Saturday, February 16, 2013

Are Fewer Airlines Better or Just an Example of What Happens When You Deregulate Markets?

In case you didn't see the news the other day, US Air is merging with American Airlines to form a new American Airlines.

It sure seems that the U.S. airline market has consolidated a lot over the last ten years. You know why it feels that way? Because it has.

Indeed, we've gone from 10 major airlines and all the choice and competition they provided in 1999/2000 to a total of 4 airlines as of 2013. What does this consolidation mean for customers? What does it say about our economy?

Well, first check out the below chart I saw on CNNMoney today that illustrates the changes. Also note that the majority of the airlines went through bankruptcy.

OK, what does that mean?

Well, one thing we've seen over the past decade, and really since the 1980s, is deregulation of the airline industry. Prior to that, airlines and how they competed were much more regulated. With the implementation of the Airline Deregulation Act, this changed. While the FAA still had safety regulatory powers, after the Act, airlines and their consumers were exposed to the full measure of market forces. This was done, of course, with the notion that "freeing" airlines from regulation would enable them to offer more options and lower prices for customers and the airlines themselves to thrive and become more profitable. You know, the whole, "the free hand of the marketplace" solving all ills.

Extend that competitive environment across the ensuing three decades and you get what we have now: fewer airlines (less choice), worse service, and prices that are - while perhaps slightly less than what they were in the 1970s (adjusted for inflation) - still pretty dang expensive. And, as we know, most airlines have gone through or not survived bankruptcy.

So, let me ask you thing airline deregulation and the consolidation of the industry has worked for you? Do you have more choices today? Are costs reasonable for air travel? Is service better?

And finally...and I think this is the lesson time you hear some politician or business leader talking about the need for deregulation of some sector of our economy - energy, auto, finance, banking, healthcare, etc. - think about how deregulation worked out for the airlines. Think about the difference between the fantasy promise of milk and honey that the "the free hand of the market" position promises and the reality that markets that will exploit profit, consolidate and deliver less choice and worse benefit to the consumer.

Is competition good for the economy? Certainly. Is reasonable and sensible regulation also good for the economy? Also certainly. What we don't want, however, are wide-open and unregulated industries such as I've named above. History shows us that this is not a model that works well for society.

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