If the U.S. Justice Department approves the proposed merger of United Airlines and Continental Airlines, two U.S. House members said they plan to re-regulate it.
According to The Associated Press, Representatives James Oberstar (D-Minn.), chairman of the House Transportation and Infrastructure Committee, and Jerry Costello (D-Ill.), chairman of the panel’s aviation subcommittee, said they will attempt to re-establish a government agency responsible for overseeing the airline industry if the merger goes through.
“I do think it’s going to pass regulatory muster, but I do think it’s going to be tough,” said Sen. Kay Bailey Hutchison (R-TX.) on the Continental-United merger during a Senate Commerce Committee (Wall Street Journal). The merged airline’s headquarters is planned for Chicago, which would relocate Continental’s headquarters out of her home-state of Texas. Some politicians, like Sen. Hutchinson, believe that the merger will hurt consumers.
Senate Commerce Committee Chairman John D. Rockefeller (D-W.Va.) reportedly said it is “increasingly clear” that the current structure of the U.S. airline industry is not financially sustainable (Wall Street Journal). Rockefeller said that he supports airline consolidation as long as it “creates the conditions not only to survive, but also to thrive in a competitive global industry.” However, Sen. Rockefeller did not say whether or not he supports re-regulation.
Allow me to address a few of the key points politicians, like Rep. Oberstar, are using to attempt to persuade congress.
Airline Deregulation
The Airline Deregulation Act of 1978 removed governmental control over fares, routes, and market entry from commercial aviation. This dissolved the Civil Aeronautics Board, commonly known as CAB, which piloted the entire U.S. airline industry. Airlines were operated as a public utility and competition on routes was limited.
Following 1978, airlines became a market-force driven industry. Rates of return were no longer overseen by the government, and price became the name of the game. Fare wars and “peanut fares” drove down the cost of flight for consumers, making it affordable for almost everyone to fly.
How cheap is cheap?
The earlier article quotes Susan Kurland, the U.S. Transportation Department’s assistant secretary for aviation and international affairs, saying that consumers have “reaped enormous benefits” due to the steps taken in the 1970s to deregulate the industry (Wall Street Journal).
Adjusted for inflation, air fares have fallen 25 percent since 1991, and are 22 percent lower than they would have been had regulation continued (Morrison and Winston 2000). According to the Air Transport Association, airline prices have fallen 44.9 percent in real terms since airline deregulation. Robert Crandall and Jerry Ellig (1997) estimated that when figures are adjusted for changes in quality and amenities, passengers save $19.4 billion dollars per year from airline deregulation. These savings have been passed on to 80 percent of passengers accounting for 85 percent of passenger miles (Competitive Enterprise Institute, George Mason University’s Jerry Ellig / Robert Crandall, and Library of Economics and Liberty).
Loss in quality
An argument for re-regulation, or restoring the U.S. airline industry to pre-1978, is a loss in quality. According to studies by TripAdvisor, travelers have voiced their concerns with airline fees (also known as ancillary revenue), specifically checked baggage fees, and expect airlines to add additional fees.
Rep. Oberstar said the $2.7 billion earned by U.S. airlines in ancillary revenue is evidence that consumers are no longer benefiting from deregulation (Star-Telegram). Yet, as Boarding Area’s Dan Webb points out, Rep. Oberstar’s arguments “don’t seem to make a lot of sense” since carriers only averaged $3.84 per passenger in ancillary revenue for 2009. Additionally, Webb noted the Department of Transportation’s report of a $7.40 drop in average airfares for 2009.
Service and quality wise, some believe they should get more. On nearly all domestic flights, meals are only served to first class passengers. Passengers seeking those precious inches of extra legroom, in coach, book exit-row seats. Some airlines charge premiums for the special seats in coach. For those looking for a pillow and blanket, that too has its own fee. Yet these drops in quality tend to be appropriate, considering the prices of airfare.
Passengers have options and can easily vote with their wallet. Although airline food may not be as good as it used to be, booking a first class ticket could land you a meal (depending on the duration of the flight) and extra comfort. On long-haul flights, most airlines fly a nice variety of seat types, ranging from coach to premium coach to business class to first class and so forth (maybe even more options).
Some airlines, like American Airlines, added “more room in coach” to “ease the crowded conditions faced by most passengers,” (The New York Times). American took out two rows of seats to add extra legroom for passengers. To make up for the lost seats, ticket prices on American increased, but consumers were not willing to pay the extra dollars and the campaign was scraped.
It is fairly clear that price is important to consumers, but have airlines done the best job at marketing a flight as more than a flight? What about telling customers exactly what they’re getting — like satellite television — when they book? The Cranky Flier’s Brett Snyder seems to think airlines need to give travelers a better sense of what they’re booking.
Southwest Airlines is a clear example. When customers book with Southwest, they know exactly what they’re getting – two free bags, the rapid rewards credits, etc – because Southwest clearly states it when you select the fare.
Conclusion
Airline deregulation has significantly helped consumers. Air travel was once exclusive to the wealthy, but has slowly transformed into a service all can enjoy. Competition was fairly limited during the days of pre-deregulation, but now consumers have a vast variety of options to get from Point A to Point B, and they can get there affordably. Sure, the industry could use a few minor changes, but nothing else has been more beneficial to consumers than deregulation.
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