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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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