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May 24, 2005

Crandall on the Wright Amendment

crandall.jpgBefore retiring in 1998, former American Airlines chairman and CEO Robert Crandall steered American successfully through the first two decades after deregulation of the American airline industry.

Mr. Crandall was viewed as a hard-knuckled but successful executive during his tenure at American. Always worried about the tendency of airlines to price cut themselves to ruination, Mr. Crandall was tape-recorded (some would say set up) by the CEO of bankrupt Braniff Airlines, who prompted Mr. Crandall to make the unremarkable statement that both airlines would benefit if they raised prices. The Justice Department censured Mr. Crandall for broaching price fixing over that incident. In his campaign to control rising costs during the new era of deregulation, Mr. Crandall took on the airline labor unions, prompting a flight attendant strike in 1993 and a pilot strike in 1997. However, when he retired, American was a much healthier company financially than it is now.

While running American, Mr. Crandall did not enjoy the competition that Dallas-based American faced from Dallas-based discounter, Southwest Airlines. In this WSJ ($) letter to the editor, Mr. Crandall takes the Journal to task for what he considers revisionist history regarding the controversial Wright Amendment, which restricts Southwest from flying most interstate routes from its Dallas Love Field hub:

In the 1960s, the cities of Dallas and Fort Worth made an agreement with the U.S. government and with the airlines then serving the two cities. The U.S. had told the cities that it wouldn't provide continued support for two airports, but that if they could agree on a single airport, the government would provide help in creating it. The cities agreed to prohibit competition with DFW from any other airport, the airlines serving both city airports agreed to move and to take on the financial burden of paying off the bonds with which DFW would be built and sustained, and the new airport was built. During construction, Southwest was created, and when the airlines moved to DFW, Southwest found a legal loophole that allowed it to remain at Love Field, which is much closer to the businesses, hotels and high-income residential areas of Dallas. Thus, Southwest gained a unique monopoly position in one of the country's premier markets and avoided bearing any of the cost of creating and sustaining DFW.

The city of Dallas could and should have closed Love Field to fulfill its promise to prevent competition against DFW, as Denver did when it closed Stapleton to prevent it from competing with the new Denver airport. Unfortunately, Dallas lacked the moral courage to fulfill its obligation. In retrospect, it was a mistake for American and others to agree to the compromise that the Wright Amendment represented, for Southwest and others now mischaracterize it at every opportunity.

Posted by Tom at May 24, 2005 5:56 AM |

Comments

Leave it to Robert Crandall to describe the minimzation of free enterprise as the offshoot "moral courage." I'm curious why he didn't bother to explain why the American Eagle service failed to topple Southwest when AA attempted to compete on the same playing field ... or does Crandall lack the moral courage to tell that story?

Posted by: Greg Wythe at May 24, 2005 9:32 AM

What's interesting about all of this is that a questionable governmental regulatory policy (i.e., subsidizing a new airport between Dallas and Ft. Worth) ended up facilitating competition within the airline industry that has rendered most of the supporters of the dubious governmental regulation obsolescent or at least struggling to survive against the competition. How's that for just desserts? ;^)

Posted by: Tom K at May 24, 2005 9:43 AM

Agreed ... once more the briar patch story holds continued relevance for mankind.

Posted by: Greg Wythe at May 24, 2005 9:56 AM

Thanks for presenting Crandall's view, Tom, as I know you've been a consistent critic of the Wright Amendment.

I happily concede your earlier points that it was not sound economic policy. However, I don't think it was completely unreasonable to think that if Dallas and Fort Worth were going to have a huge, hub-style airport, that incentives should be created to discourage local competition with that hub style airport -- AND if Southwest didn't want the extra costs/regulations/hassle of doing business at that airport, then that's really its decision. Not market-oriented policymaking necessarily, but not out there in moonbat territory.

Southwest has been brilliant with its Wright Amendment PR, but nobody should confuse the PR with the fact that the airline enjoyed benefits from operating out of Love, Wright Amendment and all. Of course, there are certainly more benefits for Southwest if the Wright Amendment goes away now (and arguably more benefits for travelers and ultimately the industry), but nobody's going to win me over to the notion that Southwest somehow deserves sainthood because of its pursuing policy changes that are ultimately beneficial to their bottom line. That's just good business. :)

Posted by: kevin whited at May 24, 2005 10:02 AM

Kevin, you're right that Southwest paints the picture with regard to the Wright Amendment that best serves their political agenda. No question about that.

But my sense is that Houston's experience with Intercontinental and Hobby reflects that the governmental regulation involved in creating and facilitating DFW really was not necessary. Indeed, a case can be made that the governmetal protections provided to legacy airlines at DFW delayed American and other legacy airlines from making the kind of changes that they needed to make to remain competitive. As you know, due in large part from the competition with Southwest at Hobby during the early 1980's, Continental was forced to confront and make the changes that many of the other legacy airlines have been making over past several years.

What I wonder about is whether the federal government's decision to support just one Metroplex airport was really the reason that Crandall supported the construction of DFW? Inasmuch as Ft. Worth's Meachem Airport would certainly have been the loser and Love Field the winner if the feds had shut down one of the two Metroplex airports, American's Love-based operations would have enhanced by that decision. My bet is that Crandall used the federal government's decision to break American out of the growth limitations that it faced at Love Field.

Thus, as with Southwest, I suspect that Crandall is also not above slanting the facts a bit to favor his old company's position. That's just good business. ;^)

Posted by: Tom K. at May 24, 2005 10:25 AM

---
But my sense is that Houston's experience with Intercontinental and Hobby reflects that the governmental regulation involved in creating and facilitating DFW really was not necessary.
---

Agreed! I think hindsight proves that right, as does an economic perspective towards public policymaking. That perspective is, thankfully, somewhat better represented today.

---
I suspect that Crandall is also not above slanting the facts a bit to favor his old company's position.
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I suspect you are right. :D

Posted by: kevin whited at May 24, 2005 11:15 AM

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