The Magazine

The Industry You Love to Hate

Learning why airline service is so bad will only make you angrier

Mar 19, 2001, Vol. 6, No. 26 • By JAMES HIGGINS
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You arrive at your destination late at night.


"Welcome to our hotel. Will you be checking in?"


"Yes, I have a reservation."


"And you'll be staying over until Sunday?"


"No, I'll be leaving a day early."


"Since you no longer have a Saturday night stay, we'll have to re-book your reservation. Instead of $ 129, your rate will be . . . let me see . . . $ 2,000 a night."


"What!?! Ill go to another hotel."


"All the hotels in this area are booked. Now please be seated over there. Guest traffic control has just told us that you're number 48 in line to be given a room."


"Hey, that chair looks like it was built for a child. My knees will be hitting the seat in front of me!"


"Regulations require that you be seated, sir. The wait shouldn't be more than two or three hours."


"I'm going to the men's room."


"Sir, if you do that well have to call security, sir."


And so you wait, and wait, and wait. Five painful hours later, a bellman arrives and leads you to a tiny door.


"Your room, sir."


"I'm starved. How do I order room service?"


"No room service on a stay of less than three days, sir. But you can have a bag of pretzels and a four-ounce container of mineral water with our compliments!"


"Where's my luggage?"


"We haven't found your luggage yet, sir. But if it's not delivered to you within 24 hours, under our 'Customers First policy we pledge that the hotel manager will send you a form letter of apology."


"Hey, my reservation says I'm staying at the Hotel Grando DeLuxe. The sign out front says this is a CheapoLodge."


"We code-share with the Hotel Grando DeLuxe, sir . . . "


Impossible? At a hotel, yes. But this treatment is what Americans have learned to expect from airlines. Americans may not agree about taxes, about Medicare, or about who won the last election. But bring up the subject of airline service, and liberals and conservatives alike shake with anger -- sometimes even in front of television cameras.


Commercial air travel was once thought to be the great American success story: Industry deregulated, fares went way down, number of passengers went way up. Everyone lived happily ever after.


But then everything went wrong. U.S. airlines lost more money in a two-year period in the early 1990s than they had made in their sixty-year history. Fares shot up. One major airline held passengers captive on a grounded airplane during a Christmas blizzard in 1999. What should have been minor work slowdowns in the summer of 2000 paralyzed much of the air transport system. This year's labor problems promise more of the same. Passengers at some of the nation's largest airports have learned to expect two to three hour delays as the norm. And the airlines have hypnotized Congress into doing nothing but ask the carriers for vague promises to do better.


Moreover, no one seems to be able to explain how it all got this bad or what to do about it. Liberals meekly call for a "Passengers' Bill of Rights" but hesitate to call for regulation, since deregulation itself was an all-Democrat affair, the outcome of 1978 legislation sponsored by Teddy Kennedy and signed by Jimmy Carter. Conservatives, recognizing that the status quo is indefensible but not quite understanding why, grope for technical fixes like privatizing the air traffic control system -- an idea that sounds frightening to many passengers -- or take refuge in sentimentality about "the market" and how it should eventually cause airlines to stop antagonizing their customers.


We can see why the commercial air travel system is so confusing to analyze. It's an amalgam of airlines, airport authorities, federal regulators, and government air traffic controllers. So where does the problem lie?


Sports legend has it that Vince Lombardi once began a practice by going back to basics with the words, "Gentlemen, this is a football." To understand the economic reason why you've just waited three hours on the tarmac on a perfectly sunny day, we need to start by asking, "What is economics?" The answer is that it is the study of optimization: how to do things best within constraints.


What is the binding constraint, the limiting factor, in the air travel system? The answer is right before your eyes as you watch a long line of airplanes waiting to take off at a major airport. The constraint is the limited number of available takeoff and landing slots at our busiest airports.


When airlines were deregulated in 1978, they were deregulated only in a few, very limited ways. They could charge the fares they wanted, and they could apply to the government for the right to fly on new routes. Other important elements of the system stayed the same.


The process by which the government distributes take-off and landing slots was not deregulated in 1978 -- or ever. In fact, it isn't really a market at all. It's a bureaucratic allocation of resources, something like the way the Soviet Union used to allocate food.


It's reasonable to wonder why capitalist enterprises such as major airlines would ever stand for such an arrangement. That question moves us beyond the bad part of the story -- the absence of market pricing for the scarce, prime takeoff and landing slots -- and brings us to an even worse part of the story. The major carriers that have these incredibly valuable assets get them forever, for free -- from you! You can be sure you didn't see that fact of economic life mentioned in the brochure you got about your winter vacation in the sun.


Airports in the United States are almost all owned or leased by government agencies of some kind. If you were starting with a blank slate and wanted to allocate takeoff and landing slots for maximum benefit to the public, which owns the airport, you'd determine how many takeoffs and landings you could safely accommodate in a day, then sell or lease each of those slots to the highest qualified bidder.


That is not how it's done. Instead, those that have slots keep them. (Because of the lobbying power of owners of small private planes, the relatively minor landing fees airports charge we based on aircraft weight. Measuring the value of the time it takes to take off and land by weighing airplanes would have warmed the heart of a Soviet economic planner.)


Existing and new carriers alike nip endlessly at regulators' and politicians' heels, seeking and getting a few more slots here and a few more slots there at airports already laden with far more flights than they can accommodate. That's the part of the process that creates ever-lengthening flight delays. Occasionally, the floodgates break, and there is a real mess. The most recent example was the arbitrary decision by Congress to impose 300 new flights per day at New York's La Guardia Airport, a destination already choked with delays.


If you want to set up a popcorn stand at a major airport, you have to lease the space to do so at a rate that's related to the value of the space you want to use. But if you own the rights to use scarce takeoff and landing slots, there's no such market discipline. What matters is whether you or your corporate forebears got there to ask regulators for an allocation of slots ten or twenty years ago, or in 1968, when the practice of assigning slots started as an ad hoc attempt to reduce "holding patterns" -- where planes circle over distant locations waiting their turn to land.


You can see what result this leads to. If you are Established Multinational Airline and happen to own the slots to fly from, say, Chicago O'Hare to New York La Guardia at 5 P.M. on a weekday, you can fill every seat with high-fare business fliers. But if you are Startup Airways, maybe you can get a 5 A.M. slot to go to a vacation destination to which every passenger will demand a $ 99 round trip.


These desirable slots are the single most valuable asset the major carriers have. In essence, they are a permanent, mountainous, government-sponsored barrier to entry and a de facto subsidy.


Once you understand that the big carriers get their most valuable assets for free, forever, from the taxpayer, it is much easier to comprehend why companies that provide such lousy service to customers have maintained and increased their hold on the U.S. passenger market. It's difficult to overstate the uniqueness and value of these assets: Slots that involve bilateral routes between big U.S. and foreign cities sometimes have to be wrung out of foreign governments personally by the president of the United States. But the federal government then gives away these slots to whichever carrier represents itself best in Washington.


That's not all. Once an airline has received its slots free from the taxpayer, this airline is allowed to turn around and sell the slots to other parties, keeping the proceeds. A new entrant who wants to become a national carrier has to buy desirable slots from an existing competitor.


It appears that the federal government didn't recognize this problem when undertaking partial deregulation in 1978. In 1985 the dying Pan American World Airways wanted to sell its slots for flights across the Pacific to United Airlines for $ 750 million of cash which Pan Am needed to stay in business. As Thomas Petzinger reports in his 1996 book on the airline industry, Hard Landing, the two airlines did not know whether they could get away with buying and selling a government-granted license.


Stopping that sale would have killed Pan Am, America's most storied carrier, and would have seemed a slap at airline deregulation. The government let the sale go through. Pan Am was interred in 1991, but the consequences of the decision to allow airlines to sell landing slots live on.


Doesn't this problem go away because the holders can sell the rights to new entrants? No, because having piles of solid gold landing rights -- many of them growing in value with each passing year -- permanently reduces the capital costs for the established carriers, allowing them to continue dominating the industry.


If this problem is so egregious, it's reasonable to wonder why we haven't heard about it. The answer is that none of the existing participants in the system has an incentive to explain what is going on. Do the major carriers want to advertise just what advantage they have that allows them to annihilate every startup airline? Do government bureaucracies, always seeing themselves as wise, want to give up their decision-making power to the marketplace? Do startup carriers want to antagonize the very bureaucrats they must deal with to get into the game at all? No, no, and no.


The power of landing slots as barriers to entry is awesome: Every major U.S. carrier now operating was already flying at the time of deregulation in 1978. The history of the last 23 years in commercial aviation is strewn with the carcasses of small and startup carriers, many of them backed by very smart, deep-pocketed investors with names like Pritzker, Icahn, and Kerkorian, who had succeeded in other businesses but who just didn't understand the slant of the playing field they were walking onto.


The current situation should come as no surprise. There is a body of economic theory, dating back to the 1950s, that warns us of the perils of partial deregulation. It goes by a somewhat depressing name, "Theory of the Second Best." The implication of the theory in this case is that deregulating part but not all of a market might not make things better for consumers.


Should we move closer to full deregulation by putting takeoff and landing rights out for bid? Of course. Public treasuries would benefit mightily. (A few years back the federal government got billions of dollars of winning bids in an auction for a part of the wireless communication spectrum that did not yet even exist as a business!) The major airlines that today squeeze and abuse customers at every turn would have to compete on a more level playing field with newcomers who believe they can do better and are willing to back up that belief with capital. And if local airport authorities have reason to think they might share in any auction proceeds, they might at last have adequate incentive to end the de facto moratorium on construction of new runways and airports, the archetypal NIMBY problem that threatens to create a real capacity crisis in the system.


But don't count on this happening any time soon. Expect the big carriers to fight to the death against any proposal to end the big giveaway.


To be fair to the U.S. commercial airline industry, it is very good at one thing: safety. Commercial jet travel is by far the safest way to travel in the United States. In some years there are no fatal accidents at all involving commercial jet airliners. And we should all appreciate that record.


So it turns out that markets do work -- but only within the constraints that attend their creation. Since new entrants aren't a real threat, the problem isn't that airlines have an incentive to antagonize their customers but rather that the airlines lack an incentive not to antagonize their customers. Bad service or not, those big carriers will still be here tomorrow, and next week, and next year. And so will you -- perhaps on the same plane, still waiting to take off.




BY JAMES HIGGINS;James Higgins is an adjunct fellow at the Claremont Institute for the Study of Statesmanship and Political Philosophy