Frequent flyers complain about airlines and even occasionally call to re-regulate them. But those calls fail to recognize that airlines are in fact one of the most highly regulated industries as it is, and what the Airline Deregulation Act did was free up airlines to compete on schedule and price.
The government no longer had to approve new routes, and no longer set prices, with the closing of the Civil Aeronautics Board. The CAB used to protect the airlines, not consumers by limiting what was termed ‘ruinous competition’. They ensured prices were set high enough to earn profits.
Calls to re-regulate the airlines, then, are in some sense anti-consumer. They’re calls to ensure higher profits and less choice. (In fairness, usually folks don’t really mean they want to restore regulations that were previously in place, but rather they want the government to blink twice and ameliorate whatever ills they happen to be complaining about.)
It’s worth noting, though, that in many ways air travel really has gotten better.
- The US air transport system runs increasingly on-time with relatively few cancelled flights and relatively few involuntary denied boardings.
- United and American especially are investing in new planes. New aircraft technologies like the Airbus A350 and Boeing 787 open up new non-stop routes between cities that hadn’t previously been connected, reducing travel time (and risk of misconnections) while providing a better inflight experience as a result of changes in cabin pressurization.
- Many airports are getting modern facelifts, even the long-maligned Tom Bradley Terminal at LAX has gotten downright nice.
- Prices for tickets have fallen for the past year and in inflation-adjusted terms are far lower than they were 20 and 30 years ago.
People complained about airlines nickel and diming them in the 1980s, when Alaska Airlines ran a television commercial about their competitors reaching the point of charging to use the lavatory inflgiht. And airline meals were the butt of jokes even when I was growing up in the 1970s and 1980s.
Oddly, a new article in Harvard Business Review offers an analysis of why air travel is so terrible.
Juan Pablo Vazquez Sampere suggests that air travel is bad — and, bizarrely, “So Few Airlines Are Profitable” — because airlines haven’t ‘moved upmarket’.
Chasing the next-higher-margin consumer requires both new firms and incumbents to leverage their resources, processes, and priorities. Instead of getting into a price war or squabbling over a shrinking market, both disruptors and incumbents find new ways to create value. This benefits customers – both the high-end customers being chased by incumbents, and the low-end or middle-market consumers being served by disruptors — and the industry at large.
He suggests that computer makers and steel manufacturers survived and thrived by doing things better and better to make more money, not by simply cutting costs.
Instead of having a few companies stagnate because they don’t move upmarket, the entire industry has ended up in stagnation. Customers are receiving the same or worse service as they did decades ago. Mere company survival is considered success.
…But instead what we observe is a bunch of companies trapped in their customer layer and unable to grow in revenue — except through external means such as oil prices (when oil prices dropped, ticket prices didn’t, and airlines pocketed the difference — some went as far as buying a refinery), the global economy (in boom times, people fly more), and other industries (such as tourism).
In fact, Delta purchased an oil refinery not when oil prices dropped but when oil prices peaked. And while the biggest driver of airline profitability today is low fuel prices (leading one to question to claim about so few airlines making money), there are fundamental differences between air transportation and computer manufacturing that the author fails to appreciate.
He suggests that airlines are doing three things.
- Aggressively cutting costs. That was true when faced with higher fuel prices than we see today, indeed United’s most recent attempt was cynically named “Project Quality.” But airlines have seen costs rising, not falling, over the past year — as they pay employees more, add snacks back to economy, and invest in premium cabins.
- Pursuing global alliances. While many observers see alliances as mostly a thing of the past, with joint business ventures becoming even more important, the author sees alliances as a way to monetize spoiling inventory (as opposed to using their frequent flyer programs for this). He bizarrely concludes, “unable to innovate their core offering, airlines have figured out a way to innovate in the way costs are allocated” as though alliances were about cost-shifting.
- Mergers. He specifically cites Alaska’s recent deal for Virgin America, but doesn’t seem to understand that’s about access to airport facilities which are highly constrained — and in the US airports are largely operated by governments, and expansion is a government exercise which is hard to pursue — rather than aircraft or people or even eliminating a competitor.
The author then dismisses regulation as a barrier to innovation in the industry. However airlines are heavily regulated.
- Airlines choose from among the same aircraft made by the same aircraft manufacturers.
- Airlines cannot compete by offering better security screening. The biggest frustrations expressed about air travel in the past couple of months have been security wait times. While Delta, American, and United have all invested in speeding the process it’s ultimate a single government agency providing the screening (or dictating how it’s provided in the case of a handful of airports that have opted for private screeners).
- Air traffic control is provided on a monopoly basis by the government. Every airline uses the same services. None can meaningfully innovate in getting through the Northeast corridor more quickly.
Delta has built a marginally more reliable airline than competitors despite operating older aircraft. They’re also investing in faster inflight internet. And they’ve made investments in lounges and food but those aren’t orders of magnitude better than the offerings of comptitors. They’re able to earn a modest revenue premium as a result.
Virgin America was offering a better inflight experience and especially a better domestic first class experience for all routes except the transcon markets. And it was among the least profitable carriers as a result.
The most profitable airlines in terms of operating margin have been the ultra low cost carriers like Spirit, along with Alaska Airlines.
Contra Harvard Business Review, it’s very difficult to innovate in air transport when it’s such a highly regulated industry, and where key services are provided on a monopoly basis by governments.
There are things we could do to make air travel better, even within the constraints of such a heavily regulated industry — but it’s something that the HBR piece misses entirely. We can have more competition, if we simply allow it.
While the current discussion is about limiting competition, we should be talking about opening up US markets to more competition. We should allow foreign ownership of airlines operating in the US. We should allow Ryainair and Singapore Airlines to carry passengers in the domestic market.
We should also be talking about making it easier to expand congested airports so that new entrants can take on incumbent carriers which have effective cartels via lack of gate and runway capacity.