The Legacy of Airline Deregulation
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PAUL SOLMAN: 25 years after the deregulation of America’s airline industry, it would seem to be flying blind. The skies may still be friendly for United, but back here on earth, the business climate has become positively hostile. United is bankrupt; so is U.S. Airways, flying belly-up since August. In fact, 2002 was the worst year ever for the U.S. airline industry: $9 billion dollars in losses to go with $7 billion the year before. Even pre-9/11, however, customers had begun to complain that planes felt more and more like cattle cars, were less and less able to take off and land on time. So we traveled to Ithaca, New York, to ask the architect of deregulation, is it now time to re-regulate? His answer, “no way.”
ALFRED KAHN: I certainly don’t want to have the government back in the business of trying to restructure the airline industry. That would be catastrophe.
PAUL SOLMAN: Alfred Kahn was a professor at Cornell University back in 1977, when President Jimmy Carter lured him to Washington to help shut down the CAB — the Civil Aeronautics Board– and replace a tangled web of regulation with free market competition. It was, at the time, a radical move.
ALFRED KAHN: I said there was the possibility that you would have competition that might even be regarded as destructive. It was a risk I was willing to take.
PAUL SOLMAN: And still am, still are?
ALFRED KAHN: Oh, absolutely.
PAUL SOLMAN: So you don’t regret deregulating the airlines?
ALFRED KAHN: Oh, dear, not at all. I mean, it’s the greatest thing I ever did in my life, other than have children. What I did has been extraordinarily beneficial to millions and millions and millions of people every year who couldn’t afford to travel, who now can visit their grandparents– which now strikes home to me– go home for vacation from college, who can travel and indeed be tourists and go to Europe for two or $300, have broader horizons.
PAUL SOLMAN: Compare this, says Kahn, to the supposed golden-era when Eastern was number one to the sun, TWA was up, up and away, Pan Am made the going great. And, yes, the going was great, so long as you could afford it. High fares kept lines short, besides which, line length was actually regulated. Planes were commodious, even sandwich size was mandated. The skies were roomy. In short, traveling by air was traveling in style. But then came the 1970s, and a devastating double whammy: Recession and inflation.
PAUL SOLMAN: Problems in the Middle East choked off the supply of oil, driving prices up and drivers nuts.
DRIVER: It’s going to be a hot summer. It going to be rough. Going to be a lot of trouble.
PAUL SOLMAN: The economy as a whole suffered, and recession reigned. For the airlines, higher fuel prices meant higher fares, stoking inflation, just as incomes due to the recession were going down. Passengers began to stay away in droves. Now, you might think the obvious move would have been to cut prices. But one carrier cut, another cuts more, and soon you have a price war, which hurts all airlines. Regulation, historically, protected them from such cutthroat composition, so they figured they could simply wait for the customers to return. Enter Alfred Kahn, tapped by President Carter to deregulate the industry for its own good, and fight inflation by forcing competition to produce cheaper seats, more flights.
FLIGHT ATTENDANT: Welcome aboard Jupiter Airlines 230 mile flight which would take you straight to the heart of none other than good old big city, otherwise known as Dallas.
PAUL SOLMAN: The major airlines didn’t like it, neither did the unions, and even some customers were unhappy. Still are. What do you say to people like me who say, “gee, I liked it better in the old days. I’m more worried now about whether the planes are safe, I’m more uncomfortable. Go back, go back!”
ALFRED KAHN: All right, let me say two things. First, let’s get safety out of the way. Airline accident rates are down much more than 50 percent. Safety has continued to improve, we never deregulated safety. But discomfort, in part, I have to say, as we used to say in the army, “TS” the major benefit of deregulation was to make travel available for common folk.
PAUL SOLMAN: So you don’t care that I’m not as comfortable as I was?
ALFRED KAHN: Well, I really do, because I think by the same token, is I want to have different price quality options, I really do want a quality high-priced option available. But you can’t complain about having to pay what it really costs. And what it really costs is that you’re denying that space to somebody else.
PAUL SOLMAN: So I shouldn’t complain, I should just pay the freight.
ALFRED KAHN: Precisely. Don’t complain at having to pay $2,000 going across the country round-trip, and yet demand the same kind of service as you had under regulating.
PAUL SOLMAN: Alfred Kahn is a liberal Democrat, but first and always, he’s an economist. That means he’s a devout believer that the market should conserve any scarce resource by charging you what it really costs.
ALFRED KAHN: The beauty of the intense price competition that was set off and made possible by deregulation, has had the effect that the average load factoring planes were filled 52.8 percent full, in the decade before deregulation. In the last several years, they’ve been filled over 70 percent.
PAUL SOLMAN: In other words, what’s bad for comfort can be good for business. When regulation was lifted, competition took off, prices came down, passengers lined up, the industry grew, its workers made more, and it became tougher to run an airline. Low-cost carriers like Southwest could now challenge the big guys. More capacity meant fierce fighting for the other guy’s customers. But the industry as a whole was making money until another double whammy: The economic slowdown of 2001 followed by September 11.
PAUL SOLMAN: We’re sitting here at the table at a moment in time where U.S. Air, the plane right out the window there, is in bankruptcy. United has just gone into bankruptcy, Continental was in bankruptcy, and since you started deregulation, Braniff’s out of business, Texas International’s out of business, Eastern’s out of business. I probably can’t name half those.
ALFRED KAHN: Many would. Do you know how many restaurants that get opened every year last beyond the first five years? It’s a tiny, tiny fraction. That’s part of the market economy, the competitive market economy. If you believe in competition as the best possible protection for consumers, you have to accept losses of money by investors.
PAUL SOLMAN: But we’re talking about lost jobs as well.
ALFRED KAHN: Do you know what’s happened to total employment in the airline industry? It has gone up, last time I looked it’s gone up 60, 70, 80 percent. We have increased the number of jobs in the industry markedly, as I predicted, because via competition, we have developed markets that didn’t exist before, we have greatly increased the number of air flight schedules, I mean enormously increased, and enormously increased the industry.
PAUL SOLMAN: In fact, Kahn says, he tried to explain this 25 years ago to the AFL-CIO, which opposed the signing of the Airline Deregulation Act of 1978.
ALFRED KAHN: Their interest may have been conceived not so much in terms of new jobs for other people, but high wages for their own members. That’s where the monopoly profits of the industry went. They went to the unions, particularly the pilots and the machinists, and especially the pilots. I don’t mean to paint them as villains. I mean, I’ve always been a supporter of the trade union movement, but I know a monopoly when I see it. And the fact that it’s a monopoly of particularly skilled, well situated, strategically situated unions doesn’t make it more acceptable.
PAUL SOLMAN: You don’t have to buy Kahn’s view about the role of pilots, but there’s no question that whoever is to blame, deregulation has hurt the innocent. Small communities, like Kahn’s own, Ithaca, are reeling. Since 9/11, airports in small and medium sized cities have lost about a third of their scheduled flights. Airport director Robert Nicholas, whom Kahn has known for years.
ROBERT NICHOLAS: My concern is that once you establish a pattern of people saying, well, there’s nobody at Ithaca any more, we’re going to have to go to Syracuse to get airline service, that they begin to get used to that, you establish a pattern and then they never come back.
ALFRED KAHN: As we say politely, the market works, but with lag. But clearly, it’s not going to be the kind of service we get now.
PAUL SOLMAN: But, says economics, if there aren’t enough Ithacans willing to pay enough to make air travel profitable here, that’s proof they prefer to go to Syracuse to get on a plane given the relative prices. Whether planes fly to Ithaca or not, however, there’s a bigger question: Where is deregulation going to take us? One of Kahn’s chief economists when he was in Washington is fellow Cornell faculty member Robert Frank, who helped implement deregulation back in the ’70s.
ROBERT FRANK: We’re just going to have to see some consolidation, we’re going to see some more mergers, we won’t have 15 carriers by the time the dust settles.
PAUL SOLMAN: Is that a good thing though?
ROBERT FRANK: If it would be just as cheap and convenient to have 20 airlines, then that would be better, but what we know is that consolidation reduces costs. When we have one carrier, people don’t lose their luggage as often. They have a little more convenience arranging their reservations, the super saver programs don’t cause as much confusion. So on balance I think we would all gain as consumers if there were fewer carriers.
PAUL SOLMAN: Well, that may be debatable, but in any case, economists think market competition should decide.
ALFRED KAHN: The real protection of the public has got to be competition. And it was overwhelmingly because regulation suppressed competition that I opposed it, as did the Department of Justice Antitrust Division, as did the federal trade division, as did all other people who are really concerned about the industry, the poor, people of modest means, and people coming into the labor market.
PAUL SOLMAN: And says Alfred Kahn 25 years after the biggest policy push of his career, deregulation has brought air travel to those of modest means, has increased employment, has, in short, grown the airline industry for better and worse. But though there were costs to deregulation, they were far outweighed, he thinks, by the benefits, and that’s all any economist can ask.