A panel reviewing airline deregulation is due to report its findings to Congress this summer. The report, under the National Academy of Sciences, comes not a moment too soon.
Two decades after the great deregulation experiment began, the result is mixed. On some routes, there is real price competition; on others, the demise of regulation has brought monopoly power and monopoly pricing.
In the 1980s the Reagan administration let antitrust enforcement collapse, which permitted dominant airlines to crush upstart competitors. It is only the revival of dormant antitrust policy that has allowed airline competition to exist at all.
A recent West Coast trip provided some startling examples. California, unlike the Northeast corridor, enjoys serious price competition. If you fly between San Francisco and Los Angeles, a distance of 330 miles, you can choose United, Delta, Reno Air or Southwest. The lowest unrestricted fare, on Southwest, is $89 one way (from Oakland). From San Francisco, the comparable fare is $128.
By comparison, the cheapest unrestricted fare between Boston and Washington National is $294. The distance is almost identical. US Airways charges three times the Los Angeles-San Francisco fare because it has a monopoly. To show its contempt for the captive traveler, US Airways, which once served hot meals, has stopped offering even snacks.
To see how airline competition might work, consider car rentals. At San Francisco, all the car-rental agencies are in the same building, and prices vary greatly. At this writing, Enterprise has the cheapest economy car, at $25.95 a day. Or you can choose Hertz ($26.99), National ($28.99), Thrifty ($29.99), Dollar ($34.99) or Avis ($46.99).
This works just like textbook economics. Some combination of brand loyalty, perceived differences in service, and supply and demand allows customers to discipline rental companies, and everyone to make a living.
Airline price competition also works more or less this way on the West Coast but not in the Northeast. Even where there are "competing" airlines, as in the case of the Delta and US Airways shuttles between Washington, New York and Boston, the fares are identical and astronomical at $202 one way.
There is also significant price gouging in hub cities, such as Minneapolis, Detroit, Cincinnati, Charlotte, St. Louis, Atlanta, etc., where one carrier has locked up most of the flights.
So what is to be done? I put the question to Prof. Alfred E. Kahn, the economist who sold President Carter on the idea of deregulating airlines. Kahn, now a professor emeritus at Cornell, has had more than a few second thoughts. He favors strong antitrust regulation, so that big airlines don't drive new competitors out of business with selective price-cutting.
"I certainly believe there is such a thing as predatory pricing," Kahn says. Kahn also wants to charge much higher landing fees for private planes at major airports, to divert them to smaller fields and open up more slots for consumer jetliners.
Kahn, a member of the review panel, believes expansion of airport infrastructure would help. But congested airports such as New York's LaGuardia, Boston's Logan and Washington National are at capacity. And some "reliever" airports are too far away to be effective substitutes.
For the Washington-Boston traveler, Providence and Manchester offer cheaper fares, as do Baltimore and Washington Dulles. But this assumes you have an hour or two to blow on extra travel. Despite "competition" from these alternate cites, USAir has been able to defend its exorbitant Boston-Washington National rate. Even in airports with plenty of expansion room, such as Minneapolis-St.-Paul, Northwest uses its dominant market position to muscle out potential rivals.
What's needed is not just the hit-or-miss application of antitrust suits, but a full-blown competition policy with rules of fair engagement. How much market power a dominant airline can exercise need not be strictly limited. Regulatory policy needs to make room for new competitors whenever there is evidence of abuse. If price competition can work in California, it can work in the Northeast and Midwest.
The fathers of deregulation missed one key detail. In an industry so prone to monopoly power, competition needs a traffic cop. Unlike the old-style regulation, where fares and routes were tightly regulated, this would be regulation in service of greater competition.
Kahn should appreciate this better than anyone. Under deregulation, his consulting trips between Ithaca and Washington (only on US Airways) cost $628.
The writer is co-editor of The American Prospect.