Airline Regulation Debate Evokes Sense of Deja Vu

It was the summer of 1977, and Bob Crandall was disgusted. Congress was ready to deregulate the airline business, and the American Airlines executive, who would go on to run the giant carrier for 18 years, griped aloud that Uncle Sam was going “to wreck this industry.”

Deregulation happened anyway, when President Carter signed it into law the following year. And now Crandall admits: “I was wrong.”

Once free of government shackles, Crandall introduced some of the most important innovations in airline history, including “supersaver fares” and frequent-flier mileage awards. But because deregulation also wreaked such financial havoc on American and every other airline, it prompted him to fight some of the ugliest labor battles in airline history.

Which is why Crandall epitomizes the wild ride the airlines have taken since they flew into deregulated skies. It’s been a ride of monumental twists and turns, most of them never envisioned by the legislators and regulators who set it in motion, and who forever changed how tens of millions of Americans would travel.

And now, with this year’s 20th anniversary of deregulation, Washington is threatening to change the rules again, even though the airline business has never been healthier. Politicians, upstart rivals, business travelers and even the architect of airline deregulation--an economist named Alfred Kahn--are complaining that the airlines wield too much power and are price-gouging the public.

“There are serious, out-of-control situations out there with pricing,” said Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy group. “And the airlines are in a complete state of denial that there is a problem.”

He and other critics also contend that single airlines dominate too many big-city airports, which helps keep fares high. Many smaller airports, meanwhile, are getting less airline service than they had before deregulation, some U.S. officials say.

As a result, legislation to re-regulate the industry is pending. And once again, Crandall and other airline chieftains warn that U.S. officials will wreck the industry if they meddle too much. “It is very frustrating,” Crandall said shortly before he retired in May. “Our competition isn’t predatory. It’s vigorous.”

Deregulation Seen as Improvement

Overall, though, nearly everyone agrees that deregulation has dramatically changed the lives of countless consumers for the better.

A generation ago, many people still considered flying a treat; today the mass of Americans takes it for granted--and often sees it as a hassle. On every major holiday, television news stations plant themselves at the local airport to witness the throngs.

But it’s not just consumers who have been profoundly affected. So have the millions of people who work for the airlines, the airplane builders, travel agencies, airports, labor unions, rental-car companies and advertising agencies--all of whom have benefited from the airline industry’s growth.

“Would I do it over again, knowing what I know now? Yes,” said John Robson, a former Civil Aeronautics Board chairman who helped enact deregulation and, in the end, the demise of that agency.

But Robson said that while any airline that breaks antitrust laws should be prosecuted, “I get worried when I see government agencies trying to put down on a piece of paper their version of a perfect market. I would be flabbergasted and terribly upset if we really tried to turn back the clock.”

Deregulation “has been a success for consumers, airline employees and the companies themselves,” agreed James Higgins, an airline analyst for the investment firm Donaldson, Lufkin & Jenrette Inc. in New York.

But if you let Higgins and the others keep talking, you hear a litany of worries and criticisms about the airline business and where it’s heading.

Perhaps that’s because any industry governed by market forces is constantly changing and adapting, because the market itself is always in flux. But perhaps another reason is that airline deregulation’s short history is a story bursting with irony.

Consider:

* More people fly today than ever before; U.S. airlines boarded nearly 600 million passengers last year. It’s cheaper on average to fly today (after adjusting for inflation) than in 1978.

But many travelers, especially business travelers who must pay extra to board flights at the last minute, are screaming that the airlines charge too much.

* A record number of people work for the airlines, nearly 650,000. The nation’s largest employee-controlled company, United, is an airline, and one of America’s most-admired companies, Southwest, is an airline, according to Fortune magazine.

But tens of thousands of airline workers also lost their jobs over the last 20 years. Thousands more gave up wages and benefits to help their airlines survive. And acrimonious contract disputes between the airlines and their workers are commonplace.

* Deregulation has meant a financial boon for major U.S. airports. But when combined with community noise concerns that have blocked expansion, some airports are now so packed that they don’t know how they’ll handle the even bigger crowds expected in the next decade.

* In grappling with a deregulated market, the airlines at times have lost once-unthinkable sums ($13 billion in the early 1990s alone). Now they’ve earned record profits for three years running, and yet passengers still routinely complain about the carriers’ lousy service and subpar food.

* Despite moving more people on more flights every year, the airlines have kept an admirable safety record. The ratio of fatal accidents to departures is about the same as in 1975. But some of the deadly crashes that have occurred have been blamed on deregulation.

* Airlines have tried every marketing gimmick in the book to draw more passengers: Fare wars, hot pants on flight attendants, free miles. Yet never has an airline seat been considered more of a plain-vanilla commodity--regardless of which airline’s logo is on the plane--than it is today.

* Deregulation enabled dozens of new, small airlines to take to the skies. Yet most of them are now bankrupt corpses. And today the industry is dominated by just eight carriers, and several major U.S. airports are dominated by a lone airline.

Moreover, the surviving airlines are joining forces in alliances that nearly resemble outright mergers, consolidating the industry even more.

“Unfortunately, applications to the DOT for start-up airlines have declined from about one every six weeks just a couple of years ago, to virtually none in the last 12 months,” said Mitchell, the business fliers’ advocate.

But perhaps the biggest irony of all is that after two decades of living with deregulation, Washington is investigating whether the airlines need to be re-regulated.

Big Airlines Dominate

One of Capitol Hill’s biggest worries is that certain airlines dominate several major airports. Critics contend these “fortress hubs” make it nearly impossible for start-up carriers to successfully enter those markets.

One airline dominates in Detroit (Northwest), another in Atlanta (Delta), and Phoenix (America West), St. Louis (Trans World Airlines) and Dallas (American), to name a few. Small rivals contend that if they try to wrestle part of those markets away, the big airlines merely flood the markets with cheaply priced seats until the new rivals are ruined, then raise prices again after the threat disappears.

Bills are pending in Congress that would, among other things, give more landing slots to new airlines at busy airports. The Justice Department is probing possible antitrust violations by the big airlines. And the Department of Transportation (DOT) is proposing new guidelines aimed at clamping down on airlines that use unfair tactics to block competition from new, low-fare carriers.

United Chairman Gerald Greenwald said, “This system is not perfect. But to re-regulate to solve that problem, in my view, is to take an elephant gun to go hunting mosquitoes.”

Some union executives also hate the notion of giving preference to new--and typically nonunion--airlines after seeing the upheaval that union workers have endured for 20 years.

“These work forces suffered through the worst part of deregulation,” said Patricia Friend, head of the Assn. of Flight Attendants, a union representing 42,000 attendants at 27 airlines. “They [government] can’t just confiscate slots that people have purchased and worked hard to build up. It’s completely and totally unacceptable.

“We have adjusted and adapted to the new reality of a deregulated industry,” Friend added. “So can the rest of you.”

When deregulation took effect, the airline business became a free-for-all. No longer did airlines have to ask for government permission to change fares, enter new markets or shed old routes. They just did so.

But as competition reached fever pitch, the business casualties began piling up. Some airlines expanded too much, cut fares too much and failed to cut their costs quickly enough to offset the lower fares. When they tried to cut costs by renegotiating labor contracts, they ran into nasty, prolonged fights with their unions.

Competition Killed Many Carriers

Economic recessions, notably one in the early 1980s and another a decade later, made matters even worse for the airlines.

Many small and mid-size cities saw their air service curtailed or ended; they simply weren’t profitable enough for the airlines to stay. For Americans who still had service, deregulation meant new, cut-rate airlines--such as People Express--that kept offering cheap fares.

But most of those new entrants eventually failed. So did some giants of the industry, including Eastern, Pan American and Braniff, which never adapted to the deregulated market and collapsed, taking thousands of workers down with them.

There were exceptions. Southwest Airlines, a Texas-based carrier whose cut-rate prices helped spur deregulation, stuck to the business of being a low-fare, short-haul “point-to-point” airline with good service. Now the nation’s seventh-largest carrier, it has been one of the industry’s best performers year after year.

Southwest is, in fact, Exhibit A that the government should leave the airline business alone, many industry-watchers say. Under the guidance of flamboyant Chairman Herb Kelleher, the airline has continued to prosper without changing deregulation’s rules, they note.

The push to free the airlines in the late 1970s was led by several government officials, but the man most often linked with deregulation is Alfred Kahn. A smart, witty academic and free-market proponent, Kahn was tapped by Carter to succeed Robson and usher in deregulation as the last chairman of the Civil Aeronautics Board.

Now a professor emeritus at Cornell University in Ithaca, N.Y., Kahn says the “most satisfying part of what we did” was lowering overall fares. Last year, 94% of fares paid were discounted to some degree from list prices, and studies show deregulation has saved consumers several billion dollars a year, he said.

But fares for last-minute travel, which is mostly business travel, “have gone up outrageously” and the dwindling number of start-up carriers is also disappointing, he said.

Kahn said he is against re-regulating the business, but “we’ve failed to vigorously apply the antitrust laws to this industry.”

Some observers contend that the major airlines’ alleged predatory behavior is what dissuades people from starting new airlines. But others point to the history of most new airlines, which is littered with bankruptcies, stranded passengers and laid-off workers.

Previous start-ups “had demonstrated an uncanny ability to self-destruct via ill-timed expansion, unreliable service and poor strategic decisions,” Perry Flint, executive editor of the trade publication Air Transport World, wrote in a recent editorial.

Also, the big airlines say their critics are conveniently forgetting that, in coming years, there likely will be new treaties that will further open U.S. routes to foreign carriers. That would spawn much greater competition for the U.S. airlines and give consumers even more choices, the big carriers say.

For now, the airlines--like any business--will charge what a deregulated market will bear, even if that makes for some unhappy customers and legislators. “I’m not even going to try to debate that there’s a public-relations problem” for the airlines over the rise in fares, said United’s Greenwald.

But Greenwald said that when it comes to re-regulating the industry 20 years after Carter sent it into unprecedented change, it boils down to this: “If you think this deregulated system is 95% good and the other 5% is bad,” he said, “then is the fix you have in mind for the 5% going to screw up the other 95%? Or are you better off leaving things alone?”