June 6, 1990
"U.S. Air Travel has Taken Off, Despite Grousing"
San Jose Mercury News
By Timothy Taylor
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SOME industries have a perennially bad image. A Wall Street Journal survey last fall found that 22 percent of Americans said they had no confidence in the oil and gas industry; 23 percent had no confidence in bankers; 27 percent had no confidence in the insurance industry. No surprises there, except perhaps that some of the numbers are so low.

But I was surprised when the survey found that 43 percent expressed no confidence in the airline industry. Nowadays, it seems that everyone has a story about rising fares, delayed flights, lost luggage, peculiar ticket restrictions, and more.

Here's my story: When I flew to New York a few weeks ago, the flight was more than an hour late leaving San Francisco. The reason, the pilot explained, was that he had been on vacation for several weeks and had forgotten to spring his clock an hour forward for daylight-saving time, so he was late to the airport. Passengers around my seat agreed that this was not a man we would entrust with a multimillion dollar piece of machinery.

However, judging by what people do, rather than what they complain about, airline deregulation has been a success. The table at right shows how the number of riders and miles traveled have increased considerably more in the 1980s, since the industry was deregulated, than they did in the 1970s.

In fact, I suspect that memory has faded of how air travel was regulated for four decades before 1978. The Civil Aeronautics Board used to control who could fly every interstate route in the country and approve all fares charged. From 1938 to 1978, no new airlines were allowed to enter the market for major interstate trunk flights.

Interstate airlines competed in providing great food and service to a select clientele. Meanwhile, intrastate carriers in places like California and Texas were competing with each other, charging half as much per mile as the CAB-regulated airlines, and still making money. The industry was far overdue for reform.

Airline deregulation has brought concerns of its own, although some of these problems are more rumored than real. For example, despite the fear that profit-hungry airlines would cut down their margin of safety, air travel keeps getting safer.

The real concern is that airlines have used deregulation to reduce competition. There were 30 large airlines in 1978. But after 11 mergers and 16 takeovers in the past five years, 90 percent of the industry's passenger miles are now flown by just eight carriers, according to a February report of the Department of Transportation.

Instead of competing to reduce price, airlines have invented gimmicks like frequent flier miles and used their computer reservation systems and special deals for travel agents to hook business.

Routes that are dominated by a single company have fares that are 14 percent higher per mile than routes with some competition. And air fares in general rose in 1987 and 1988, although they fell a bit in 1989 and the airlines have just been announcing some lower fares for this summer.

Although this indictment proves that airline deregulation has been imperfect, it remains a moderate success.

Two Brookings Institution economists recently calculated that current air fares were 18 percent lower than they would have been if the CAB were still regulating fares. Even if passengers are paying more for air travel than a year or two ago, they're still saving about $6 billion a year compared with the previous rules.

Moreover, counting the number of airlines doesn't really measure competition, since an additional airline in, say, Texas doesn't provide any competition for my flights to see my family in Minneapolis. What matters is how many passengers have an actual choice on the routes they fly.

Before deregulation, only 28 percent of air passengers traveled between cities served by three or more air carriers; today, about 55 percent do. Before deregulation, almost half of all passengers traveled on airlines that carried 70 percent or more of the traffic on that route; today, less than a fifth do.

The hub-and-spoke system adopted by many airlines has increased competition between many cities. By feeding riders in and out of hubs, it has also helped to make the industry more efficient. The table above shows how planes are flying more full than ever in the 1980s, even though seats have been added to most planes.

Airline deregulation has clearly benefited consumers, but it has also demonstrated that airlines (like most industries) don't especially want to compete on price. They would rather try to establish a market niche and charge higher prices.

It's up to the government to make those niches a bit less secure. For example, frequent-flier benefits could be taxed as income. Federal rules can help to assure that potential competitors have access to runways and gate space.

It may seem contradictory to call for government action to make deregulation work. But the difference between a market and a brawl is that markets need a background of rules and regulations to assure that competition is channeled in productive directions.

THE FREQUENCY OF FLIERS

Measured in boardings and in miles flown, U.S. air travel shot up after deregulation. And as the load factor, which shows the percentage of available seats filled, indicates, planes have been flying closer to capacity. All figures refer to domestic flights only.

Year Boardings (x) Pass. miles (y) Load factor 1970 153 104 48.9% 1975 189 132 54.6% 1980 273 201 58.0% 1985 357 271 60.7% 1989 420 334 62.1% (x) in millions of passengers. (y) in billions of miles. Sources: For figures through 1985, the 1989 Statistical Abstract of the United States. For 1989 figures, Department of Transportation, "Air Carrier Traffic Statistics," November 1989.

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