Defining the Success of Modern Airline Deregulation and Competition

November 2, 2018

The Brookings Center on Regulation and Markets hosted scholars and a former airline executive on October 30 to discuss the legacy of Airline Deregulation Act (which marked 40 years since enactment last Wednesday) and the current state of American passenger aviation. Those who were involved with the Civil Aeronautics Board (CAB) and others in the field recognize the legislation as a unique confluence of macroeconomics, political will, and the right people in the right place at the right time. During the 1970s, government agencies were staffed with accomplished microeconomists, and Senate Judiciary Committee counsel (now Supreme Court Associate Justice) Stephen Breyer pitched the policy to late Senator Ted Kennedy as a consumer protection issue.

As noted in the opening presentation, thanks to deregulation, airline ticket prices fell, productivity rose with hub-and-spoke routing, and air travel access expanded for new kinds of passengers because market forces replaced administrative decision-making at the CAB. Most of these consumer benefits are the direct result of rise of low cost carriers, including Southwest Airlines. Congress soon after deregulated trucking, railroads, natural gas, and telecommunications. However, it also generated challenges in pricing transparency, infrastructure investments, and consolidation.

Kathy O’Neill, chief of the U.S. Department of Justice’s Transportation, Energy, and Agriculture Section, explained some of her office’s civil antitrust authority and what could be considered as a red flag for anticompetitive behavior in the airline industry. DOJ looks at route overlaps where head-to-head competition could get cancelled out, system-wide theories of harm, coordination through enhanced multi-market contacts (i.e. raising ancillary fees), public signaling behavior and contingencies in statements as circumstantial evidence. Of course, as posited by moderator Josh Gotbaum, it is difficult to legally prove collusive behavior when price information is public.

Airports, particularly hubs, are becoming more crowded with increased demand for air travel, and the current, overburdened infrastructure poses intractable barriers to entry for newcomers and smaller firms. At some of the largest hubs, gate and take-off/landing slot availability are severely limited. DOJ sued to block United’s planned acquisition of 24 Delta slots at Newark in 2015 on grounds of monopolization, which United later withdrew. Then in October 2016, the FAA lifted slot controls at Newark, which helped to unleash meaningful competition and improve on-time performance at the key airport.

Regulatory economists Nancy Rose and Dorothy Robyn raised a few policy concepts that could make the industry more efficient: airway congestion pricing, pulling back on antitrust immunity, and air traffic control privatization. Through a 2008 DOT rulemaking, the FAA allowed limited experimental congestion pricing, but no airport has yet to try it in lieu of standard weight-based landing fees. Rose warned of a need to revisit immunity granted to international alliances, and Robyn has been a vocal advocate for reforming the governance of air traffic control.

Technology continues to drive new frontiers in passenger aviation. New narrow-body jets make transatlantic flight cost-effective and introduce a new competitiveness for American carriers to Asian-Pacific markets. Self-flying planes might begin taking over air cargo labor, new distribution systems could revolutionize reservations and revenue management, and geared turbofans can change the noise profile of planes that might enable more efficient routing near the New York-New New Jersey airports.

Richard Anderson, current Amtrak CEO and former Delta CEO, used his keynote to highlight how rural flyers are clear losers in airline deregulation. The heavily subsidized Essential Air Service program counteracts huge losses for carriers on those rural routes (EAS carriers onl runs an average load factor between 40 and 50 percent, which is even lower than the 55 percent average overall load factor during regulation prior to 1978). In his current role, he is more optimistic that Amtrak and intercity rail can learn from the deregulation success and become more economical mode of travel for Americans.

A video recording of the events and links to panelists’ publications can be found here. For more information on the trends in airline competition, Eno’s Aviation Insights examine new airlines entrants, fares, and other trends.

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