Has deregulation really helped consumer?

[PCL_128]

This was something shown on PBS's Newshour and I though you guys might like to see it. It debunks a lot of the deregulation myths we always hear.

"PAUL SOLMAN: 25 years after the deregulation of America's airline industry, it would seem to be flying blind. The skies may still be friendly for United, but back here on earth, the business climate has become positively hostile. United is bankrupt; so is U.S. Airways, flying belly-up since August. In fact, 2002 was the worst year ever for the U.S. airline industry: $9 billion dollars in losses to go with $7 billion the year before. Even pre-9/11, however, customers had begun to complain that planes felt more and more like cattle cars, were less and less able to take off and land on time. So we traveled to Ithaca, New York, to ask the architect of deregulation, is it now time to re-regulate? His answer, "no way."
ALFRED KAHN: I certainly don't want to have the government back in the business of trying to restructure the airline industry. That would be catastrophe.

PAUL SOLMAN: Alfred Kahn was a professor at Cornell University back in 1977, when President Jimmy Carter lured him to Washington to help shut down the CAB -- the Civil Aeronautics Board-- and replace a tangled web of regulation with free market competition. It was, at the time, a radical move.

ALFRED KAHN: I said there was the possibility that you would have competition that might even be regarded as destructive. It was a risk I was willing to take.

PAUL SOLMAN: And still am, still are?

ALFRED KAHN: Oh, absolutely.

PAUL SOLMAN: So you don't regret deregulating the airlines?

ALFRED KAHN: Oh, dear, not at all. I mean, it's the greatest thing I ever did in my life, other than have children. What I did has been extraordinarily beneficial to millions and millions and millions of people every year who couldn't afford to travel, who now can visit their grandparents-- which now strikes home to me-- go home for vacation from college, who can travel and indeed be tourists and go to Europe for two or $300, have broader horizons.

PAUL SOLMAN: Compare this, says Kahn, to the supposed golden-era when Eastern was number one to the sun, TWA was up, up and away, Pan Am made the going great. And, yes, the going was great, so long as you could afford it. High fares kept lines short, besides which, line length was actually regulated. Planes were commodious, even sandwich size was mandated. The skies were roomy. In short, traveling by air was traveling in style. But then came the 1970s, and a devastating double whammy: Recession and inflation.

PAUL SOLMAN: Problems in the Middle East choked off the supply of oil, driving prices up and drivers nuts.

DRIVER: It's going to be a hot summer. It going to be rough. Going to be a lot of trouble.

PAUL SOLMAN: The economy as a whole suffered, and recession reigned. For the airlines, higher fuel prices meant higher fares, stoking inflation, just as incomes due to the recession were going down. Passengers began to stay away in droves. Now, you might think the obvious move would have been to cut prices. But one carrier cut, another cuts more, and soon you have a price war, which hurts all airlines. Regulation, historically, protected them from such cutthroat composition, so they figured they could simply wait for the customers to return. Enter Alfred Kahn, tapped by President Carter to deregulate the industry for its own good, and fight inflation by forcing competition to produce cheaper seats, more flights.

FLIGHT ATTENDANT: Welcome aboard Jupiter Airlines 230 mile flight which would take you straight to the heart of none other than good old big city, otherwise known as Dallas.

PAUL SOLMAN: The major airlines didn't like it, neither did the unions, and even some customers were unhappy. Still are. What do you say to people like me who say, "gee, I liked it better in the old days. I'm more worried now about whether the planes are safe, I'm more uncomfortable. Go back, go back!"

ALFRED KAHN: All right, let me say two things. First, let's get safety out of the way. Airline accident rates are down much more than 50 percent. (The ongoing trend, the rate of decline in accident rates, was greatly reduced, which he conveniently fails to mention.)Safety has continued to improve, we never deregulated safety. But discomfort, in part, I have to say, as we used to say in the army, "TS" the major benefit of deregulation was to make travel available for common folk.

PAUL SOLMAN: So you don't care that I'm not as comfortable as I was?

ALFRED KAHN: Well, I really do, because I think by the same token, is I want to have different price quality options, I really do want a quality high-priced option available. But you can't complain about having to pay what it really costs. And what it really costs is that you're denying that space to somebody else.

PAUL SOLMAN: So I shouldn't complain, I should just pay the freight.

ALFRED KAHN: Precisely. Don't complain at having to pay $2,000 going across the country round-trip, and yet demand the same kind of service as you had under regulating.

PAUL SOLMAN: Alfred Kahn is a liberal Democrat, but first and always, he's an economist. That means he's a devout believer that the market should conserve any scarce resource by charging you what it really costs.

ALFRED KAHN: The beauty of the intense price competition that was set off and made possible by deregulation, has had the effect that the average load factoring planes were filled 52.8 percent full, in the decade before deregulation. In the last several years, they've been filled over 70 percent.

PAUL SOLMAN: In other words, what's bad for comfort can be good for business. When regulation was lifted, competition took off, prices came down, passengers lined up, the industry grew, its workers made more, and it became tougher to run an airline. Low-cost carriers like Southwest could now challenge the big guys. More capacity meant fierce fighting for the other guy's customers. But the industry as a whole was making money until another double whammy: The economic slowdown of 2001 followed by September 11.

PAUL SOLMAN: We're sitting here at the table at a moment in time where U.S. Air, the plane right out the window there, is in bankruptcy. United has just gone into bankruptcy, Continental was in bankruptcy, and since you started deregulation, Braniff's out of business, Texas International's out of business, Eastern's out of business. I probably can't name half those.

ALFRED KAHN: Many would. Do you know how many restaurants that get opened every year last beyond the first five years? It's a tiny, tiny fraction. That's part of the market economy, the competitive market economy. If you believe in competition as the best possible protection for consumers, you have to accept losses of money by investors.

PAUL SOLMAN: But we're talking about lost jobs as well.

ALFRED KAHN: Do you know what's happened to total employment in the airline industry? It has gone up, last time I looked it's gone up 60, 70, 80 percent. (Meanwhile, since 1978, the U.S. economy has increased in size, what, at least 200 or 300%???)We have increased the number of jobs in the industry markedly, as I predicted, because via competition, we have developed markets that didn't exist before, we have greatly increased the number of air flight schedules, I mean enormously increased, and enormously increased the industry.

PAUL SOLMAN: In fact, Kahn says, he tried to explain this 25 years ago to the AFL-CIO, which opposed the signing of the Airline Deregulation Act of 1978.

ALFRED KAHN: Their interest may have been conceived not so much in terms of new jobs for other people, but high wages for their own members. That's where the monopoly profits of the industry went. They went to the unions, particularly the pilots and the machinists, and especially the pilots. I don't mean to paint them as villains. I mean, I've always been a supporter of the trade union movement, but I know a monopoly when I see it. And the fact that it's a monopoly of particularly skilled, well situated, strategically situated unions doesn't make it more acceptable.

PAUL SOLMAN: You don't have to buy Kahn's view about the role of pilots, but there's no question that whoever is to blame, deregulation has hurt the innocent. Small communities, like Kahn's own, Ithaca, are reeling. Since 9/11, airports in small and medium sized cities have lost about a third of their scheduled flights. Airport director Robert Nicholas, whom Kahn has known for years.

ROBERT NICHOLAS: My concern is that once you establish a pattern of people saying, well, there's nobody at Ithaca any more, we're going to have to go to Syracuse to get airline service, that they begin to get used to that, you establish a pattern and then they never come back.

ALFRED KAHN: As we say politely, the market works, but with lag. But clearly, it's not going to be the kind of service we get now.

PAUL SOLMAN: But, says economics, if there aren't enough Ithacans willing to pay enough to make air travel profitable here, that's proof they prefer to go to Syracuse to get on a plane given the relative prices. Whether planes fly to Ithaca or not, however, there's a bigger question: Where is deregulation going to take us? One of Kahn's chief economists when he was in Washington is fellow Cornell faculty member Robert Frank, who helped implement deregulation back in the '70s.

ROBERT FRANK: We're just going to have to see some consolidation, we're going to see some more mergers, we won't have 15 carriers by the time the dust settles.

 

[PCL_128]

Part II

PAUL SOLMAN: Is that a good thing though?

ROBERT FRANK: If it would be just as cheap and convenient to have 20 airlines, then that would be better, but what we know is that consolidation reduces costs. When we have one carrier, people don't lose their luggage as often. They have a little more convenience arranging their reservations, the super saver programs don't cause as much confusion. So on balance I think we would all gain as consumers if there were fewer carriers.

PAUL SOLMAN: Well, that may be debatable, but in any case, economists think market competition should decide.

ALFRED KAHN: The real protection of the public has got to be competition. And it was overwhelmingly because regulation suppressed competition that I opposed it, as did the Department of Justice Antitrust Division, as did the federal trade division, as did all other people who are really concerned about the industry, the poor, people of modest means, and people coming into the labor market.

PAUL SOLMAN: And says Alfred Kahn 25 years after the biggest policy push of his career, deregulation has brought air travel to those of modest means, has increased employment, has, in short, grown the airline industry for better and worse. But though there were costs to deregulation, they were far outweighed, he thinks, by the benefits, and that's all any economist can ask."

(Read these two consumer reports articles that reveal the truth. The first is about deregulation generally and the second about airlines specifically):

http://www.consumerreports.org/main...D=1042487785583

Deregulation was supposed to cut prices, expand choice, enhance service--improve your life. So how come you're not smiling?

Imagine Bank of America simply reneging on your "free checking for life"; Sprint signing you up for eight-times-higher phone rates; AT&T Broadband charging $44 a month for a poor-quality cable-TV signal, kiss-off customer service, and not even The Weather Channel.

Unfortunately, there's nothing imaginary about treatment like that. There are no apologies, either. Broken promises, deceptive marketing, and dreadful service have become accepted business practices in an increasingly Wild West marketplace, where incessant telemarketers interrupt your dinner but customer service won't answer the phone.

Talk to Michael Jacob, a technical writer from Oakland, Calif., one of hundreds of consumers who wrote us about such problems over the past two years. Bank of America told him that it planned to add a monthly fee of up to $12 to his free-checking-for-life account. When he protested, the bank told him he would have to produce his original 1985 agreement with the bank. Of course, he couldn't.

How did business practices get so shabby? One root cause is an economic experiment begun in the 1970s: deregulation.

During the previous 80 years, policy-makers believed it necessary to regulate certain industries that tend to create monopolies or oligopolies of two or three giants likely to collude. One aim was to protect consumers from the lusty excesses of concentrated business power: price fixing, poor service, and scarce choice.

In the 1970s, however, proponents of deregulation argued that government rules stifle competition and efficiency. Deregulation was supposed to undo that and give consumers lower prices, better service, and greater choice as companies vied for their business.

Airlines were the first major consumer industry to be deregulated, in 1978. Banks, cable television, and telephone service followed in the 1980s. Other deregulated industries include trucking, railroads, and natural gas. Now electric utilities are doing it.

Problem is, many deregulated industries have retained their monopolistic proclivities. The big players have advantages or engage in predatory practices that can stifle competition as effectively as regulation supposedly does. Competition, after all, can and often does eliminate competitors.

Many economists continue to support deregulation. They chalk up the recent California utility debacle and the Enron scandal to poor implementation of fundamentally sound theory--a pardon they don't allow for the deficiencies of regulation.

But there are signs the pendulum may be swinging back, as it already has in one bellwether state. "We know from bitter experience in California that more regulation is needed," says Loretta Lynch, president of the California Public Utilities Commission.

We took a closer look at five industries where deregulation has had a direct impact on consumers: airlines, telephone, cable TV, banking, and electricity. For each, we assessed six key measures and dug for data in over a hundred public and private studies.

Our findings: While consumers have made some gains under deregulation, on balance they've lost ground. Service has typically deteriorated. Consumer rights have sometimes suffered. Claimed price cuts are often not all they seem. And when free markets have gone bad, deregulated industries have seen no contradiction in getting multibillion-dollar government bailouts.

We also looked for patterns across businesses. It's easy to see blackouts or a sky-high cable bill as unrelated frustrations of modern life. But we found these disturbing trends:

The oft-repeated claim that deregulation cut consumer prices while regulation kept prices artificially bloated is a myth. The inflation-adjusted cost of airfares, telephone service, and electricity were falling for decades before deregulation. Cable-television costs, which had decreased when the industry was regulated, rose sharply after deregulation.

The marketplace has become more adversarial toward consumers. Absence of strict rules has inspired aggressive tactics, which have led competitors to respond in kind. Sellers have gained disproportionate power over buyers through widespread use of hidden charges, fine-print loopholes, ever-changing prices, and unauthorized switching of service.

When Congress deregulated industries, it didn't just untie the hands of business. In many cases, it straitjacketed consumers. For example, the Airline Deregulation Act of 1978 quietly exempted airlines from states' basic deceptive-practices laws that prohibit such things as bait-and-switch advertising. (Codeshares are by definition bait-and-switch advertising.) The Supreme Court in 1992 upheld the airlines' immunity.

This report details how deregulation has affected consumers and what they can do to better protect themselves.

RECOMMENDATIONS

Elected officials need to reassert their authority. Here's how:

Regulation of monopoly markets. When there isn't enough true competition, regulators must protect consumers from monopolylike power.

Vigorous antitrust enforcement. This has been a known antidote to market abuses since the 1890s.

Strong consumer protections. These safeguards are needed:

A truth-in-airfares disclosure and a passengers bill of rights.

Protection from unreasonable and capricious bank fees.

Mandatory cable and telephone customer-service standards with meaningful dollar penalties to encourage compliance.

Electric-service-reliability standards and tough financial penalties for failing to maintain sufficient generating-capacity margins.

Help from the states. We like legislation introduced in 2000 by U.S. Rep. Tom Tancredo, R-Colo., which would help regulators enforce federal consumer protections by allowing state attorneys to initiate enforcement action under those regulations. Tancredo's bill never got out of committee. It should be reintroduced.

Deregulation should never be no regulation. Free markets are ever changing, and players are always devising new mischief. Government must remain vigilant of abuses and respond swiftly."

Airline specific information:
http://www.consumerreports.org/main...D=1042487786129

"AIRLINES
WHAT WAS DEREGULATED: Airfares, schedules, and routes in 1978.

SAVINGS: A 20-year decline in fares has continued under deregulation.

SERVICE: More connections, delays, cramped seats, and uncomfortable small planes.

CONSUMER RIGHTS: Airlines have been exempted from state consumer-protection laws.

SAFETY: Security deteriorated, even though it remained regulated.

CHOICE: Some new low-fare carriers, but only five major airlines control 73 percent of the market.

INNOVATION: The hub-and-spoke system created airport congestion and delays.

 

[PCL_128]

Part III (Last one, I promise)

THE FACTS ABOUT THOSE CHEAPER FARES

QUICKER TO DRIVE Eager to offer choice, airlines offer frequent flights on small planes. But that's led to delays and airport congestion. Rick and Marcia Kahler, of Rapid City, S.D., shown with Davin and London, say it once took them 24 hours to get home from Denver on Air Wisconsin, United's commuter partner.

Much of deregulation's claim of success hangs on falling airline-ticket prices. Indeed, inflation-adjusted airfares dropped 37 percent in the 22 years since deregulation commenced in 1978. But over the 22-year period before deregulation, inflation-adjusted airfares fell just as much and just as fast.

Meanwhile, lower prices after deregulation aren't what they seem. Ninety-six percent of tickets sold today are discounted, yes, but most are also saddled with restrictions. Most regulated fares were unrestricted. "A discount ticket is a different-quality product than an unrestricted ticket," says Daniel Ginsburg, an economist who tracks airfare-price inflation at the Bureau of Labor Statistics.

In other words, consumers are paying 37 percent less for inferior quality. In an apples-to-apples comparison, deregulated full-coach fares in 2000 were 65 percent higher than their regulated equivalents in 1978, on average, even after adjusting for inflation.

Another myth is that discount tickets were an invention of deregulation. In fact, airlines used to offer hefty discounts for family travel. So a family of four traveling round-trip, nonstop from Los Angeles to Miami, and buying seven-day-advance discount tickets, would have paid 56 percent less in 1970 than in 2002, adjusted for inflation.

The terrorist attacks of Sept. 11 severely cut demand for air travel and artificially improved quality of service on measures such as on-time arrivals. That aside, quality of airline service has gotten worse under deregulation: Planes were 16 percent more crowded in 2000 than in 1977. Coach seats have been packed closer together. Our readers didn't rate satisfaction with airlines before deregulation, but in 1990 they gave the industry a score of 71 out of 100, which fell to 63 in 1998, the most precipitous drop we've recorded in any service industry.

Proponents of airline deregulation say service has improved, but they mean frequency, not quality, of service. Rick Kahler, president of Kahler Financial Group in Rapid City, S.D., is a reader who wrote to us saying that more of those frequent flights are on noisy, cramped turboprops rather than big 737 jets, almost half of which Rapid City lost after deregulation. "I'd rather have three jet flights a day than nine turboprop flights," he says. And the turbopropping of air travel is not confined to small, low-traffic destinations like Rapid City: Thirty-three percent of flights in and out of airports of all sizes were on turboprops in May 1998, compared with only 21 percent in May 1978, according to a General Accounting Office (GAO) study.

Consumer rights, meanwhile, have atrophied. Aside from inflation-prompted increases in the dollar limits on airline liability for lost luggage and penalties for denied boarding--rights created in the regulated era--"there have been no big new consumer rights created since deregulation," says Tim Kelly, a Department of Transportation regulatory coordinator for consumer protection.

Airline security was not deregulated, but airlines let it seriously deteriorate under the unwatchful eye of the Federal Aviation Administration. In 1978, airline screeners failed to detect 13 percent of dangerous objects in FAA tests. By 1987, the rate rose to 20 percent, and it went higher still for tests in 1991 through 1999, the GAO says; those test results, however, are now classified. "For all those in the know about security, what happened on 9/11 was not unexpected," says Gerald Dillingham, GAO aviation security director."

 

[bobbysamd]

Knee-jerk deregulation response

PCL_128, I promise to read your posts in depth later when I have more time.

For the moment, when I see Alfred Kahn and deregulation mentioned in the same sentence, my reaction is "no." Both volumes of Flying the Line and Hard Landing by Pettinger document airline deregulation well. For one thing, deregulation with union weakening in trail has hurt pilots. Aside from that (very selfish) observation, I view degregulation as bad from the pax's seat. Maybe fares are cheaper now but service is also cheap. I'm old enough to remember great service and great in-flight meals in coach on airlines. Also, there was better flight availability, more point-to-point service, and minimal hubbing. I will not include (greatly appreciated and 100% necessary) security improvement which many pax grin and bear but regard as a pain in the a$$.

No, I'm not a fan of airline deregulation but it was bound to happen sooner or later.

 

[larry]

....

I'm surprised more people did not respond to this. Its an interesting read.

I've learned to be wary of absolutes. I don't think a government run airline is a good idea any more than I think a completely free market is a good idea.

A completely free market leads to a predatory market like the one we have now. Essentially each airline is undercutting the others and hemorrhaging money waiting on the other guy to go out of business. Even if this goes as planned you are looking at having one national airline that survived in the end. The what happens to prices? I don’t believe for a second that regulation will skyrocket prices. They will go up in some places and go way down in others. The prices and the market would stabilize.

My regulated city owned electric bill is $100.00 a month. What is it in California?

Deregulation happens when some politician has a business interest. Want to bet on Jeb Bush attempting to deregulate insurance in Florida? That would be great for him and the insurance companies, but nobody else.

 

[SDF2BUF2MCO]

PCL, like Bobby, only have time to scan over.

The article makes some valid points but I would also ask would there be as many people flying today if it weren't for deregulation? I started flying as a kid in the 70's and remember well the great service (especially on Frontier...all "coach" class seating). I also remember when Frontier would take my bags and put them on Continental if I was flying onto a non-Frontier destination. With that said, I also remember my friends thinking it was a big deal to fly on a jet. Not so today.
Off the top of my head deregulation has made flying more accessible to the masses. Therefore, it has created more jobs in the airline biz (i.e., more pilot jobs, etc.). Realize it is only my layman's opinion and I'm being presumptuous that government regulation would not have allowed for the growth. This may be a bad analogy, but it is kind of like the coming of age with Kmart (sorta) and Wal-Mart. Don't think there were any major discount stores until the late 60's/early 70's. Before that you either went to JCPenny or the local five and dime. Good or bad, the airlines seem to be trying to figure out if they're going to be a Macy's or a Wal-Mart.
Great choice of a topic.

 

[bobbysamd]

Deregulation article review

I've read all three articles. My opinion hasn't changed from above.

I sure do remember Frontier's terrific service. I also remember few, if any, hassles with interline bags.

You get what you pay for. Southwest does a great job for what it provides, including point-to-point transportation. The rest have some catching-up to do to improve their service, including better connections for openers.

 

[Publishers]

Bobby

Bobby, we probably separate here again. The fact is that those that say poor old XXX does not have service anymore are full of it. Columbus Ohio had a dominant UAL on its CMH to Chicago run at $464 rt in the seventies. Some of these cities ended up bieng monopolies that no one could afford.

Another major problem with deregulation was the lack of incentive for carriers to get control of their costs before. Like utilities today, the guarantee of profit led to abuses.

The public may have been served and after all, that is who we serve, not pilots or employees.

 

[bobbysamd]

Service

The public may have been served and after all, that is who we serve, not pilots or employees.

I dunno about that. Let's define "service." Frequent flights, for sure, although the majors have cut back post 911 and because of the recession. But some of this "service" is ludicrous. For example, I was just perusing United's DEN-ORD schedule. One flight showed the following "intinerary":

United Airlines 787
Boeing 737-500 8:05 pm
Denver (DEN) 8:58 pm
Las Vegas (LAS) 1st Y, Coach WL Non-stop 629
United Airlines 1058
Airbus A319 11:45 pm
Las Vegas (LAS) 5:06 am (Next day)
Chicago (ORD) 1st WL, Coach WL Non-stop 1515

(copied from the United timetable)

Perhaps this is an extreme example, but I submit that it is typical. And ridiculous! Going from Denver to Chicago via Las Vegas?!? AMTRAK is only a little slower. You're in Florida, Pub; that's like driving from Vero to Ft. Lauderdale via Orlando (at least it would avoid much of I-95! )!

I did allude to pilot salaries and welfare in my earlier post. That is important. Airlines are very much a service and hospitality business. I just don't see deregulation really benefiting pax. I know that lower fares and free market has attracted more people to the airport than before. Therefore, you would think that the airlines would be rolling in coin. Except for a couple, they're not.