Attention All Passengers (6 page)

I hear such airline war stories repeatedly, so I'm
always questioning my perspective. I met up in Washington with Charlie Leocha,
director of the Consumer Travel Alliance, and asked his take on the big picture.
He told me: “I think we've moved from an industry where all competition was
based on customer service. Once the industry was deregulated, the real
competition became price competition. Then two things happened. First, price
became more important. Second, airline executives no longer were aviation
people. They became MBAs. And passengers were no longer passengers, they became
statistics.” He underscored how important LaHood has been: “Finally the DOT is
helping us out. It's critical. Because we have no standing in the courts due to
federal preemption. Therefore we have the rights of medieval serfs because we
cannot petition our noble lords and masters at the airlines. So we petition the
DOT to intercede on our behalf.”

In the end, Raymond LaHood, a former congressman
and one of two Republicans in President Obama's cabinet, did what neither the
House nor the Senate could do: he strengthened passenger rights. First came the
three-hour tarmac delay rule in 2010. And then in April 2011 he announced a new
set of provisions:

• greater transparency in fares and fees

• refunds of baggage fees if the bags are
lost

• increased compensation for involuntary
bumping

• a prohibition on raising fares after tickets
are purchased

• an expansion of the tarmac delay rules

I asked LaHood to summarize, which he did thus: “I
served in Congress fourteen years and Congress never passed one bill having to
do with passenger rights. We were here for two years and we got it done. So you
can cross your fingers and all your toes and your legs and arms and everything
else with the hope that Congress will pass legislation. But I'm not optimistic
about that. We have done what Congress couldn't do for a decade, and we did it
in two years.”

My concern, one shared by many others, is that the
DOT simply has not done enough to rein in an industry that clearly wants to
police itself. Furthermore, through I would give LaHood an A for his work on
passenger rights, the DOT and its subsidiary the FAA seem incapable of providing
effective oversight of aircraft maintenance, outsourcing, regional carriers,
pilot proficiency, infant restraints, and other life-and-death safety
issues.

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What Happened to the Airlines?

Capitalism without bankruptcy is like Christianity without hell.

—Frank Borman, astronaut and CEO of Eastern Air Lines

A
t the very first meeting of the DOT's Future of Aviation Advisory Committee, Raymond LaHood instructed us that two topics were off the table. One was aviation security, since that falls under the purview of the Department of Homeland Security. The other was reregulation of the airline industry, which would not be considered by the Obama administration. Yet in some ways, the battle over airline deregulation reflects the larger schism occurring in American politics. There are two warring camps, and each side wonders how the other could possibly be so blind—and so wrong.

Proponents of deregulation claim that nearly three times as many Americans are flying, and when adjusted for inflation, airfares are lower than they've been in decades, while safety has improved. Critics maintain that service has deteriorated, airplane cabins are overstuffed, labor relations have imploded, airline balance sheets are a wreck, and outsourcing is compromising quality, service, and even safety. To varying degrees, there is truth in both arguments. What's more, at times it is difficult to determine what effects, both good and bad, are directly attributable to deregulation itself, and which changes would have occurred anyway over three decades. Yet in my view, we've reached a tipping point, and the bad effects are outweighing the good.

“Clearly consumers are saving money in the deregulated era,” former congressman James Oberstar says. He points to more nonstop service and fewer one-stop flights. “But there are customer service issues and maintenance outsourcing concerns as well as concerns about consolidation.” Coming to terms with those concerns could be the most contentious battle the airline industry has ever endured.

When Flying Was Fun (1903–78)

It may be hard for younger people to understand that flying was not experienced by most Americans prior to the 1970s. (My father spent four years in the U.S. Army in World War II, and served on three continents before being wounded at Anzio, but all his travels were by truck, train, and transport ship.) A full sixty years after Kitty Hawk, only 15–20 percent of American adults had ever flown on an airline. Today those numbers have been reversed, with about 85 percent of the population having flown. Ed Perkins, my predecessor as editor of
Consumer Reports Travel Letter
, believes there's been a societal shift: “What's happened with the airline industry has happened in so many other industries.” He notes it started primarily for the wealthy, but because of technological advances aviation spread to the masses. In fact, Perkins compares flying to skiing, which was once an upper-class pursuit but has trickled down to virtually all classes.

Therefore, any discussion of the U.S. airline industry is cleaved by the watershed year of 1978, the way American history hinges on historic dates such as 1775, 1865, or 1945. Because in 1978 the airline business for the first time became just that—a business. And nothing has been the same since.

Starting in 1937, the Civil Aeronautics Board had treated interstate commercial airlines as a utility and determined which carriers operated on which routes, and on which days and at what times. The CAB also decided how much airlines could charge for fares, and ensured they received a return on investment. Interestingly, carriers that operated within the borders of a single state were free from regulation, such as Pacific Southwest Airlines in California and Southwest Airlines in Texas.

The process was cumbersome, and old-timers joke that Washington bureaucrats threw darts at a board to determine the fares between Cleveland and Minneapolis. Airlines that wanted to expand their route maps were subject to interminable red tape and could wait years for responses. There was an air of gentility about the airlines, and most U.S. carriers were restricted to domestic routes while Pan Am—and to a lesser extent TWA and Eastern—flew the American flag overseas.

Then President Gerald Ford, followed by President Jimmy Carter, expressed support for deregulating commercial aviation, and the movement came to be seen as a precursor of deregulation in other industries, such as telecommunications and trucking. The man chosen to usher in the future was Dr. Alfred Kahn of Cornell University, who had written
The Economics of Deregulation
, the seminal work on the topic. Kahn was tapped by Carter to head up the CAB—and then dismantle it.

Perhaps one anecdote sums it up. When PBS broadcast an examination of airline deregulation in 2002, Associate Justice of the Supreme Court Stephen Breyer was among those interviewed, because back in the 1970s he was chief counsel for the U.S. Senate Committee on the Judiciary. In that role he worked closely with Senator Ted Kennedy in shaping the Airline Deregulation Act, which was signed into law on October 24, 1978. On PBS, Breyer recalled how Lamar Mews, then the president of Southwest Airlines, attended a hearing and said: “The people who put those chicken coops on the tops of their car and drive across Texas don't do that anymore. They and their chicken coops can come right on my airplane.” Breyer noted they certainly did, and he told PBS, “No one says it's fun, flying in an airplane filled with chicken coops. But nonetheless, if people want to pay the low prices for that kind of service, they should have the opportunity to do it. That's what had to happen in Texas, and now the object of the hearings was to ask why shouldn't that be true everywhere?”

Today, of course, it
has
become true everywhere, and the cabins of regional jets are jam-packed with chicken coops to prove this. I reached out to Justice Breyer to see if he has further thoughts on the effects of deregulation, but word came back that his views have not changed. In fact, most of those who fought for deregulation still support the principle, if not all the results.

Upon Kahn's death in December 2010, the
Wall Street Journal
ran this headline: “Stuck in an Airport? Blame Alfred Kahn (1917–2010).” Although he died just as I began researching this book, I contacted several people who worked closely with Kahn on deregulation: Michael Levine, Severin Borenstein, Diana Moss, and of course, Justice Breyer. They all maintain Kahn was an uncommon man, exceedingly bright and generous. But opinions vary slightly on how he viewed the aftereffects of deregulation.

Here are Kahn's own words, in testimony before Congress in 2000: “There are, I think, two things to be said about the fact that [a deregulated airline industry] has also been accompanied by a marked increase in discomfort and congestion. First, that it was precisely the failure of regulation to offer travelers a low-cost/lower-quality product that was its greatest failure. And second, that this deterioration in the quality of the air travel experience is a consequence, in important measure, of the failure of government to provide the optimal infrastructure—specifically, air traffic control and airport capacity—and to price it correctly.”

The arguments persist on whether some form of regulation should be reimposed on the airlines. But one thing is certain: there is no going back entirely to 1978.

Brave New World of Competition

In August 1978, as that debate was raging in Congress,
Time
published a cover story—“New Era in the Air: Cheap Fares, Crowded Flights”—depicting a sardine can with wings. How crowded? Passenger load factors for U.S. carriers reached 61.5 percent systemwide that year. Consider that four empty seats out of every ten was considered “crowded” thirty-four years ago; in 2010 the domestic industry average had reached 82.1 percent.

Time
opined: “Never has the future been less certain. The U.S. airline industry has been treated like a semi-monopolistic public utility, with routes and fares controlled by the Civil Aeronautics Board, which has sought to avoid over-competition and ruinous price wars. Now, President Carter seeks to free the airlines from Government economic controls entirely and allow them to fly anywhere at any time and charge any price, no matter how ridiculously low.” The article itself is a bit of a time capsule, with its references to “stewardesses,” call center wait times of “up to ten minutes,” and hot versus cold in-flight meals. Virtually no one accurately predicted the explosive passenger demand of the deregulated industry, with
Time
stating: “In the future, passenger growth will be somewhere between 6 percent, which is the historic average, and 10 percent.” In fact, in 1978 the U.S. airline industry carried 275 million passengers; that number would increase to 720 million by 2010, a rise of 162 percent.

What's particularly striking about the birth of airline deregulation was how it was midwived by the left, not the right as many assume today. Democrats controlled the White House and both houses of Congress in 1978, and the strongest proponents for unleashing free-market forces were President Carter and Senator Kennedy. And among those who testified on its behalf was Ralph Nader. Thirty-three years later, I asked Nader if he has any regrets, and he said, “In terms of competition, we supported it.” But he stressed there were two underlying assumptions: the first was the implementation of stringent safety oversight, and the second was the implementation of stringent antitrust laws. Unfortunately, Nader maintained, both promises have been broken.

I visited my fellow FAAC member the economist Severin Borenstein, who began working for Kahn at an early age. We sat in Borenstein's office at the University of California at Berkeley, and he reminisced about the man who arguably had the greatest impact on the U.S. airline industry since the Wright brothers. Knowing that he remained in touch with his mentor Kahn until his death, I pressed him on what the architect of airline deregulation really thought of the end product more than thirty years later. “Fred said it didn't work out the way he thought it would,” Borenstein acknowledged. What could not be foreseen was how legacy airlines would use tools such as frequent flyer programs, travel agency override bonus commissions, and dominance of hub airports to thwart competition: “Deregulation did not mean suspension of antitrust laws. Fred was quite vocal about this. The [Department of Justice] is where you sort of expect more oversight.”

In two key areas—policing predatory pricing and overseeing mergers—Borenstein said the Justice Department has been “a real disappointment.” Even so, he said Kahn did not recant: “He was still a believer in deregulation. It was a big improvement over regulation. But most of the fare decline has been due to higher load factors.”

Today all domestic airlines and all domestic airline executives are strong proponents of deregulation, though that wasn't the case in 1978. Airlines for America, the primary trade organization for U.S. carriers, cites the dramatic growth of the industry and the plethora of low fares as proof positive of deregulation's success. “Even the carriers that have lost money still prefer to compete, because competition drives the market,” says John Heimlich, chief economist for the A4A. “Reregulating means limiting competition and compensating airlines on cost.”

Lost amid the deregulation debates are underserved regions of the country, particularly since, as the nonpartisan public policy organization Demos reported, more than one hundred communities had lost air service during the past decade, a condition the federal government has sought to address through the Essential Air Service program, which funds airlines.
1
In 2010, Severin Borenstein and I were asked by the FAAC to examine its usefulness, and facts quickly emerged: there is waste in the system, yet some communities, particularly in rural regions, remain dependent on EAS. One year later, EAS would be at the center of the partisan congressional feuding that cut off funding for FAA reauthorization in the summer of 2011.

The Arguments for . . .

Michael Levine is that rare individual who can teach—and can do. A respected law professor at Yale and New York University, he worked side by side with Kahn at the CAB and subsequently worked in the industry, as the CEO of New York Air and as executive vice president at Northwest. He lives not far from me in Connecticut, and we got together to discuss all things airline for hours on end. During our chat I mentioned that I've never owned a car that was not an American make, and when we walked out to his driveway to inspect my Pontiac Vibe, he noted it was a joint product of General Motors and Toyota.

Levine also pointed out that in the 1970s nearly all airlines fought deregulation, yet once it began “they decided anything goes.” But he stressed that the original intent was not to restore the airlines to a laissez-faire world reminiscent of nineteenth-century England, but to ensure they behave like other businesses. And other businesses operate under a mixture of free markets and government regulation. Levine stated that the specific aims of airline deregulation were to do with “airline-specific regulation” damaging to consumers, such as control of routes and pricing; however, other standard retail sales obligations—such as disclosure of fares—would remain in effect.
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Yet many airline executives clearly feel that
any
form of government intervention is obtrusive; as former Continental Airlines CEO Gordon Bethune says, “It's the most regulated deregulated industry in the world.” Passenger advocate Charlie Leocha agrees to an extent, by maintaining the airlines remain a “semiregulated” business, similar to electric utilities, because the government provides air traffic control through the FAA and oversees airline certificates through the DOT. “It's definitely a public-private enterprise,” he says.

Hubert Horan has written extensively on the subject, and prior to one of our conversations he wrote extensively to me about it as well: “I fundamentally believe that deregulation was a hugely positive beneficial thing for the industry and consumers, although I can point out lots of minor implementation flaws and errors.” He added: “Deregulation doesn't stop companies from doing dumb things, and doesn't stop fuel prices from increasing. The benefit of deregulation is that it limits the ability of dumb—or politically powerful—companies from running to the government for protections from the consequence of dumb decisions.”