Full Circle for the Airlines

Outside the Box



photograph by Kenny1

In this age of increased fares, delayed and 
crowded flights, congested airports in some cities, almost deserted ones in others, increasing special fees, and generally poor service, more and more business travelers are starting to reconsider their positions on the regulation of the airline industry.

As the airlines argue, it is somewhat of a catch-22 for them.

None of us can legitimately argue that fuel costs have not negatively impacted airline costs and fares. Airlines have low fixed costs and high variable costs, with much of the latter consisting of fuel expense. For example, at the recent jet fuel price of $2.969 per gallon, the cost per hour to operate a Boeing 757-200, Delta’s predominant aircraft, would be about $3,100.

Obviously, these costs must be recovered through fares, but this is not the major complaint of most of today’s passengers, particularly the business travelers. The concern is the quality of product received for the price. Fares are high and erratic, varying with Saturday night stay-overs, lead time, and other considerations. But, of course, that only comes into play when the airline offers the flights you need when you need them, which is becoming less and less frequent, particularly to and from Memphis.

Fees have become a major irritant to most fliers. In 2011, domestic airline revenues from all fees totaled $5.8 billion, with more than half of that for baggage. That naturally has resulted in more carry-ons with no space left for the last passengers to board the aircraft. Oh, by the way, don’t forget to pay the fee for the extra leg room if you want some semblance of comfort.
Obviously, poor service such as a flight delay is often not the fault of the airline. But when things do go wrong, often the airline employees seem ill-equipped to deal with the issue, compounding an already unpleasant experience.

The mergers and acquisitions in the industry have probably been the major source of higher fares and other unpleasantness. Memphis is a case in point. Since Delta’s acquisition of Northwest in 2008, flights out of Memphis have been reduced by more than 30 percent, and airfares have been in the top range of the country’s 100 major airports, about 30 percent higher than the national average.

What surprises me is that so many people are surprised. It makes no sense for a firm to acquire another if it does not plan to gain synergies and eliminate costs of duplication of services or products. And an axiom in the industry is that carriers will charge “whatever the traffic will bear.”

Is re-regulation the answer? Many think so. As a longtime proponent of deregulation, I am on the fence on this one, although about to fall off.  The Airline Deregulation Act was signed into law on October 24, 1978. The Civil Aeronautics Board had set fares, routes, and schedules for the airlines, and the 1978 act removed that power. The stated goals of the new legislation included “the avoidance of unreasonable industry concentration which would tend to allow one or more air carriers to unreasonably increase prices, reduce prices, or exclude competition” and “the encouragement of entry into air transportation markets by new air carriers, the encouragement of entry into additional markets by existing air carriers, and the continuing strengthening of small air carriers.” Sounds nice, doesn’t it? But we are right back where we were in the early ’70s.

The Memphis-Shelby County Airport Authority, the mayors, and the passengers are trying to do all they can, but this is a very different and uneven playing field. When Columbia, Missouri, agreed to give incentives to American Airlines to provide flights to and from Chicago and Dallas-Fort Worth in exchange for a revenue guarantee, Delta pulled their flights to and from the city.

Why? Delta said it wasn’t fair.

I believe it is time for the airline regulation question to be revisited. While I hope that re-regulation is not the only answer, it is time to consider it seriously.

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