Towards Democratic Regulation of the Airline Industry

Matt Stoller
Apr 13, 2017 · 8 min read

In the reaction to the the United Airlines fiasco, we see something very powerful. Americans are using words like corporate concentration and monopoly — and antitrust and regulation — to describe the reason David Dao was beaten. And how you ask a question, how you define a problem, leads to what kind of political system you will have.

Americans are finally pushing back on the anti-democratic arguments they were sold by some liberal Democrats and right-wing conservatives four decades ago.

In 1978, President Jimmy Carter, aided by Ted Kennedy, economist Alfred Kahn, and future Supreme Court Justice Stephen Breyer, promoted what they called the “Deregulation” of the airline industry. What they actually ushered in was a new era of American inequality, one that resulted in the concentration of power and wealth in the hands of a self selected few.

Now people are realizing that airlines are still regulated — they are simply regulated by giant corporations and self-serving financiers. They are regulated by a few airline CEOs, who choose routes, capacity, and ticket prices, as they alone see fit, destroying the economic viability of cities in quiet board rooms. They areregulated by asset managers on Wall Street who own chunks of each airline and carefully limit competition among them (but fly on private jets, so they don’t have to experience the system they run). They are regulated by poorly maintained reservation systems, which routinely break down, grounding massive numbers of airliners, as happened to Delta last week.

Now we’ve seen that America’s air transport system is also regulated by municipal police, called by airline bureaucrats to rough up customers who disobey them.

In short, the rhetorical trick behind the word “deregulation” has been unmasked. It will take time to filter outwards, but we can now ask the question of whether airlines will be regulated by ourselves in the form of a democratic government, or by and in the interest of airline CEOs and asset managers. Which means, it’s time for the public to begin to push hard for government regulation of the airline service — not only to avoid mishandling of over-bookings but to make sure these valuable public resources serves us and our communities.

Five years ago, the conversation about the brutal beating of David Dao would have headed in a very different direction. People would have complained about their rights as consumers. Politicians would have proposed bills on baggage fees, transparency in ticketing, and rights of consumers vis-a-vis overbooked flights. Today, the conversation largely centered around something much more fundamental — who regulates the airline industry? Is is it Wall Street? Or is it the public working through democratic government?

Even a journalist like Matt Yglesias, who once called Amazon a “charitable institution being run by elements of the investment community for the benefit of consumers”, had to concede that antitrust authorities had been too lax on airline mergers in the Bush and Obama years.

This is good. Still, it’s important to correct one of the key misunderstandings that is still underpinning the debate, and that is the legacy of what was then known as ‘Deregulation’. Yglesias’s piece was clear and well-written. It also simply repeats the history of deregulation as it has been told by its proponents from the 1970s onward.

That story is that though there were some problems with deregulation, costs were reduced for consumers because of elevated competition. Yglesias uses a chart to show that ticket prices have gone down from 1978 onward. If you look at the fine print of that chart, you’ll see it uses data from the ‘Air Transport Association’, which is the airline lobby. The Air Transport Association spends roughly $85 million a year in direct lobbying, and probably much more, ensuring that reporters tell the story they want to have heard.

In fact, deregulation didn’t do what its proponents claimed. A 1990 study by the Economics Policy Institute study showed that deregulation actually kept airline prices higher than they otherwise would have been (not to mention proponents of deregulation taking credit for the collapse in oil prices in the 1980s, which are a big input into airline costs). Indeed, to understand how bad and how expensive America’s airlines have become, just travel to Europe, and experience vastly superior service at cheaper prices.

There are other misleading markers in Yglesias’s story, like the implication that flying before 1978 was for the rich, “when people dressed for flights and service was lavish”. But the period before deregulation is when flying became a middle class transportation medium. In fact, “by 1977, 63 percent of Americans over eighteen had taken a trip on an airplane, up from 33 percent in 1962.”

That costs were high and flight was just for the rich is an important fake story, one that underpins the entire framework that Americans have been living under for four decades. What the airline industry is channeling through Yglesias and other defenders of corporate prerogative is that your ability to travel around the country demands that you accept an occasional bloody beating of someone like David Dao. Democracy might be good in theory, but it won’t deliver you airline ticket prices you can afford.

This is the opposite of the truth. Government action in the 1930s helped to break the patent pools strangling the aerospace industry, direct public financing helped accelerate its growth, and mail contracts helped subsidize early airliners. But it is regulation that is most misunderstood.

Prior to 1978, airlines were regulated by the Civil Aeronautics Board. Airline service was held to be a “public convenience and necessity” — much like a utility — and the CAB worked to ensure simple goals. One goal was to keep prices reasonable and customer service good. Another was to ensure that airline workers were treated fairly. A third was to make the airlines served all American communities fairly, and didn’t choke off traffic to certain cities and towns.

This regulatory regime grew out of the harsh treatment that Americans had suffered from the railroads in the 19th Century, where entire regions were undermined at the whim of a few financial barons. The CAB regulatory framework, designed in the 1930s, was written to protect the public from unpredictable and chaotic financial actors.

This regulatory regime worked well. Prices dropped dramatically over the course of several decades, as technological and operational improvements were passed on to passengers, workers, and communities at large. Americans began flying in large numbers and flying became a middle class means of transportation.

In the 1970s, many liberals — led by Carter-Administration official Alfred Kahn — began to embrace the long-standing conservative argument that public utility rules protected unionized employees at the expense of the “consumer.” Kahn was a key proponent of this philosophy, a Democratic economist who organized to place power over key public institutions into the hands of financiers. Kahn believed the best way to ‘help consumers’ was to let the “market” regulate business; although what he actually wound up accomplishing was to let big corporations and bankers regulate the business. This is the tradition to which Yglesias’s argument belongs, a 1970s pro-concentration mindset where democracy is irrelevant at best and harmful at worst, and the supposed “welfare” of the consumer is used as an excuse for concentrating private power over public spheres.

Initially, even as many routes disappeared, airline deregulation did seem to result in lower fares, particularly on trunk routes such as those from Los Angeles to New York. New business models, like discount airline People Express, emerged. Southwest, confined to Texas prior to deregulation, became a major airline competitor.

But cracks soon surfaced. By the mid 1980s, it became impossible to fly on a commercial jet to certain state capitals. Then the mergers and hostile takeovers ripped through the industry and startup airlines collapsed (something Kahn found very surprising). Carl Icahn bled TWA dry with aggressive financial tactics. Eastern Airlines and Pan Am went bankrupt.

Moving regulatory power from democratic bodies like the CAB to Wall Street led to a wave of mergers, concentrating the industry and putting regulatory power in the hands of a smaller and smaller group of financiers. And the process continued, with the Bush and Obama administrations overseeing a spate of tie ups that cut the number of traditional carriers down to three.

The result? Today, U.S. airline prices are higher than in Europe, service is far worse, and workers in the airline industry have much less power than they did. The regulatory changes and consolidation affects us not only as “consumers.” They have also made it much harder to get to and from many parts of America, including big cities like Cincinnati and St. Louis. As air service is cut, business moves out, shifting corporate headquarters and industrial activity to better connected coastal cities..

Even when airline managers try to compete with one another, Wall Street fund managers veto the attempt. A few years ago, Jet Blue drew up a strategy to compete aggressively on both price and quality with the major carriers. CEO David Cush said his goal was to “make a few hours out of people’s day a little bit nicer, more pleasant.” Wall Street analysts immediately attacked the company, and pressed Jetblue to charge for legroom, extra bags, and reservation changes. Jetblue caved.

In other words, the only ones who are not regulating the airlines are you and me, the people. The deregulation of the airline industry back in 1978 did not get rid of rules and regulations or even government. It just shifted the power to regulate from professionals working for the public to plutocrats working for themselves. And the bloody face of Dr. David Dao shows the face of that lie. Government hasn’t stepped ‘out of the airline market’. Government is now the enforcer of rules the airline barons put in place.

It’s time to recognize that airline “deregulation” has failed the public, and a new approach is necessary. Democracy once brought us cheap airfare and broad service, because we the people once decided that an airline industry needed to be shared among all of us and not privilege any one part of the country more than any other. We should move back to that system.

The right policy direction is clear. The government should move to undo some of the mergers of the Bush and Obama years, such as United’s takeover of Continental in 2010. The government should also move to ensure fair service for Heartland cities, if necessary cross-subsidizing routes with money that is currently going to executives and investors. This kind of democratic regulation is, frankly, inevitable. The economics of the airline industry are similar to those of railroads, so it’s no surprise that the elimination of rules designed to stabilize the system and protect the public have led to insolvent and poorly managed airlines and mistreatment of the public.

More broadly, it’s time for the public to recognize that there is no such thing as “Deregulation.” The choice is always simply between regulation by the public for the public or regulation by private powers for their personal benefit. In short, we must regulate our society through democracy, or the plutocrats will regulate our lives for us. And sometimes, as we saw with David Dao, they will use violence to get their way.

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