This Approach Won’t Fly
The Justice Department, in accusing American Airlines of having a pricing strategy aimed at driving out competition at its hub airport at Dallas/Fort Worth, says it is acting in the interest of consumers. But it might do more harm than good. Rather than attacking airlines’ pricing policies in the courts and discouraging them from offering discounts, the government should act to loosen the grip of dominant airlines on the nation’s busiest airports and allow new, low-cost carriers to enter those markets.
Airline deregulation in 1978 brought dramatic changes in the industry. Competition has forced some carriers out of business, others to merge. Consolidation has led to the strengthening of the hub-and-spoke system in which airlines have a controlling share of traffic into and out of their hub airports.
More than 60 companies have entered the air passenger business in the last two decades, vying for a share of mostly regional traffic. Most of the low-cost carriers, such as Kiwi, have not survived, but some have, and new ones continue to come on line.
Clifford Winston of the Brookings Institution, an independent think tank in Washington, says that despite recent increases, overall air fares have dropped by nearly a third in real terms--after discounting inflation--and the safety of air travel has improved dramatically.
This did not come free to consumers. Unprofitable lines to some small cities have been abandoned, the pricing of fares has become chaotic and delays are a problem. Airports are crowded as more travelers take to the sky. Labor tension produced by the airlines’ aggressive cost cutting has led to strikes, often during the busiest travel periods. American, the nation’s second-largest airline, was particularly hard-hit by labor unrest.
The gist of the government’s case against American is that the airline over a period of years “repeatedly sought to drive small, start-up airlines out of Dallas/Fort Worth by saturating their routes with additional flights and cutting fares.” When competition disappeared, the prices bounced up. All the airlines have lowered prices, often substantially, when competitors entered their markets.
If the government wins its case, American will be effectively barred from lowering prices to meet competition from the low-cost entrants. And the new carriers, which had to offer far lower air fares in order to attract passengers, would no longer need to do so. As a result, price competition would decline.
Moreover, the lawsuit does not address the root cause of the problem, the tight grip the large carriers have on landing and takeoff slots at hub airports. Opening new slots to low-cost airlines would stimulate competition on the nation’s busiest routes and improve services to underserved locations. The Senate’s proposed Air Transportation Improvement Act would go a long way toward accomplishing that by opening new slots at four of the busiest airports--Chicago O’Hare, Washington’s Reagan National and New York’s LaGuardia and JFK. This can be done by releasing slots held for the military (at O’Hare), extending hours of operation (at National) and removing other restrictions.
In many ways, deregulation of the airline industry has worked all too well, generating huge increases in air travel and consequently testing limits of passengers’ tempers. But the cure, if one is needed, is not in reverting to the pre-1978 days of price and air route regulation.
