The 40-year rise and fall of airline competition.
After what amounts to a decades-long series of disasters, the American aviation industry is finally in a good place. Overcapacity and fare wars have been eliminated, redundant staff is gone, and with the economy improving, people are buying plane tickets again.
Which is exactly how United Airlines found itself dragging an unwilling customer off an overbooked flight to Louisville, Kentucky, incurring a massive PR fiasco and reminding us that the industry is likely to bounce forever between exploitative and unprofitable.
This particular case resonated with the public because it was unusual and egregious — a sumptuous blend of a moderately rare edge case doused with a hefty dose of poor judgment.
But it also resonated because it felt, in many ways, not so unusual. Anyone who flies regularly has experienced the endless indignities of modern air travel — the security theater, the cramped seats, the delays, the missed flights, and all the rest. Making it particularly egregious is the reality that the crucial ingredient of consumer choice seems to be missing. Most of us have at one time or another sworn to ourselves that we will “never” again fly on one airline or another, only to discover that there are very few airlines one can switch to and that they all seem dismal in their own way.
The airline industry, unfortunately, suffers from some serious business model flaws— most notably very high fixed costs in the form of buying and maintaining aircraft, and the problem that a half-empty flight is almost as expensive to operate as a full one.
Most of us fondly remember a time in the not-so-distant past when the United States had many more airlines and much more vigorous competition between them. This was a true blessing for consumers, but it was genuinely unworkable economically — the consumer bounty was based on investors, bondholders, and unionized workers losing money.
So we’re now shifting into an uncomfortable era of consolidation, diminished competition, higher prices, more profits, and fewer choices. And even if choice were revived by future policymakers, experience suggests that travelers will choose lower prices over higher quality, leaving air travel a perennially frustrating experience.
United suffered the downside of efficiency
The practice of “overbooking” flights — selling more tickets than there are seats available — strikes almost everyone as mildly outrageous whenever it results in someone getting bumped.
The economic case for it is, however, fairly ironclad. It’s simply not that uncommon for a ticketed passenger to not show up for a flight due to illness or some external change of plans. Customers also value the opportunity to reschedule flights for less than the full price of buying a brand new ticket. Meanwhile, the profit-maximizing strategy for first-class seats is generally to price them so high that they don’t sell out, and then offer a few lucky passengers free upgrades — immediately freeing up space in apparently overbooked economy cabins — as a privilege of their advanced frequent flier status.
An airline could, of course, refuse to overbook as a matter of policy. This would result in flying planes that were substantially less full, on average, without meaningfully reducing operating costs. Ticket prices would need to be higher as a result. No airline has seen this as a winning strategy in the marketplace, and regulators haven’t tried to impose it on them.
The United flight in question turns out not to have been overbooked, merely full, but United realized it needed to move some crew to Louisville to operate subsequent flights. As aviation blogger Gary Leff writes, “If the employees didn’t get to Louisville, a whole plane load of passengers were going to be ‘bumped’ when that flight was canceled, and likely other passengers on other flights using that aircraft would have their own important travel plans screwed up as well.”
In principle, of course, the crew could have simply made the four-hour drive, but airline personnel generally have unions and collective bargaining agreements that mandate minimum standards of treatment for crew members who need to be shuffled around.
Kicking a few passengers off a full plane to move crew to Louisville is, for better or for worse, what an efficiently run airline looks like. They didn’t have tons of spare crew members hanging around in a small airport like Louisville just ready to fill in at a moment’s notice. And they didn’t have tons of unsold seats on flights the crew members could take. The needs of the many customers who would otherwise have been stranded in Kentucky outweighed the needs of the few who were kicked off the flight to Chicago. The system, in a sense, was working as designed.
The shocking video images of a noncompliant customer being forcibly dragged off a plane, his head injured and his face bloodied, reflected some longstanding problems with the Chicago police, but it also represented a collision between the logic of optimal management of airline resources and the needs of actual human beings.
The rise and fall of deregulation
Fifty years ago, air travel was very different.
Most European countries featured a dominant, state-owned airline that provided air travel for a fee as a kind of public utility, like a city bus system or the postal service or modern-day Amtrak in the United States.
America took a different route, relying on privately owned airlines but heavily regulating interstate travel via an agency known as the Civil Aeronautics Board. The board regulated which airlines were allowed to fly which routes and what fares they could set — in theory, ensuring that private for-profit companies served the public interest. In part, this consisted of forcing airlines to provide cross-subsidies. An airline would get access to a lucrative route, but would also have to agree to serve a less economically viable one on an unprofitable basis.
These were the grand old days of air travel, when people dressed for flights and service was lavish.
Fares were also very high — about double what you’ll pay today on a per-mile basis.
For constitutional reasons, the Civil Aeronautics Board’s regulatory authority was limited to interstate air travel. Most important air routes cross state lines, but there are some key exceptions, including Los Angeles to San Francisco and many point-to-point routes in Texas.
Airlines flying these unregulated skies generally offered much lower fares. Texas, in particular, came to be home to a low-cost airline, Southwest, that exclusively flew nonregulated flights and offered much lower fares than mainstream airlines. It didn’t escape the notice of residents of big Northeastern cities that a Boston-Washington flight was much more expensive than an unregulated one from LA to San Francisco.
In the late 1970s, the Carter administration — strongly backed by frequent critic Ted Kennedy, with then-staffer Stephen Breyer leading the charge — acted to rescind fare regulation nationwide and open up the spigots of competition.
That created a spurt of airline startups and quasi-startups in the 1980s, most of which went bust quickly, as well as the demise of two important legacy carriers, Pan-Am and Eastern, who couldn’t make it in the more competitive new environment.
By the 1990s, there were seven transcontinental legacy carriers: US Air, Continental, TWA, Northwest, American, United, and Delta. These big seven competed with smaller regional carriers such as Hawaiian, Alaska Air Lines, and Midwest Express, along with low-cost upstarts like AirTran and the ever-growing Southwest.
The ’90s were the global high-water mark for deregulatory impulses in general, and paired with generally cheap world oil prices and a generally strong US dollar, they were certainly a high point for airline deregulation as a success story.
Deregulation had successfully unleashed the forces of competition on the industry, leading to lower fares and more consumer choice. It hadn’t been a painless process, as the tumultuous ’80s involved some spectacular bankruptcies, and the arrangements were in some ways worse for the airlines’ unionized workers. But there were more routes flown and more planes in the sky, and more Americans were able to travel than ever before.
The problem that emerged after the turn of the millennium was that this level of air service was only sustainable in the middle of an economic boom.
Airlines were losing tons of money
The 9/11 terrorist attacks, the small recession following the dot-com bust, the high commodity prices of the mid-aughts, and the large economic downturn of 2008 pushed the airline industry into a wave of financial losses.
As of 2013 or so, the post-9/11 losses were so bad that they had wiped out more than 100 percent of all profits incurred by all US-based airlines in history. Over the past couple of years, a return to strong profitability has finally reversed the losses, but exploring them is critical to understanding why the present situation is so unsatisfactory.
Airlines for America data
One basic dilemma of the industry is that it’s difficult for a big airline to respond in a smooth way to a decline in demand. The cost of flying a plane from Cincinnati to Phoenix is largely driven by the distance between the cities and the fuel and staffing costs associated with a plane of any given size.
If demand for travel on one route drops while demand on some other route is increasing, you can optimize by switching a smaller plane to the less popular route and deploying a bigger plane to the more popular one. But if demand is falling across the network, you can’t just shrink all your planes by 5 or 10 percent. You need to either go whole hog and cancel entire routes — which will cause your revenue to fall even further — or inefficiently fly a bunch of half-empty planes.
If one particular airline faced a downturn, it could at least sell some of its idled planes to raise capital. But if all airlines are facing a downturn, then there’s nobody to sell to. So even your idled planes are costing you money, since they need to be stored and maintained somewhere.
The only realistic solutions involve taking on debts to cover losses while keeping some semblance of your route network intact, and pressuring unions for givebacks to management. Both tactics tend to encourage airlines to declare bankruptcy, either to get out of old debts or to wriggle out of old obligations to workers, and so the 21st century has been a boom time for airline bankruptcies.
The bankruptcies themselves have driven waves of consolidation. A bankrupt airline needs new investors to revive itself, and the investors who are willing to pay the highest price are generally other existing airlines, which talk themselves into the idea that combining route networks will create a new whole that is greater than the sum of its parts.
Consolidation has worked to increase profits
The consolidation shakeout unfolded over several years but has left the United States, in practice, with radically fewer airlines. TWA was the first to fall in late 2001, having done bankruptcy reorganizations twice already in the ’90s and calling it quits shortly after 9/11 to be bought by American. Northwest was absorbed into Delta. US Air was bought by a financially healthy low-cost upstart called America West, which then adopted the US Air name.
American Airlines was then bought out of bankruptcy by the new US Air, which promptly rebranded itself American. Midwest went bankrupt and was absorbed by Frontier. Southwest continued its steady growth, including by an acquisition of the then-bankrupt AirTran.
The result is a new paradigm in which these big four airlines control more than 80 percent of the American passenger market, with the remaining 20 percent balkanized across a bunch of smaller carriers.
Some of this consolidation was undoubtedly necessary and even appropriate. Antitrust authorities can’t force private businesses to run unprofitable airlines indefinitely just because that’s convenient for consumers. And at times, the merger of two smaller airlines into a single larger one is good for competition because it builds a larger route network that can compete more effectively with the big players.
America West’s takeover of US Air, for example, decreased the number of independently owned players in the industry but increased the number of companies offering comprehensive nationwide service. The result, for many people looking to reach a wide range of destinations, was in practice more choice rather than less.
But as Justin Elliott has detailed for ProPublica, the final merger that brought the number of big carriers down from five to four — between American and US Air in 2015— was intensely controversial among professional regulators, and appears to have gotten through in a storm of lobbying and political pressure.
Proponents note that American was bankrupt at the time and had no other bidders — without a merger, it arguably wouldn’t exist at all. Skeptics note that T-Mobile and AT&T offered similar arguments to the Obama administration when they wanted to merge. But when that deal was rejected, T-Mobile’s owners turned out to have been bluffing, and an independent T-Mobile actually unleashed a wave of competition and innovation around the industry.
Either way, the consolidated airlineindustry is working essentially as planned. Ongoing economic recovery has meant higher fares and more crowded planes, leading to fat margins. The industry will still almost certainly take big losses the next time there’s a recession, but it will be operating with a financial cushion rather than a debt overhang, and the current paradigm offers a clear road map for a return to profitability whenever the economy recovers.
By the same token, if consumers feel they are paying more to ride on more crowded airplanes with steadily devalued rewards programs, they are not mistaken — that’s what an oligopolistic industry with limited competitionwill get you.
People don’t want to pay for quality
The collapse of the dream of the ’90s has led rather inevitably to a backlash and, at times, even a nostalgia for the old pre-deregulation days of the Civil Aeronautics Board.
But while the on-board beatdown is a golden rhetorical opportunity for anyone trying to make any point about the airline industry, it truly doesn’t fit the facts.
Despite “deregulation,” the airline industry is, in fact, highly regulated by the Federal Aviation Administration, especially with regard to matters related to bumping of passengers. Authorities could, and probably should, increase the compensation owed to involuntarily bumped passengers and avoid some of the specific dynamics that gave rise to this incident. The conduct of the Chicago Police Department, meanwhile, is both deeply troubling and part of a much larger pattern of excessive force and other issues exhaustively explored in a recent Justice Department inquiry.
Meanwhile, as proponents of re-regulation ought to know, the old system was aimed not at encouraging competition but at preventing it. The idea was to discourage damaging price wars on popular routes, ensuring that airlines would earn fat surpluses on them in exchange for operating money-losing routes to other cities.
There’s a reasonable argument to be had about whether people flying from Houston to Phoenix should pay higher fares in order to subsidize people flying from Cleveland to St. Louis. Doing a complicated series of opaque cross-subsidies that increase costs to some consumers without explicit taxes or direct assistance to the poor would be a very American way of trying to address a social problem.
But a subsidy mechanism is not a free lunch — it’s simply a way of shifting around who pays. By the same token, the good old days in the 1980s and ’90s of high competition and falling fares weren’t a free lunch either — passengers were enjoying a collective subsidy from overly optimistic investors and lenders.
In the long run, for air travel to be better, passengers would have to pay for it. And decades’ worth of evidence suggests we prefer cheap and safe to pleasant. Policy aimed at reviving aviation competition would likely do exactly what past rounds of pro-competition aviation policy have done — lower prices while making the consumer experience worse.
The triumph of no-frills aviation
The big, overarching theme of the past four decades of the aviation industry is the triumph of the low-cost carrier. America’s biggest domestic airline is Southwest, the original low-cost airline. The biggest airline overall is American, which seems like a continuation of a venerable legacy brand but in reality is the result of a successful rebranding of America West, the earliest and most successful low-cost startup of the deregulatory age.
In response to competitive pressures, United and Delta have steadily moved in the direction of low-cost practices — squeezing more seats into economy class and disaggregating the basic air travel bundle so that in exchange for a cheaper fare, you get nickel-and-dimed on various fees.
And as industry consolidation has gained steam, the most important upstart challenger to the big four is Spirit Airlines, which offers rock-bottom prices and generally gets poor marks for quality. In theory, it should be possible for a new entrant to the aviation industry to come in at the high end, offering a superior product to customers who are willing to pay for it. But efforts to compete this way — from MGM Grand Airlines and the Trump Shuttle in the 1980s to Virgin America in our time — have consistently failed.
Beyond the behavior of the police, a critically important issue outside the scope of aviation policy, the United disaster basically touches on a series of travel frustrations related to redundancy.
A pleasant airline to fly on would routinely have empty seats on its planes so nobody would have to get bumped and it would be easy to reschedule. Flights would be frequent, so if you did need to miss a flight, you could take a later one without huge problems. Spare aircraft would be sufficiently abundant that mechanical problems wouldn’t lead to huge delays or cascading series of missed connections. And staff would be abundant enough that the inevitable vagaries of illness, traffic jams, and bad weather wouldn’t force airlines to hurriedly shift employees from one airport to another.
Airlines clearly could build that kind of redundancy into their systems. Indeed, the logistics of doing so would be fairly trivial compared with the enormous technical challenges involved in safely moving hundreds of passengers at high speeds through the air while serving them hot coffee and listening to their complaints about the bad wifi.
But to do so would cost money. Less overselling of seats and more padding of schedules for crew and equipment would ultimate translate to higher fares. That’s a price we pretty clearly could bear as a society if we chose to, but as consumers we have collectively and repeatedly chosen not to. Instead, wherever competition has reared its head in the industry, the mass market has aimed for low prices above all else, followed by a vigorous culture of collective complaining when something goes wrong.