The Wall Street Journal’s Holman Jenkins, Jr.’s Business World ($) column today addresses the mess that is the American airline industry, and notes that this is not a problem that has just arisen recently:
Today’s crisis is not materially different from the airline crisis of the early 1990s, or the crisis of the early 1980s with the onset of deregulation.
Airlines have shown an ability to mint short-term profits in an economic bounceback when demand grows faster than they can lay on more jets and gates. But that’s not the same thing as being able to make profits consistently enough to pay back the capital invested in the industry. The airlines have never been able to do this, at least not since deregulation.
Kenneth Button, a professor at George Mason University and head of its transportation center, finds the same feature present in Europe’s increasingly deregulated market, an inability to price above cost. But before giving up on capitalism, airlines or both, perhaps we should look more closely at the problem.
Airlines are selling a highly perishable product, thus tempted to fill seats for any fare that will cover a bag of peanuts, several gallons of fuel and the cost of processing a booking. That means, when their competitive dander is up, airlines sell seats for a price far below their long-term costs. And competition is never in short supply — barriers to entry are low. Anyone can lease a couple of jets with no money down, sell tickets over the Internet and join the fray. Even if an airline fails, its lenders repossess the planes and find someone else to put them to work.
Airports, meanwhile, are local monopolies and, ahem, seldom leave money on the table for their airline customers. Ground services and catering also enjoy sufficient local market leverage to make money off the airlines even as the airlines can’t make money off their own customers. And the industry’s biggest suppliers of all, its own employees, demonstrably have the upper hand when it comes to divvying up the revenues of the business. Notice that workers at United and US Airways (both in bankruptcy) as well as at American, Northwest, Delta and Continental (each losing money and flirting with Chapter 11) still manage to hang on to wages substantially higher than those paid by the industry’s few profitmakers, such as JetBlue and Southwest.
If the cut-throat competition between carriers results in low fares, should we care? Mr. Jenkins suggests that we should:
Instability in the airline industry produces an irresistible urge for activity in politicians, who’ve already dumped $7 billion in taxpayer money on the airlines since 9/11.
Mr. Jenkins then goes on to suggest that consolidation of the industry would likely be helpful to consumers:
Airlines are not incompatible with capitalism so much as incompatible with modern antitrust policy, which assumes that “more competitors” is the same thing as “more efficiency.” That’s why, whenever the industry’s parlous finances start making news, carriers plop another “code-sharing” deal in front of regulators. These instruments of cooperation between competitors have the potential to blunt the industry’s urge to bleed itself to death during travel downturns. The latest embraces Delta, Northwestern and Continental and this week added foreign partners Air France, Alitalia, Aeromexico and Czech Airlines.
Don’t expect airlines to advertise their alliances thusly, but neither should passengers fret unduly. Fewer crazy fares might turn up on the Internet, but average fares would likely continue their long-run decline even if antitrusters wisely looked away for a while and let these experiments flower. The most notable outcome would be less financial chaos and less pressure on politicians to “fix” the airline problem in ways that make it worse.
Read the entire piece.
Meanwhile, in the latest example of the law of unintended consequences, this NY Times article reports on how the Air Transportation Stabilization Board — which Congress created to “save” the airlines after the 9/11 attacks — may decide to pull the plug on US Airways.