The Economy

Dec. 21, 2004
It's time for real airline deregulation.

Recently the U.S. has clashed with several foreign countries that are dragging their feet about allowing more American companies to offer a variety of services overseas. There is one area, however, where the U.S. has stonewalled -- and that is airline transportation. Suggest flying Singapore airlines from, say, Detroit to Miami, or British Airways from Chicago to Denver, and you will be laughed out of court. But there is no valid reason for that exclusion. Domestic airlines are understandably unenthusiastic about this suggestion. For that matter, the steel, textile, and auto industries weren't so wild about foreign competition either, but it has long been a matter of fact. Why should the domestic airlines get special protection -- particularly when their service record has deteriorated so much in recent years? Foreign competition has invariably served the consumer well: prices decline and quality improves. The domestic airline industry has shown us just the opposite: higher prices and rotten service. The airlines may claim it is cheaper to fly now than before deregulation, but last year airline fares rose an average of 6% at the same time that crude-oil prices fell 40%. Fuel costs are generally about 20% of total airline costs, so fares should have declined 8% instead of rising 6%. The airlines, for their part, point to the five straight years of losses from 1990 through 1995, arguing that even if profits were high last year, that covers only part of the pain and suffering from the lean years. And besides, they have to generate more cash in order to buy more new aircraft. Of course. It has been many decades since any company admitted it was raising prices to gouge customers and fatten the pockets of officers and shareholders. Higher prices are always justified by the "need" for more capital spending. However, most frequent flyers would readily agree that the sharp deterioration in service is even more annoying than higher fares. Lying to customers has become so serious that several Congressional bills have been proposed to reduce this pathology. Of course that is one way to try to stem the problem -- tie the airlines up in so much extra paperwork that they eventually throw in the towel. But why not try the alternative approach: Allow more competition. Let selected foreign airlines with superior service and safety records fly some of the major domestic routes -- particularly in those cities that, like Detroit, are at the mercy of a single airline. I know there is a shortage of gates at many airports, but my plan would not mean wholesale disruption. Instead, set aside 5% or 10% of the total gates for foreign airline slots. Domestic airlines claim they could not operate profitably with such a small number of gates because it would not dovetail with their so-called hub-and-spoke system, the main point of which seems to be to make passengers miss their connecting flights as often as possible. However, most foreign airlines would welcome the opportunity to obtain a toehold in U.S. domestic markets and would therefore be willing to accept a mere handful of gates in each major city. Even with only a few flights per day, the results would be dramatic: The big major domestic carriers might even start treating their passengers like human beings, although that probably is too much to ask. Furthermore, this "open skies" policy of airline travel would strengthen the case for allowing U.S. service firms to operate in foreign countries. As a result, it would be a win-win situation: U.S. exports of services would rise, airline fares would diminish, and service levels would improve. In the long run, even domestic airlines would benefit when they were forced to improve by the spur of competition instead of through yet another level of government bureaucracy. The only losers would be current overpaid airline executives who pretend they know nothing of the torture that frequent travelers suffer every day. Michael K. Evans is president of the Evans Group and professor of economics at the Kellogg School of Business, Northwestern University, Evanston, Ill. His e-mail address is [email protected].

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