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
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.