Airline Regulation

Paul Gessing attributes the financial problems facing U.S. airline companies to excessive Federal interference. He makes two basic arguments. The first is:

the reality is that industry experts cite excess capacity as one of the biggest problems of the air carriers. Worse, when airlines act to reduce overcapacity and save costs, federal regulators often stand in their way. The pre-9/11 proposed merger between United and US Airways is just one example. At the time the two companies were forced to call off their planned merger when the U.S. Justice Department threatened to block the deal. The latest merger effort involves US Airways and America West. This deal will also face federal scrutiny that could once again bully the industry into retaining an unhealthy oversupply of capacity.

Gessing is basically arguing that unless we allow an oligopoly structure, overcapacity cannot be reduced. Yet, carriers such as Southwest Airlines do not seem to suffer from overcapacity. Speaking of Southwest Airlines, Gessling continues:

Yet another area in desperate need of reform within the aviation marketplace is air traffic control. According to Russell Chew, chief operating officer of the Air Traffic Organization within FAA, air traffic control is facing an $8.2 billion funding gap over the next five years. This shortfall mainly is the result of inefficiencies inherent in the unionized, government-operated system, combined with the ongoing decrease in ticket prices. The latter effect means that revenue from the 7.5 percent tax on airline tickets continues to dry up despite surging traffic. The solution to these problems is obvious: the federal government should “commercialize” air traffic control services and allow a private organization to manage them. Private management would be able to implement a more market-based pricing scheme and invest in new technologies to increase safety and reduce costs. Congress’s Government Accountability Office has studied air traffic control operations in 5 of the 38 countries that have commercialized operations — Australia, Canada, Germany, New Zealand, and the U.K. — and has determined that commercialization has brought on reduced operating expenses, improved efficiency through modernization, and a drop in unit costs, all without compromising safety. Aside from the systemic flaws plaguing the government’s policy toward the air travel sector, Congress’s tendency to meddle is also readily apparent in the existence of the so-called “Wright amendment.” This federal rule restricts flights into and out of Love Field near Dallas. The cities of Dallas and Fort Worth, and the Dallas/Fort Worth airport (DFW), which opened in 1974, tried unsuccessfully to force Southwest Airlines to move its operations from close-in Love Field out to DFW. Although they failed to force Southwest to move, the existing carriers convinced House Majority Leader Jim Wright (from Fort Worth) to push through Congress a measure designed to stifle the growth of Southwest and punish the up-and-coming carrier for not moving to DFW.

Whether privatization of air traffic control is a good idea would make for a very interesting debate. While Gessing is certainly right to complain about the political meddling exemplified by this Wright amendment, Southwest Airlines has done financially well over the years.

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