Monday, January 24, 2011

Deregulation Works Better With Smart Regulators: Case In Point - Airlines

It's recent death of Alfred Kahn, the overseer or airline deregulation has brought up a lot of retrospectives.  Service may not be what it used to be, but airfares are about 70-80% less than they used to be, adjusted for inflation.  And since incomes have gone up, the overall affordability of air travel is understated just by the price level alone.

We've been through some bad times since deregulation.  The 1980s and the rise of the hub and spoke system resulted in the creation of ugly and idiotic restrictions that persist.  The booming 1990s led to terrible labor problems. (Remember the unions at United with CHAOS - Create Havoc Around Our System?).  And after 9/11, we had a period of removing just about every amenity not nailed down.

So we should pause today and reflect on a couple of things (1) it's really not so bad and (2) it's better here in the US than anywhere else.  Let me make the case for both.  First, on the side of it's not so bad.  The reality is that, despite some teething troubles as the industry has scaled up, the travel experience is not terrible.  More than 75% of all flights arrive on time.

Secondly, service is good and its getting better.  There was a time post-deregulation through 9/11 when airlines employees felt a long-simmering rage.  Many of the people you're flying with joined up at a time when expectations for pay and job security were much better.  The bankruptcies of the last decade gave airlines a chance to wipe the slate clean and employees the chance to move on.  Finally the last folks who worked under regulation or joined just afterwards are retiring, and with them will go the expectations that came with empty planes and genteel business travelers.

More important than a change in generation has been the standard set by the competition.  The no-frills companies that have come to shake up the airline industry have been built on model of service that sets a very high standard.  Southwest, jetBlue, and Virgin all have shown legacy carriers just how much work needs to be done to improve their own standard of service.

Free Food. Free WiFi.  More Legroom. Good Service.  Things really do suck, don't they?  (Photo from  mrkathica)

The result has been salutary: better food (even if you have to pay for it) and less 'tude even on the "full service" carriers.  If only they felt compelled to match Southwest by avoiding those huge change fees, deregulation could be considered an absolute triumph.  I've been flying a lot for most of my life, and things are better now than at any time I can remember.

And travel is better in the US than anywhere else.  While Europe and Asia have elements of deregulation, they're limited.  In Europe, especially, deregulation has somehow ended up as a sad farce rather than a real force for change.  Europe now has a parallel air transport system:  discount carriers in Europe operate from different airports avoiding head-to-head competition with mainline carriers at their hubs.  And, far from setting a high standard of service, Europe's discounters have worked to outdo each other in the creation of new and more horrific ways of treating their passengers.

Whats different here is that the US DOT has systematically forced Southwest and jetBlue into even the most congested airports as part of merger approval deals (Delta, United) and other changes. In Europe, major carriers continue to enjoy their fortress hubs at slot controlled airports.  Combine that with the fact EU deregulation covers a far smaller portion of the major carriers networks and you get a result that shouldn't surprise anyone: not much improvement.  Sure, Europeans still enjoy meals on short flights.  And fares 3-5x the US level as well.  That's one expensive cookie.

That deregulation in the US worked well is not an accident, smart regulators - including those who oversaw the period of regulation - architected a system that maximized competition.  30 years after deregulation in the US, though there are fewer major airlines, the big carriers are more likely than ever to face competition from a high service / low fare carrier on their routes - a huge achievement brought about by a "deregulation" that was handled very carefully by a smart, thoughtful deregulator.

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