FLYING BLIND Airline Deregulation Reconsidered JAMES LARDNER ROBERT KUTTNER DĒMOS | 220 FIFTH AVENUE, 5TH FLOOR | NEW YORK, NY 10001 | 212.633.1405 | WWW.DEMOS.ORG - ABOUT DEMOS Dēmos is a non-partisan public policy research and advocacy organization. Headquartered in New York City, Dēmos works with advocates and policymakers around the country in pursuit of four overarching goals: a more equitable economy; a vibrant and inclusive democracy; an empowered public sector that works for the common good; and re- sponsible U.S. engagement in an interdependent world. Dēmos was founded in 2000. Miles S. Rapoport, President Tamara Draut, Vice President of Policy & Programs ABOUT THE AUTHORS James Lardner is a Senior Fellow at Dēmos and the co-author, with José García and Cindy Zeldin, of Up to Our Eye- balls: How Shady Lenders and Failed Economic Policies Are Drowning Americans in Debt. He is also the co-editor of Inequality Matters: The Growing Economic Divide in America and Its Poisonous Consequences. As a journalist, he has written for the New York Review of Books, The New Yorker and The Washington Post, among other publications. Robert Kuttner is co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow at Dēmos, where he is leading a new project on the future on regulation. He was a longtime columnist for Busi- nessWeek, and continues to write columns in the Boston Globe. His newest book, his eighth, is the New York Times best-seller, Obama’s Challenge. The book addresses the economic crisis that President Obama faces, and the need for him to be a transformative president and to embrace radical reform. His previous book, The Squandering of America (2007), explored the political roots of America’s narrowing prosperity and warned of an impending crash. The book won the Sidney Hillman award. ACKNOWLEDGMENTS This report, part of a series of Dēmos reports on Effective Regulation for the 21st Century, was made possible by the support of The Nathan Cummings Foundation, The Panta Rhea Foundation, The Public Welfare Foundation, the Association of Flight Attendants-CWA and the Association of Professional Flight Attendants. The authors are grateful to Jim Berard, Jim Craun, Paul Dempsey, Doug Feaver, Patricia Friend, Laura Glading, Lin- da Goodrich, Owen Herrnstadt, Thomas Kochan, Bill McGee, Kevin Mitchell, Bernadette McCulloch, Rep. James L. Oberstar, Mark Rose and David Smallen. Special thanks to Dan Akins. - DEMOS BOARD CURRENT MEMBERS MEMBERS, PAST & ON LEAVE Stephen Heintz, Board Chair President Barack Obama President, Rockefeller Brothers Fund Tom Campbell Miles Rapoport, President Juan Figeroa Ben Binswanger Robert Franklin Chief Operating Officer, The Case Foundation Charles Halpern Christine Chen Strategic Alliances USA Sara Horowitz Amy Hanauer Van Jones Founding Executive Director, Policy Matters Ohio Eric Liu Sang Ji Partner, White & Case LLP Spencer Overton Clarissa Martinez De Castro Robert Reich Director of Immigration & National Cam- David Skaggs paigns, National Council of La Raza Linda Tarr-Whelan Arnie Miller Founder, Isaacson Miller Ernest Tollerson Wendy Puriefoy President, Public Education Network Affiliations are listed for identification purposes only. Amelia Warren Tyagi As with all Dēmos publications, the views expressed in this Co-Founder & EVP/COO, The Business Talent Group report do not necessarily reflect the views of the Dēmos Ruth Wooden Board of Trustees. President, Public Agenda COPYRIGHT © 2009 Dēmos: A Network for Ideas & Action TaBLE OF CONTENTS EXECUTIVE SUMMARY 1 I. INTRODUCTION 3 II. THE PUSH FOR DEREGULATION 4 Raising the Alarm 4 Kahn’s Crusade 5 From Reform to Deregulation 5 III. DEREGULATION IN THEORY AND PRACTICE 6 The Fare Wars 6 The Dinosaurs Evolve 6 Hub and Spoke 7 The Big Get Bigger 7 The Collapse of Antitrust 8 IV. THE INDUSTRY TODAY 9 Increased Instability 9 Continued Consolidation 9 Declining Quality of Service 10 Deterioration of Pay and Working Conditions 11 Falling Prices 12 Scattershot Prices 12 V. SAFETY: NOT SO SACRED 13 A World Apart 13 A Logistical Nightmare 13 A Slippery Slope 14 VI. CONCLUSIONS 16 Getting It Wrong 16 Thinking Bigger 16 declining profi tability and rising instability. Th e indus- try ran up huge losses in the early 1980s and again in the EXECUTIVE early 1990s, and, the authors note, “each of those periods, SUMMARY too, was marked by a wave of bankruptcies and layoff s. Th e economic downturn of 2000 and 2001 sent the airline Th e February 2009 crash of a Continental/Colgan industry into another tailspin, with nine airlines fi ling for fl ight heading into Buff alo, New York called America’s at- bankruptcy before September 11.” tention to the deeply troubled state of the airline indus- try. Since 2000, U.S. airlines have reported net losses of more than $33 billion—almost twice their ac- cumulated profi ts from 1938 to STATISTICAL HIGHLIGHTS: 1999. Eleven domestic airlines fi led for bankruptcy protection in 2008 • Out of roughly 150 low-cost air- alone; nine shut down altogether. lines founded since 1978, fewer Th e surviving companies have been than a dozen are still operat- on a cost-cutting tear, with some ing; they account for only about resorting to steps that (despite pro- 10 percent of current airline capacity. testations to the contrary) clearly • Before deregulation, there were 11 major trunkline threaten passenger safety. carriers; today, the country has six large mainline car- Preliminary fi ndings in the Buf- riers—American, United, Delta, Continental, US Air- falo investigation suggest that the ways, and Southwest. e fi rst three, along with their pilot and copilot lacked crucial ex- regional partners, control two-thirds of domestic air perience and training; they may have travel. been operating on insuffi cient sleep as well. Since the crash, critics have • More than 100,000 pilots, mechanics, fl ight attendants, raised troublesome questions about ticket agents, cargo handlers and other airline workers the little-known regional airlines have lost their jobs since 2001. that now handle a growing propor- • e number of people on the payroll of the legacy air- tion of domestic fl ights, eff ectively between 1998 and 2006. acting as subcontractors to the big lines dropped 26 percent brand-name airlines. Th e major car- • DOT Data for US Airways, United, Delta, American and riers have been faulted for farming Northwest show labor costs falling by nearly a third, out more and more fl ights to these on average, between the end of 2001 and the beginning smaller companies, which, in many of 2006. cases, appear to have signifi cantly less rigorous hiring and training • According to the U.S. DOT, 2008 total baggage-fee standards. charges by U.S Airlines came to more than $1.1 bil- lion—a fi gure that is expected to triple by 2010. In Flying Blind: Airline De- regulation Reconsidered, a wide- • In 2007, more than a quarter of all fl ights were de- ranging new Dēmos report on the layed, accounting for 112 million lost passenger hours. industry, co-authors James Lard- • More than 100 communities have lost air service over ner and Robert Kuttner point out the past decade. that regional carriers now account for roughly 35 percent of all fl ight hours, more than double the 16 percent share that these companies held at the beginning of the decade. At that time, the re- Th e report traces the industry’s current troubles back port shows, two-thirds of all heavy aircraft maintenance to the decision, three decades ago, to lift most federal reg- was performed in-house, while today more than 70 per- ulation of air travel. “Deregulation was supposed to lead to cent of the work is outsourced, leaving federal inspectors a dramatically expanded universe of airlines—companies scrambling to keep up with nearly 5,000 repair facilities in big and small, old and new, competing and innovating for the U.S. and abroad. the public benefi t,” the authors write. Instead, “Today’s Th e report links these practices to a broader “race to industry is more concentrated than ever, yet lacks the re- the bottom” on service standards and labor practices. sources and motivation to make crucial investments in While many industry leaders blame the airlines’ diffi cul- equipment, technology, and human capital. And most of ties on the price of fuel and the current economic crisis, the major U.S. airlines appear to have no long-term strate- Flying Blind uncovers a three-decade-long pattern of gy except more of the same—more outsourcing, more ser- BLIND FLYING 1 vice cutbacks and hidden charges, more wage and benefi t reductions, and more consolidation in the hope of surviv- POLICY RECOMMENDATIONS ing long enough to be in a position to turn a profi t and FOR REGULATORY REFORM expand again during a future economic recovery.” e authors call on Congress and the relevant executive Even many of the original champions of deregulation agencies to make a thorough study of the airline industry. have acknowledged their failure to anticipate some of the Th ey recommend creation of a federal task force to ex- key results. By the late 1980s, the economist Alfred Kahn, amine the industry’s problems and propose solutions. who has been called the “father of airline deregulation,” Specifi cally, they call on the task force to: was writing: “I should have recognized that the naturally • Develop a plan to moderate the booms and busts and monopolistic or oligopolistic character of most airline build a more stable domestic airline industry. Here, markets…would continue—indeed expand—under de- the remedies could include capital-reserve require- regulation.” ments and bankruptcy reform. Kahn and others have taken refuge in the argument • Expedite (and establish stable fi nancing for) a mod- that deregulation has produced lower airfares and wider ernized Air Traffi c Control (ATC) network.