Should The Airlines Be Regulated (Again)?

That’s the position held by a post on Chris Elliott’s blog this morning.  Now, I respect Chris and his blog/forums, though we don’t always agree.  And, on this, we don’t (though the piece is written by Paul Hudson, not Chris).  Let’s take a look at the article:

As the airline industry has undergone major consolidation in the last decade, what is left is four airlines (American, Delta, United and Southwest) that control 86 percent of all domestic flights.

There’s been a lot of consolidation, no doubt.  I’m not sure where the number 86 percent comes from, but it’s in the ballpark.  When I look at the trailing 12 months of data from February 2015 here, and add up the 4 he mentions plus SkyWest and ExpressJet (who fly for the big guys), I get 74.1%.  Now, you’ve got carriers like Republic, Air Wisconsin, PSA, Chautauqua and other smaller regionals, so you might get to 86%.  And, controlling that percentage of the market does make it a bit easier to hold fares higher.

But, capacity control is also a large factor in keeping prices up.  Planes are more full, meaning airlines can have confidence they’ll fill those last few seats at high prices.  The article even notes this discipline by the airlines:

Capacity restraint has left us with ever-fuller planes. In 1991, planes flew on average at 56 percent full, but now average over 85 percent full. This has led to higher airfares and increased passenger complaints. Revenue from baggage, cancellation and change fees for US airlines nearly quintupled from 2007 to 2014.

Airlines Regulated

Should full planes lead to regulation?
Image provided by prcuciatti via shutterstock

Now, according to these DOT figures, the percentage might be a bit less, but I think we can all agree that planes are more full than at any time in recent memory.  This seems like a non-sequitur to me, though.  Is it the fault of de-regulation that airline CEOs finally developed some discipline?  Is the only reason planes are full that the government allowed all this consolidation?  It just can’t be, considering that there weren’t a couple dozen big competitors in the salad days when the airlines were adding capacity like crazy.  Do the mergers play a role in fuller planes?  Probably, but without some of these mergers (and potential resultant bankruptcies leading to some airlines going away) you could certainly argue there would be less service to fewer places now as well.  I certainly don’t think the argument that mergers are the predominant factor for full planes.  There are layers to this argument, so let’s keep moving:

Simultaneously, airline costs have plummeted for labor, debt service and especially for jet fuel, the No. 1 operating expense. This has allowed the major U.S. airlines to become immensely profitable, with nearly all posting record gains in 2014 and stock prices increasing.

Well, yes.  But, before the costs for things like labor and jet fuel went down, the airlines lost billions of dollars.  And, the cost of labor is going up, with raises for Delta and American pilots and flight attendants recently as well as some Southwest employees.  But, back to the capacity controls, fuller planes mean more profit.  Additionally, after exiting bankruptcy or merging, many of these airlines invested in new, more fuel-efficient planes.  When you can amortize the costs of the new plane over decades but take the fuel savings now, your books can look pretty good.  Still, nothing here that’s the fault of deregulation.  Let’s keep looking:

DOT needs to regulate international air fares and fees. In February, filed a rulemaking petition requesting an examination of the cost of change fees for international flights, which went from $50 in 2008 to as high as $750 today.

Again, painting the extreme.  I’ve never actually paid a $750 change fee (though they do exist).  I just booked a ticket to Hong Kong that has a $100 change fee and have booked plenty more that have fees way less than $750.  No surprise, I don’t agree with the DOT regulating change fees.  Dodd-Frank moved to regulate how banks and credit card companies made money.  But, instead of reducing fees overall, there’s been quite a bit of swapping one fee for another.  Maybe the fee for a debit card transaction isn’t as high as it used to be, but you’re going to pay a lot more statement fees, minimum balance fees, etc than you did 10 years ago.  These are publicly held companies that need to answer to shareholders.  Regulate the change fee and the airline will raise fares, charge more for bags, seating assignments, you name it.  They’re not just going to decide they want to make less money.

Another issue is airlines altering flight schedules after passengers have bought their tickets, forcing them to scramble to find accommodations for another night or end their trip early. Airlines are supposed to maintain published schedules and should be required to compensate passengers when a flight has been changed for commercial convenience.

As a general rule, I’ve found the airlines pretty accommodating when they change a schedule for something I booked.  I’m generally allowed to re-book on another option the airline has, and, given my elite status, I’m sometimes given more flexibility than that.  But, saying, “Airlines are supposed to maintain published schedules” is a big so what?  They do maintain published schedules.  And, they change them, which they’re legally able to do.  Should they have to pay you when they change a schedule because your trip has to change?  I’m a believer in free markets, so my answer is no.

Flight delays or cancellations are the No. 1 passenger complaint, with 20 percent to 33 percent of flights late and 1 percent to 5 percent canceled. As airliners are now mostly full, mass cancellations often result in several days’ delay.

Airlines know this, but instead of providing reasonable compensation or maintaining adequate reserves of equipment and personnel, have sought to absolve themselves of liability. This includes redefining ‘Act of God’ in their contracts to include equipment and crew shortages, then refusing to provide alternate transportation or even ticket refunds for canceled flights. Laws mandate compensation for flight delays up to $6,000 for international flights under the Montreal Convention, and up to 600 Euros under EU rules, but nothing under DOT rules, except for bumping.

Maintaining adequate reserves of equipment and personnel?  These are for-profit businesses. They should be required to keep a bunch of planes and employees sitting around just in case something happens?  Look, I hate a delay as much as the next person, but really?  So, how much should they have to keep lying around?  1 plane?  100 planes?  Enough to cover every scenario?  This type of thinking isn’t democratic, it’s bureaucratic.

And, I have yet to run into an airline who redefined a plane breaking as an Act of God, or an airline that refused alternate transportation or a refund when they canceled a flight.  Maybe the alternate transportation doesn’t fit perfectly, but the next time I hear someone tell me, “Yeah, the airline canceled my flight and refused to fly me to my destination, ever, and refused to give me a refund” will certainly be the first time.

Airline consolidation is a fait accompli, but with a few highly profitable airlines comes a greater need for reasonable regulation and removal of barriers to real competition. Otherwise, the new normal will be an era of consumer abuse, unrestrained price gouging and supply restriction.

What the article fails to mention is that airfare is generally the same or cheaper than it has been when you consider inflation.  There are literally dozens of articles detailing the price of airfare over the years, but this Atlantic piece does a good job framing the discussion well without getting overly technical.  Sure, if I want to buy a one-way fare on United from Dulles to Denver (a route they dominate on a non-stop basis) I’m going to pay through the nose, no matter when I buy.  But, that other nefarious co-conspirator the article mentions, Southwest, charges $197 for the same route, just less frequencies per day.

Supply restriction is just good business sense, not something that deregulation created.  You could argue the opposite, that capacity restraint was non-existent through a large chunk of the deregulated area.

That leaves us with consumer abuse.  United Airlines treats me like a dog pile even though I spent over $10,000 with them last year and hold Platinum status with their airline.  So, I’m flying mostly American Airlines.  And, Delta offers a pretty darn good in-flight product if United and American both fail me.  In the age of regulation, where prices were fixed, airlines had to compete on service, free bottles of booze and all kinds of other luxuries.  Those days are past, relics of a society that thinks very differently today about service needs.

Consumer abuse exists in both regulated and unregulated businesses.  I’ve dealt with Washington Gas for years in the DC area.  A regulated utility with horrid customer service.  How about NYC taxi cab drivers?  Never had a bad experience there, right?

Air travel is not as much fun as it used to be in many ways.  I feel it most times I’m in an airport or on a plane.  I think we can all agree on that.  Just don’t be fooled into thinking the government will make it better.

The article asks this final question:

Is it time to re-regulate the airline industry?

No.  I’ve got plenty of lower prices and better service to deal with from the Affordable Care Act, thank you very much.

The post Should The Airlines Be Regulated (Again)? was published first on Pizza In Motion.

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  1. No, we certainly don’t need Government Airlines, and that website is consistently and strongly pro-regulation. Your analysis is excellent. In fairness, the article did make one good point – the airlines are actively trying to restrict competition from European and Middle Eastern carriers, something which is not in the consumers’ best interest.

    1. DaveS, you’re right about the Middle Eastern fight. But, I think of that along the same lines as the ExIm battle Delta has been waging. Too many lobbyists on the budget.

  2. Interesting article. The Atlantic article as well, although that had some holes you could drive a truck through. As a flyer with little status flying out of a tertiary city, I find domestic flying to be an ever increasing exercise in agony. Painfully crammed in seats, wildly inconsistent service, food that has amazingly gotten even worse, insert complaint here… So, what to do? Southwest doesn’t fly anywhere within a couple hours drive, Delta is just plain awful, United has the worst name in the industry, and American flies to at least some hubs, so American (sort of) wins.
    The ultimate fact is that deregulation gave us what we wanted and lots more. One irony of this is that the big, strong, immensely profitable and previously subsidized airlines have now determined that there is enough competition, and other carriers, whether the ME3 or Norwegian, have no business flying more than minimally to the U.S. This “game over, we won, no more players, thank you” mentality shows the inherent hypocrisy of the US3 (or 4). What all of this means in practical terms for myself is that I have all of the miserable aspects of deregulation, with high prices to boot. I’m not at all sure that reregulating the industry is a decent idea, but I’m certainly not a fan of the system as is. Maybe a reasonable compromise would be a Passenger Bill of Rights, specifying penalties and recourses for the airlines’ screw ups, along with minimum standards for space, baggage, meal service provided e.g. on transcontinental flights, and points along those lines.
    We have too few airlines remaining, any they control too much of the flight traffic. How many of the changes that, Delta for instance, has made in the past couple of years have been beneficial to the customer base? Exactly. The current system is unfavorably tilted away from the consumer. Sadly, it’ll almost certainly get worse.

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