Clifford Winston, who knows as much about the US air transport system as anyone in the country, had an op-ed last week in the New York Times arguing that foreign airlines should be allowed to operate routes in the U.S.
They should. But the benefits Winston claims are far exaggerated. If there are underserved routes that could be operated profitably by new airlines, why does he think that incumbent airlines aren’t flying them? In fact he focuses on routes that have been losing service, cutbacks that have been made precisely because existing airlines found it unprofitable to operate those routes.
It may well be that when the US market gets opened up to competition, that a lot of foreign investment floods the market in spite of the likelihood of losing money. US consumers would benefit from additional service and lower fares until the capital dries up.
That ought to be allowed. But the suggestion that there would be huge and enduring benefits from the change probably goes a bit farther than is actually supported by the evidence.
Still, and while I find much of Wandering Aramean‘s writings on the airline industry to be insightful and often spot-on, even, his response to Winston is way off the mark.
Winston uses the rhetorical device to argue that aviation is supposed to be a free market but the government protects airlines from foreign competition (true enough), Wanndering Aramean rebuts,
Well, we can start with the part about how that isn’t actually a “real free market” based on a lack of reciprocity in the other countries.
It’s certainly true that the US aviation market is far from a free market now, but that has nothing to do with European and Asian markets being unfree.
Aviation is one of the most tightly regulated industries in the country, and one of the most heavily taxed as well. Governments own almost all the airports. Government operates air traffic control. Governments certify the planes that can be flown. Almost all of what can be done — aside from where to fly and when (and at some airports there are slot controls) — are specified by the government or at least approved by the government. Even in a post-deregulation world. “De-regulation” meant that airlines could decide where to fly and at what price, everything else remains heavily regulated.
Apparently the key to improving the UA aviation market is to flood it with more capacity, driving down fares. But that increased supply will somehow also drive demand. Last I checked that’s not how the basic supply/demand curve works, though I will admit I dropped my Econ class after the first exam because I didn’t really like it.
Well it is and it isn’t what we would expect. And it certainly is what the ‘basic supply demand curve’ suggests. The ‘Southwest effect’ in aviation refers to the idea that bringing in a new low cost carrier stimulates demand, lower prices induce more people to travel and not just because they can now make discretionary trips (though that’s part of it) but also because more people fly rather than drive.
Not all traffic is price sensitive. After 9/11, after air service resumed but while planes were still flying empty, average airfares went up, not down. Anyone making discretionary trips simply wasn’t making those trips, and lowering price wasn’t going to induce people into the skies. The people who were flying really needed to be flying and weren’t especially price sensitive.
It isn’t at all times and everywhere about price. But lower prices do tend to increase demand.
Meanwhile, Winston claims that foreign carriers flying domestic routes would be good for employment. Wandering Aramean disagrees:
Can someone explain to me how cutting the salaries of US-based employees and creating an environment where the domestic airlines will struggle more to maintain their margins is actually going to increase the employment rates?
More airlines operating more routes increases the demand for people trained to do the key jobs in the industry. There’s a limited supply of pilots, it’s likely to drive their wages up. It’s likely to bring furloughed employees back into the industry. Sure, airlines operating at high margins tend to pay more to their unionized workforces. So lower margins will put pressure on that process. And some US carriers could re-enter Chapter 11 bankruptcy when they find they can’t compete with new entrants into the market. But that’s not necessarily something that public policy should stand against.
And Winston is certainly right that it would increase demand for airline employees and employees in the industries servicing aviation. It would increase demand for airline caterers. And that demand is likely to expand service opportunities, and infrastructure, and over time allow for innovations which drive down price (even if in the short run competition for existing services could increase prices and thus costs relative to what incumbent carriers currently pay).
Ultimately though the idea that Singapore Airlines would start service out of Sarasota is a bit of a stretch, and it’s unfortunate that Winston picks this as an example for his piece because it creates something of a straw man. It’s more likely that — if Sarasota were to get service — that service would come from a new US subsidiary of Tiger Airways, not Singapore or even SilkAir. Or from AirAsia. And that much of that service will fail. If easy money could be made in the US market, perhaps the good folks at United or Delta aren’t well enough positioned to make it, but you’d expect that Southwest or Allegiant could.
In the end there aren’t really credible arguments to keep airlines owned by investors outside the U.S. out of the domestic market. But that won’t matter. Because there’s no popular uprising demanding a change to the law, and U.S. airlines will fight any change vigorously. Current law is protectionist, designed to benefit US corporate interests. They’ll lobby to keep those protections. And few resources will be spent lobbying to change those laws.