Airline merger fever is flourishing right now, with Delta, Northwest, United and Continental all considering possible partners. Yet, economists of a certain age stand agape at the lack of concern about declining competition levels in aviation.
Some people seem to assume that since government deregulated the airline industry 30 years ago, the issue of anti-trust action is moot. Nothing could be further from the truth.
Indeed, while Alfred Kahn and other deregulation advocates wanted government out of deciding which airline could fly where and what fares it could charge, they explicitly argued that government oversight still would be necessary in two areas: safety and anti-trust. We have maintained one but abandoned the other.
The whole aim of deregulation was to increase competition, not let it wither away. Route-and-fare regulation gave carriers de facto monopolies on certain routes. Just as for utility companies, limits on fare prices were supposed to offset government-sanctioned monopoly status.
As things worked out, regulated fares were high enough to assure comfortable profit levels for carriers. Cost increases, such as pilot salary increases, were easily passed on to the flying public.
Economists argued that if airlines could fly wherever they wanted and charge whatever they wanted, competition would lower ticket prices and increase the industry’s efficiency.
That largely happened after President Jimmy Carter named Kahn to head the Civil Aeronautics Board. People complain today about difficulties in flying, but adjusted for inflation, deregulation lowered ticket prices a great deal and made flying accessible to many households that otherwise would still be riding the bus.
Competition was less positive for the airlines than for the public. Virtually all struggled to contain expenses like salaries that had been manageable under the old regime. Many famous lines — Pan Am, TWA, Eastern, Braniff — went out of business. New upstarts like Southwest grasped market share. Mergers between one-time competitors like Northwest and Republic became common.
Now, only a handful of large carriers remain and a gaggle of smaller regional ones. Most of the surviving major airlines, including Northwest, have gone through bankruptcy at least once, shedding costs in the process. But with airlines stretched by high fuel costs, further mergers seem inevitable.
Politicians tend to focus on a merger’s effects on local employment. The question of still greater concentration and reduced competition gets less attention.
Warnings by early deregulators about maintaining competition were rapidly forgotten. In 1986, Republic was acquired by Northwest, its principal competitor. Minnesotans have paid the price in higher fares since.
Given the Bush administration’s aversion to anti-trust enforcement, any merger involving Northwest is likely to pass largely unchallenged. But the loss of local jobs is not the only price to be paid.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.