ve averaged 82% full.

But almost no one respectable will ever say airline dereg has been a failure. You read it here not quite first (because if you’d been subscribing to LBO in 1989 you would have read it there), but it’s not too likely you’ve seen it elswhere.

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Responses

  1. I assume that nobody of any nationwide consequence (except Doug Henwood) will admit that deregulation was a failure because that would directly contradict the philosophy that the unregulated free market is magically superior to the logically regulated market.

  2. [...] Appendix: Airline deregulation even more of a failure that analysts think By Doug Henwood, June 4, 2012 http://lbo-news.com/2012/06/04/airline-dereg-more-a-failure-than-matt-yglesias-says/ [...]

  3. Is this all airlines in the whole world? Including what we call budget airlines in Europe? Norwegian, Easyjet etc.

  4. Due respect Doug, I remember your LBO piece on deregulation back in 89. Revelatory!

  5. What is not mentioned is the ever shrinking number of airlines since deregulation. Since the United – Continental merger we are left with three major carriers and a handful of “budget” upstarts and regionals operating under code share agreements. So much for the theory that we all benefit from the increased competition under deregulation. The opposite happened and when you try to shop around for fares you find they are all charging the same fares, down to the cent.

    Aviation has always been a great way to lose money but there was truly something special about flying. It used to be fun because it was run by aviation folks who loved what they did. Deregulation did away with all that.

    Wages and benefits have been cut back so much that new hire pilots qualify for food stamps and senior captains make a third of what they made in the late 1980s. Who gets the benefit of the cost cutting and the higher load factors? Not the customer. Of course they are still losing money. That won’t change until United merges with American and Delta.

  6. i don’t feel this same oppression in the european budget scene: why is that? real question.

  7. This analysis makes me nervous, although I am no fan of deregulation. A comparison is made of the state of the airline industry during different time periods when the economy was different. How can we be sure what factors are responsible for the problems in the airline industry? In a properly constructed experiment there is a control group that is compared with an experimental group. The lack of such an arrangement in this case makes analysis more difficult. How did non-deregulated, similar businesses fare during the same period?

  8. By the way, another big deregulator in Kennedy’s office: a young legal staffer by the name of Stephen Breyer.

  9. I don’t see why full planes is a problem. I think we do need more space per seat and definitely better quality of air but due to environmental concerns I find full planes as something positive.

    Could you please elaborate on how this market/service should be regulated? I mean which rules should we consider applying.

  10. Because I’m a long time follower of your work, I wanted to pose a counter-argument to your attack on airline deregulation. Sorry for the long post, but I think you’ve misread the basic industry data and are focusing on the wrong problem. I think a proper reading shows the record in the 80s and 90s after deregulation to be imperfect, but on the whole positive from both industry and consumer perspectives. There have been very major negative changes that I think are much more serious than any of your deregulation points, but most are more recent, but you’ll totally miss them if you try to look at everything through the prism of the Airline Deregulation Act of 1978.
    A quick intro on where I’m coming from. I’ve been in the airline business for 30 years, and have worked first-hand on most of the bigger industry changes, including about a dozen mergers, restructurings and bankruptcies (‘m currently working for the PBGC on the AMR bankruptcy). I developed the original international alliance with antitrust immunity (Northwest/KLM in 1992) but have been totally opposed to the immunity grants and industry consolidation of recent years, and testified before Congress against the Delta/Northwest and United/Continental mergers. A full CV and publications list is at my website (horanaviation.com). Nothing here or in those publications was written on behalf of any corporate or other interest.
    1. A common misperception about industry growth pre/post deregulation is due to aircraft/engine technology, which was improving by leaps and bounds in the decades prior to the 70s, but only slowly thereafter. Consumer prices fell under regulation because unit seat mile costs fell dramatically as domestic travel moved from 30 seat DC3s to 90 seat Electras to 737s and 757s. But this totally exogenous driver of growth slowed dramatically after 1970, and you can’t blame the Airline Deregulation Act for that change. Today’s 737s and 747s are certainly more efficient than the 737s and 747s of the mid 70s, but the gains are tiny compared to the advantages of a 747 versus a Constellation. CAB-era price reductions were also supported by the underlying economic growth of that era and taxpayer investments in basic airport/ATC infrastructure, both of which also diminished after the 70s. Had CAB regulation remained in place, the price declines of the previous decades would not have continued, because the technology gains did not continue, and CAB regulation would have blocked many of the productivity improvements that were achieved in the 80s and 90s.
    2. Your point that deregulation didn’t improve affordability is wrong; real domestic fares fell about 30% between the mid 70s and early 90s. Under CAB regulation, almost none of the industry’s productivity gains were driven by airline management, in the 15-20 years after deregulation, most were management driven (revamped networks, new business models (Southwest, regionals), development of advanced computer systems for pricing and maintenance planning, etc). While a bunch of people don’t like deregulation, I’ve never seen a serious paper outlining how industry efficiency and consumer welfare could have been better in the 80s and 90s under some form of governmentally-managed competition, with explicit limits on entry, pricing and scheduling. If you’ve seen such a paper, I’d appreciate it if you would pass it on.
    3. I think it is historically inaccurate to link 70s airline deregulation with the “deregulation” of finance and other industries in later decades. None of the 70s era deregulation was driven in any way by rent-seeking industry insiders hoping to make a quick killing by transferring wealth from consumers and labor to capital—it was quite the opposite—politicians and consumer advocates seeking to undermine lazy, protected managers in order to get more service at lower prices. One of the main airline precursors was retailing deregulation (ending price-fixing “fair trade” laws). None of the 70s era deregulation was driven by anyone with an ideological devotion to the perfection of pure laissez-faire, or anyone who believed all government oversight was evil, or anyone dedicated to those already powerful and wealthy. The only things “deregulated” in 1978, were market entry (there had been none since 1933) and airline choices about schedules, capacity and fares. All of the pro-deregulation advocates of the period (Kahn, Bailey, Kennedy, Breyer, Levine, et al) explicitly argued that the end of CAB authority over schedules and capacity and prices would not in any way change existing regulations in the areas of safety, consumer protection, antitrust, SEC financial reporting or labor/collective bargaining rights. Those things did get undermined, but mostly after 2000—a quarter century later. Banks also got similar regulatory relief in the 70s from restriction on things like branch locations and interest rates on accounts, but would be silly to blame the recent financial crash on the “deregulation” of the 70s.
    4. The purpose of airline deregulation was not (as Yglesias’ post seems to assume) to guarantee steady bonuses for United’s executives but to significantly increase the pressure on companies and managers to constantly innovate, in order to drive ongoing productivity gains and to improve the allocation of capital within the industry. Improved productivity and capital allocation were the only possible ways to drive lower (real) fares given declining returns from aircraft technology. Obviously, lots of these industry changes were screwed up; no one thinks deregulation was anything near flawless. But if you ask whether it led to consumer welfare and productivity gains that wouldn’t have occurred otherwise, I think airline deregulation absolutely deserves to be seen as a positive policy change, and not the negative one you perceive.
    5. Serious problems do develop later, mostly post-2000 but you can’t link these to legislation from the 70s, and you’ll miss the real problems if you assume the industry economics of all 35 post-deregulation years was basically the same. The only serious union buster in the 80s was Frank Lorenzo’s Continental, which went bust twice, and Lorenzo was gone from the industry in 94. Much too long a story to summarize here but the main watershed events were Bush 43 DOT using willful fraud to gut longstanding antitrust laws to radically consolidate international competition, and the serial abuse of the bankruptcy laws in the same time period, which is where collective bargaining rights got devastated. These post-2000 changes created billions in artificial pricing power, and will likely undermine industry efficiency for decades to come, but have massively enriched and entrenched a handful of airline executive groups. The political/legal/ideological backdrop of these post-2000 airline changes exactly follows the pattern you are familiar with in finance, health care, oil and gas and many other industries. The real anti-market/anti-consumer changes hit aviation later than those other industries precisely because the successes of 70s deregulation (real and perceived) made it a bit harder for the folks pursuing rents and market power to directly undermine the protections for consumer welfare that existed.
    Obviously nothing in a brief email can settle any discussion about decades of airline history, but I have tons of data and written material, and would be happy to answer any questions you might have. My hope is that you’ll reconsider your strongly negative view about 70s deregulation. Should you have any interest in pursuing aviation issues further, I think you’ll discover serious policy and economic problems that are much more worthy of attack and public discussion.

  11. Ah, but fares are down and ridership has grown faster, right?

    Yes, fares are down:

    http://mjperry.blogspot.com/2011/10/even-with-fees-miracle-of-flight-is.html

    Between 1948 and 1978, annual passenger miles flown grew 12% a year; since then, they’ve grown less than 4%.

    Nonsensical metric. In 1948 very few people had flown commercially, so there was plenty of room for growth. As time goes by, growth rates slow. It’s the same reason why a mature economy can usually grow not much faster than 3-4% at best while China can regularly post growth rates in excess of 8%.

    And, man, are flights ever more crowded. From 1948 to 1978, planes were an average of 57% full. Since 1979, they’ve averaged 68% full. Over the last three years, they’ve averaged 82% full.

    Um yeah, and that’s a good thing. Higher efficiency is good for the environment.

  12. [...] with numbers from Airlines For America, the big trade group for big US airlines. Quoting from the estimable Doug Henwood: “Between 1948 and 1978, the industry made $5.5 billion in total (or $28.7 billion in 2011 [...]

  13. [...] and the Civil Aeronautics Board is no longer determining routes and setting fees. Skeptics will counter that fares were dropping before deregulation and would have likely kept dropping anyway (thanks to [...]

  14. […] How’s that been working out for us? Well, there’s definitely been innovation since the deregulation of the U.S. airline industry during the Carter years — the proliferation of hub-and-spoke operations that funneled most traffic through a few wildly overcrowded airports; the rise of no frills, point-to-point competitors (most notably Southwest) that succeeded precisely by avoiding those airports; and of course the advent of seat-back TVs and blue potato chips on JetBlue. Beyond those seat-back TVs and the jokey Southwest flight attendants, though, there have been few service or quality improvements of the sort that flyers can actually notice. And while we’ve been seen lots of reports over the years proclaiming the huge cost benefits to consumers of airline deregulation, and the great democratization of air travel that has resulted, there’s recently been a revisionist interpretation of the data pointing out that fares were dropping and passenger numbers increasing faster before deregulation than after. I’ll let economic-statistics maven (and long-time deregulation critic) Doug Henwood explain: […]

  15. […] How’s that been working out for us? Well, there’s definitely been innovation since the deregulation of the U.S. airline industry during the Carter years — the proliferation of hub-and-spoke operations that funneled most traffic through a few wildly overcrowded airports; the rise of no frills, point-to-point competitors (most notably Southwest) that succeeded precisely by avoiding those airports; and of course the advent of seat-back TVs and blue potato chips on JetBlue. Beyond those seat-back TVs and the jokey Southwest flight attendants, though, there have been few service or quality improvements of the sort that flyers can actually notice. And while we’ve been seen lots of reports over the years proclaiming the huge cost benefits to consumers of airline deregulation, and the great democratization of air travel that has resulted, there’s recently been a revisionist interpretation of the data pointing out that fares were dropping and passenger numbers increasing faster before deregulation than after. I’ll let economic-statistics maven (and long-time deregulation critic) Doug Henwood explain: […]

  16. […] Airline Deregulation is a Failure. […]


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