<B> Deregulation Has Failed</B>
By Ivan Michael Schaeffer
<i>Ivan Michael Schaeffer is president and CEO of Woodside Travel Trust, the Bethesda, Md.-based travel agency network.</i>
There's simply no way around it--total airline deregulation has failed. While the concept of deregulation remains as strong as the day the Deregulation Act was passed in 1978, the reality has fallen well short of the hype. When deregulation was put into effect, its supporters stated that competition would increase and, as a result, the American public would reap significant benefits. To generate new and stronger carriers, we were promised conditions that would lead to enormous public benefits, including truly open markets, a steady stream of new low-cost entrants arriving in the marketplace, increased competition, an end to predatory behavior by airlines and increased service to smaller markets.
Unfortunately, these conditions do not exist. As we prepare to enter a new century, the opportunities for new competition are disappearing every day.
Even the U.S. Department of Transportation now admits that deregulation, as it currently exists, has failed to foster much real competition. On Dec. 16, 1998, at a Transportation Research Board presentation, DOT General Counsel Nancy McFadden and Deputy Assistant Secretary for Policy and International Aviation Pat Murphy noted that deregulations benefits have not benefited all areas of the country equally. In addition, they concluded that major carrier competition appears to have had little impact on prices in short/medium haul markets. Finally, they noted that no new entrants have applied for a certificate and commenced scheduled service since the Valujet crash in May 1996.
So, what went wrong with deregulation? How can we return competition to the marketplace and end predatory behavior by the major carriers?
First, we must stop the increasing consolidation in the air carrier industry. As the list of alliances and marketing partners continues to grow, there will soon be just three groups of remaining carriers. Clearly, this reality does not reflect the vision of the original proponents of deregulation.
Today, for instance, American is partnering with airlines throughout the world and taking control of U.S. carriers. Midway Airlines is an alliance partner of American Airlines with no ownership control. The two carriers do not compete in any markets! Midway no longer even flies from Raleigh/Durham, its current hub, to Chicago, its original hub. Midway also can't take you to Dallas or Miami, although it flies to almost every other major city in Florida. In the Northeast, American has purchased Business Express, the largest commuter in that region.
Meanwhile, in the West, American has purchased Reno Airlines, thereby eliminating yet another potential competitor and again creating less competition. In fact, since the mid-1980s, the large carriers have purchased Reno, Western, PSA and AirCal, eliminating every low-fare competitor on the West Coast. Only Southwest Airlines remains to keep the fares of the major carriers in check. It is time to freeze additional alliances until new carriers are in the marketplace. The need to increase competition is essential if any deregulation benefits will survive.
Secondly, for deregulation to survive, we must dramatically reduce concentration at major U.S. airports. According to a March 1998 Salomon Smith Barney report, the 50 largest airports show an unprecedented degree of concentration in the airline industry. The level of concentration at hubs makes residents and corporations in those areas captives, subject to the unrelentingly high fares of the dominant carriers. Only by encouraging new entrants and creating a true level playing field can we restore some degree of competition in major markets.
Third, we must create conditions that allow new entrants to enter markets. All airports must be opened and behavior aimed at driving competitors out of markets must be immediately halted.
Moreover, we must be careful not to ignore the impact of deregulation on smaller communities. Every governmental and independent study conducted on this subject has come to the same conclusion--deregulation has failed most dramatically for two groups, those living in smaller communities and those traveling at the last minute on business.
According to an April 1998 DOT report on rural airfares submitted to Congress, small communities continue to be hit hard by dwindling airline competition. The report found that, as a group, travelers from small communities pay higher fares than travelers in large hub markets. In addition, average yields (the fare per mile) for rural small communities are higher in every mileage category than those for non-rural small communities.
The disappearance of competition, increased concentration, no new entry and inability of new entrants to penetrate many airports throughout the country have created enormous problems for many travelers in large portions of the country. Unless it is reversed, the situation will continue to deteriorate.
There is only one rational solution to restoring the American public's faith in deregulation. The mandate is clear. We must complete the deregulation effort now. Open all markets, encourage new entry, stop predatory behavior and lessen the power of alliances. Only then can we resolve the deregulation debate once and for all.