Out of Control Policy Blog

Did deregulation help fliers?

Today's New York Times has an interesting article on airline deregulation. It's a hodgepodge of disconnected ideas, but the tone and approach probably reflects today's confused thinking about markets and regulation.

Thirty years ago, airline deregulation was supposed to fulfill two main goals: spurring competition and bringing down airfares.

Now the number of airlines may be shrinking, as the planned merger between Delta and Northwest is likely to encourage other big airlines to pair off. Reduced competition will probably mean higher fares, particularly as the airlines shrink their fleets and cut flights to reduce costs.

All of which raises anew the question: Has deregulation really worked out?

By some measures, it has. By others, not so much.

The principal idea behind deregulation is to create a more competitive market to provide better services to consumers. By virtually every measure, deregulation has worked--fliers have many more destinations than during regulation when only 10 carriers dominated 90 percent of the market, hundreds of cities have regular air service, and fares are lower after adjusting for inflation.

So, what are the measures showing that it hasn't worked? Airline profits have been squeezed and there's more "churn" in the market as new airlines enter, some leave, and others go bankrupt. In other words, the very fact a dynamic market exists is evidence that deregulation hasn't worked.

In a true market, airlines will come and go, profits will be squeezed, and services to consumers will improve. That happened, and the NYT article provides the evidence.

The confusion comes in when some believe its the government's job to protect the profits of business. The ironic twist in all this is that it's the Democrats now in charge that are willing to use the levers of government to protect business, not the Republicans. Note the comments of Congressman James Oberstar.

Beyond that, the next phase of deregulation will take place when airlines are truly globalized, flying freely inside other countries' borders as well as their own, Mr. Garfinkle said. The merger between Delta and Northwest would be a major step toward that end, given their broad American network and extensive list of cities in Asia, Europe and elsewhere, he said.

However, the prospect of American carriers trying to compete against healthier foreign airlines, some of them still government-owned, is daunting to James L. Oberstar, Democrat of Minnesota, who heads the House Committee on Transportation and Infrastructure.

"It's a very bad idea," said Mr. Oberstar, whose state is home to Northwest's headquarters. He said he expected "a cascade of carriers finding partners" if the Delta-Northwest combination is allowed to go forward, leading to fewer choices and higher prices for consumers.

Samuel Staley is Research Fellow


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