Free Market Approach to Preventing Air Service Monopolies

With the recent consolidations in the U.S. domestic airline industry, airlines’ record profits, and fights over legroom, customers can be forgiven for feeling less than compassionate towards the industry. However, it is important to understand how the airline industry is structured and how to increase competition.

Back in 2008, the aviation industry was in free fall. Every U.S. airline lost money except for Southwest which made a small profit by hedging its fuel prices. While, the great recession was a factor the underlying cause was an excess of carriers serving a smaller flying populace. For example, it was common for four legacy airlines to compete with each other on routes between medium sized cities such as Cleveland and St. Louis. If each of these four airlines was flying six half-empty airplanes between the cities, each airline lost a lot of money. But if only two airlines flew six full planes between the cities those airlines made money. The desire for airlines to increase their market share created this problem. Bankruptcy was a popular option but rarely fixed the problem. Investing in the industry became a joke and many analysts thought the entire industry could fail if it continued along its current path.

As a result the aviation industry turned to larger and larger mergers. Such mergers would strengthen the airlines and remove excess capacity. With the airlines’ balance sheets in the red, the Department of Justice (DOJ) accepted the rationale for mergers. Delta merged with Northwest, United with Continental and American with U.S. Airways. The DOJ attempt to block the American-U.S. Airways merger reeked of politics because the DOJ had allowed the other airlines to merge. Rejecting an American and U.S. Airways merger would create winners and losers. And due to the structure of traditional hub and spoke airlines, most merged airlines kept service to most cities.

As a result the airlines are much healthier financially, ticket prices are higher and planes are fuller. But while some people want to reregulate the industry to solve the problem, the best solution is to user the free market solution to stop monopolistic business practices. Many of the larger airlines have de facto monopolies in their hub markets and in providing service to small cities. Some entity such as a non-profit professional council should monitor airports to ensure that there are no barriers to entry at these airports.

The biggest problems are manifested by a limit on the number of gates, runways and secondary airports. Many airports have fewer gates than they need; larger airlines sometimes rent extra gates to prevent smaller airlines from entering the market; these larger airlines may also work to prevent airports from adding new gates. If airports need gates, the council should be able to issue a non-binding recommendation on adjusting passenger facility charges to build more gates. Many airports need more runways. The FAA could help by speeding up the approval process for a new runway. Extra crowded airports should also have the option to fast track new runway construction. The council should be able to issue a recommendation when this is appropriate. Many cities could use an additional airport. In these cities, existing airport authorities or the airlines often use politics to prevent new gate construction. The council should be able to offer a non-binding resolution suggesting the construction of a second airport. A non-profit council can help reduce monopolistic practices without the burden of onerous government restrictions.

Leave a Reply

If you want a picture to show with your comment, go get a Gravatar.