Deregulation Blues

Economist Alfred Kahn, head of the Civil Aeronautics Board (CAB) during the Carter administration and the father of airline deregulation, recently donned his clown suit long enough to proclaim (in an interview with ABC's Ted Koppel) that what the chaotic US airline industry needs is more free-market reform: the "corporatizing" of air-traffic control and the privatizing of the nation's publicly managed airports.

There's no doubt that the American airline industry is in trouble. Consumer complaints about air travel are up 130% since last year. Air-rage incidents are up 500% over the past three years. Flight delays have risen by 50% in the last five years and by 11% since the beginning of this year.

Most troubling of all, prices, which were supposed to go down when deregulation was instituted in 1978, have been going steadily upward in a non-inflationary period. During 1998, for instance, they rose an average of 9% overall and an average of 17% for business travelers. In fact, over deregulation's first two decades (1978-98), the passenger price per airline leg in the US went from $70 to $110, a jump of 57%.

The airlines are not alone. Wherever the octopus of deregulation has spread its tentacles, life has invariably gotten more complicated, more frustrating, and (especially) more expensive. Cable television is a case in point. Since the deregulatory Telecommunications Act of 1996 went into effect, cable rates have increased by more than one-fifth across the country, and most of us have had to deal with one new provider after another, as merger follows profit-enhancing merger.

Swelling electricity costs are another manifestation of the deregulatory blues. California, where the pernicious notion of electrical deregulation gained its first foothold, is showing why it's a bad idea whose time has come. Since the implementation of free-market power generation and distribution, radical increases in the price of flipping the switch (double to quadruple prior rates) have precipitated a consumer revolt. Even the residents of staunchly conservative Orange County, birthplace of the John Birch Society, have joined outraged demands for a reimposition of regulatory controls.

The immediate good news is that officials of the Golden State, goaded by presidential candidate Ralph Nader among others, have responded to the public anger by temporarily rolling back "free-market" prices. The long-term bad news is that 23 other states are scheduled to shortly follow California's deregulatory lead, replacing rate supervision by state public utility commissions with so-called price competition at the retail level between private power suppliers. How these hapless jurisdictions plan to avoid California's woes remains a mystery.

Incredibly, the deregulation of all aspects of our national economic life, which has so far proven an unmitigated disaster for consumers, remains gospel to Washington's policymakers. Untrammeled free markets have represented conventional wisdom in the economics departments of America's elite universities long enough -- since the 1970s at least -- that an entire generation of graduates now serving in government apparently believes in them uncritically, despite contrary evidence before its eyes. The buzz word "competition" has become a mantra for rising politicians, upcoming bureaucrats, and the trendy academics who advise them; it connotes an economic world freed from interfering government oversight, one in which the actions and decisions of the profit-driven private sector are deemed to be invariably correct. The problem for the indoctrinated true believers in this concept is that while they may have been well grounded in laissez-faire economics, they totally lack any sense of historical perspective.

The sad history of the aforementioned American airline industry would be worth their while to examine. From 1938 to 1978, passenger air service in this country was efficiently guided by the federal Civil Aeronautics Board (CAB), which regulated fares, controlled entry into the business, prescribed routes flown and communities serviced, and approved proposed mergers. Under the Airline Deregulation Act of 1978, that all changed; the CAB was abolished in stages -- it was completely gone by 1985 -- and the airlines were thrown into a free-market environment. This was supposed to lead to more competing companies, lower fares, greater industry efficiency, and more service options for customers; it didn't. Figuratively speaking, the airlines have been on automatic pilot ever since, locked onto a glide path toward disaster.

Since 1978, when government oversight was removed from the economic side of the business, the airline industry has gone from a regulated monopoly dominated by a few giants, through an expansive competitive phase in which many newcomers temporarily participated, followed by a shake-out period when weaker and smaller firms were bankrupted or swallowed up, to what is fast becoming an unregulated monopoly enforced by a few large survivors of competition. In effect, the industry is virtually back where it started, but without previous safeguards over service or pricing policies.

Out of 176 new airlines founded after 1978 to capitalize on deregulation, only one survived until 1988; the rest (including such formerly big names as Air Florida, Skytrain, Midway, People Express, and American West) went bankrupt or were absorbed by mergers -- a record 51 acquisitions in all. In the years that followed, venerable carriers with decades of service, such as Braniff, Eastern, and Pan-American, also disappeared. By the 1990s, the number of major independent US airlines had been reduced to 15, only eight of them qualifying as truly large carriers.

These eight dominant airlines increased their combined share of the domestic market from 81% in 1978 to 95% in 1991. During that time, the "big three" of American, United, and Delta took over more than half of the market, as measured by passenger miles, and eventually accounted for 80% of industry profits. In the process, non-discounted ticket prices took off, increasing by 156% in the first decade of deregulation. Adjusted for inflation, overall airline fares, which had been stable under government regulation from 1967 to 1977, fell slightly in the first year of deregulation (1978), and then rose by 50% between 1979 and 1988. The trend continued through the 1990s.

Now, the big three airlines that brought these blessings want to get bigger; American plans to merge with Northwest, United with US Air, and Delta with Continental. If and when these consolidations (and others being discussed) are approved -- and there's no reason to suppose they won't be, given the prevailing tepid attitude toward antitrust enforcement -- the nation's eight dominant airlines will become three; one of them, the United Airlines-US Airways combination, will emerge as the world's largest single carrier.

In 1986, barely eight years after he persuaded the Carter administration and Congress to opt for an unregulated system of air travel, a chastened but unrepentant Alfred Kahn admitted that an "uncomfortably tight oligopoly" had developed in domestic air transportation. A perceptive social critic from the populist past would not have been surprised. A century earlier, in Wealth Versus Commonwealth, Henry Demarest Lloyd had written, "Monopoly is business at the end of its journey." It's a lesson the dogmatists of deregulation should have learned by now.

Wayne O'Leary is a writer in Orono, Maine.

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