Should Airlines Be Re-regulated? The Great Debate

Has airline deregulation worked? Should Congress re-regulate the industry? What impact would it have on agents, GDSs, the travel industry and the traveling public? Once seen as a settled issue by many, re-regulation is alive and well among Washington D.C. policy makers. In fact, the pending Continental/United linkup has refocused attention on airline mergers and this will accelerate if other legacy carriers seek an alliance.

Representative James Oberstar (D-MN), a legislator with a enormous influence on the airline industry, suggested in an opinion piece in Business Week and during recent Congressional hearings that, if the pending merger of Continental Airlines and United Airlines is approved, he will lead efforts to re-regulate the U.S. airline industry. Oberstar’s opinion drew an immediate rebuttal. Including a defense of deregulation from James C. May, president and CEO of the Air Transport Association (ATA), in the Aviation Daily.

“His (Oberstar’s) proposition: When he voted for deregulation in 1978, it was in support of 'vibrant competition among airlines, competition that would encourage innovation in schedules, pricing and services.' He now says that 'promise of airline deregulation was unfulfilled.' The facts simply do not support that claim,” May arguesin Aviation Daily.

“Rep. Oberstar, who chairs the U.S. House Committee on Transportation and Infrastructure, can be proud of his vote,” May continued. “Deregulation has been a boon for consumers, who benefit from more choices of airlines, including widespread low-cost carrier availability, service to small communities and, above all, low fares.”

May cites data from the U.S. Department of Transportation (DOT) that the price of the average domestic roundtrip airfare decreased by 8.6 percent between 2000 and 2009 while the Consumer Price Index increased by 24.6 percent during that period. “Thanks to deregulation, the U.S. airline industry is hypercompetitive, and consumers have benefited as a result,” May says. “Ironically, what has been elusive is benefits to the industry and its stakeholders — airlines, labor investors, among others — who have been on a roller-coaster ride through decades of financial boom and bust.

“U.S. airlines lost $58 billion between 2001 and 2009,” May continued. “In 2009, operating revenues plummeted 16.9 percent to $155 billion on a 21.5 percent drop in cargo revenue and an 18.1 percent decline in passenger revenue. These abstract financial results have had very human consequences, as U.S. passenger airlines shed more than 150,000 jobs in the past 10 years. For the U.S. airline industry to survive and successfully compete with international carriers, Congress must embrace progressive competition policies. Air France/KLM is the world’s largest carrier by revenue. The U.S. airline industry needs the freedom to demonstrate leadership. Mergers are but one way of moving the industry to be profitable and better enable it to satisfy consumer demand. The industry cannot be sustainable without profitability.”

DOT Secretary Ray LaHood understands that point, May says, noting the critical role that aviation plays in the U.S. economy and in support of global commerce and trade. He praised LaHood for forming a committee the Future of Aviation Advisory Committee representing all industry stakeholders to provide recommendations to the DOT on the U.S. aviation industry.

“We believe that Secretary LaHood is focusing on the right issues," May said, offering Congress several key recommendations:

1. Do no harm. The federal government already imposes almost $18 billion annually in special aviation taxes and fees. We need policies that incentivize not penalize the industry. For example, we support a global approach for reducing aviation emissions — aircraft fleet modernization and flight operational improvements have saved more than 1 billion metric tons of CO2 emissions in the past 20 years. Airlines are committed to even greater reductions. Congress should not impose fuel taxes to achieve those additional reductions.
2. Enact sensible energy-market reforms to prevent excessive speculation from distorting the markets, increasing volatility and driving oil prices artificially higher.
3. Modernize the outdated, inefficient air traffic control system now, which will create jobs and result in safety, environmental, operational and customer-service improvements.

May’s conclusion: “Re-regulation is not the solution. We do not compete in the marketplace of 30 years ago. It did not work then, and it will not work now. Reversal of this progress will mean less service, higher fares and fewer employees, and it would greatly hinder the progress being made to restore financial health to the industry, as well as to our economy.”

Obestar, who has been directly involved in the oversight of the airline industry since 1987, in turn, has expressed doubts even prior to the Delta/Northwest merger. “I was then, and still am, extremely fearful of a three-airline future,” Oberstar wrote in Business Week. “With only three major airlines, there would be enormous incentives for each carrier to refrain from competing with the others at their strong hubs and routes. This strategy would likely lead to the greatest mutual profitability, while strong competition across the board could prove suicidal to the airlines. Moreover, as each major carrier became larger and stronger, it would become increasingly difficult for new competition to gain a foothold in a market.

“The airline business is, without a doubt, a tough tiger to tame” Oberstar continued. “Many have tried, and many have failed. Yet, I refuse to believe more mergers are the answer. Mergers may mean short-term profits for investors, but they inevitably mean long-term losses for workers and consumers. The merged carrier is never greater than the sum of its parts. It is always less, often much less. As the executives planning these mergers are polishing their golden parachutes, employees of the affected airlines are worrying about the potential loss of their pensions, their seniority, even their jobs. This is not what we were promised when we deregulated the airline industry in 1978. If Transportation Dept and Justice Dept. will not act to cool this merger mania, then Congress should. We should just say no. Hell no!”

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