The Blog

Flying the Crowded Skies

Airlines keep capacity low enough to raise fares and reduce service standards.

12:00 AM, Oct 30, 2007 • By IRWIN M. STELZER
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IT IS THE BEST of times, it is the worst of times--best of times for America's airlines, worst of times for the passengers they are cramming into their airplanes. Not as good for the carriers as the wonderful days when regulation guaranteed them a quiet, profitable life, nor as bad for the passengers as when regulation prevented fares from dropping to competitive levels. But close, in both cases.

In the United States, airlines are making money despite delays and horrible service. US Air, United, Delta, American Airlines, and Jet Blue have all reported hefty increases in profits. The reason: after a wave of chastening bankruptcies, they have cut capacity, bringing the number of available seats more into line with demand, and reducing the scramble to peddle empty seats at any price above the almost zero cost of carrying an additional passenger. This past summer, carriers operated at around 86 percent load factors (percent of seats filled), which is good for the carriers, but not so good for travelers wedged into middle seats or hoping to cadge a seat on some frequent-flyer program. Still, there are bargains available for anyone willing to take to the air on the slow travel days during the holiday season, a gift to the traveling public from Alfred Kahn, the Cornell economist who pushed through deregulation when chairing the now-defunct regulatory agency, and this month was toasted by his former students and colleagues at a 90th birthday celebration. Travelers might also hoist a glass.

The generally tight supply situation is unlikely to change for the next several months, as holiday traffic picks up. Indeed, with the weak dollar making overseas travel eye-wateringly expensive, those Americans not committed to visiting grandma in Florida are more likely to find New York and Hawaii more affordable destinations than London and the south of France.

But the cost of overseas travel might, just might, drop in the New Year. Not because the dollar will recover: it won't. But because effective competition might finally be coming to transatlantic travel.

New carriers are already wooing business-class customers on the London-New York route with lower fares, avoiding the nightmare of London's overcrowded and poorly managed Heathrow Airport by flying to and from less crowded terminals. Even more important is the liberalized regime that will become effective in March.

Under a deal struck between the United States and the European Union after years of wrangling, any American or European airline will be free to fly anywhere between the United States and Europe. Delta and Air France have already announced a deal for the Atlanta-based carrier to get three of Air France's Heathrow slots, reducing British Airway's dominance of that terminal. The two carriers will offer 19 flights every day from the United States to London and France. Other carriers are sure to enter the fray.

The bad news for passengers is that there seems to be little relief in sight from long lines at check-in desks and at security checkpoints. Years ago, when I was at Harvard's John F. Kennedy School of Government, a colleague explained why.

Professor William Hogan is a giant of a man, physically and intellectually. For the past 30 years he has been teaching economics, statistics and, most important, good common sense at the Kennedy School. One day, when I was puzzling over how to regulate where necessary and deregulate where possible, he solved most of my problem. "Get the incentives right," he said, "and much of the rest will take care of itself."

Which brings us to Washington's Dulles, London's Heathrow, and other airports around the world. If lines lengthen at security check points no one has an incentive to add staff, open more lanes, or do anything to relieve the passenger's plight. By contrast, such a situation at Whole Foods, Giant, or any respectable supermarket results in the opening of more check-out lines to relieve congestion. Store managers have an incentive to prevent customers from taking their business elsewhere; airport managers don't, or think they don't. Indeed, they have every incentive to keep costs down and profits up, even if that means providing a miserable service. Imagine what life would be like in an airport in which security personnel, or at least the managers, had their pay cut every time lines lengthened beyond some target limit, and the power to correct the situation.