Tuesday, December 11, 2007

The Airline Industry is in Shambles: Anticompetitive is Good!

The article, "In the Crowded Sky, Change is Approaching," was published in the New York Times on December 11, 2007.

Quote from article: “I couldn’t get it through their heads that passengers are probably not interested in solving the delayed flights problem by having flights that cost twice as much, or having half the number of flights available to book on,” he [Mr. Stempler, a lawyer with Air Travelers Association] said.

My opinion: I will gladly pay the higher prices if that results in a more comfortable flying experience. Let the airlines declare bankruptcy to free up some market space.

The airline industry is a classic example of an industry with significant barriers to entry. In order to run an airline, one must purchase planes, hire pilots and flight attendants, and acquire landing rights at a limited supply of airports. These strong barriers lead to just a handful of airlines flying most of the passengers. Recently, low-cost carriers, such as JetBlue or Southwest, have emerged in force. They have driven prices down by creating competition and increasing the supply of available flights. On a positive note, consumers face a greater availability of flights and lower ticket prices. Producers suffer; competition drives the price closer to cost, reducing the profit margin. Currently, fuel costs are rising, reducing further the profit margin faced by airlines.

Today, with greater competition, planes are smaller and uncomfortable, airports are crowded, takeoff and landing slots are filled, and flights are delayed. In an unprecedented move during the Thanksgiving Holiday, President Bush declared that “business as usual is not good enough for American travelers.” The Pentagon opened up airspace to allow for the high traffic over the Thanksgiving weekend. Delays and crowded airports are the result of an over-crowded industry with too much competition.

So, what should the industry do?

First, consider regulation, where the government determines the price charged and the airlines that fly the routes. We already tried this, and it did not work. In the 1970’s, the Civil Aeronautics Board (CAB) controlled ticket prices and regulated routes; airlines were subject to long delays when attempting to add a route. It was argued that regulation led to inefficiencies and higher costs, resulting in the Airline Deregulation Act of 1978. Clearly, regulation is not the answer.

Second, consider status quo, with no change in the industry. The high competition results in many plane delays, overcrowded airports, and congested flights. This is not sustainable due to rising fuel prices, increasing consumer demand, and a relatively fixed supply of planes. Eventually something has to change.

Third, allow for airline mergers and a movement toward an less competitive industry. Mr. Stempler (quote above) certainly does not speak for every consumer. I would gladly pay the higher price associated with lower competition; I say allow the firms to merge. In order to avoid violation of the Sherman Antitrust Act and the Clayton Act, this must be done carefully. I suggest that the Department of Justice outline explicitly the allowable limits of concentration in the industry. Airlines, like Delta and United, are free to merge without all of the sunk costs associated with the approval process. In reducing the costs (both economic and monetary), the industry will converge more easily to a more highly concentrated industry (less competition).

With fewer firms (airlines) out there, the shortage of landing space and plane space will be alleviated. That Boeing 737 will not seem quite as crowded, and perhaps, all of those families with screaming babies will choose not to fly.
See, rising prices are not bad in all circumstances; those passengers no willing to pay the higher price are pushed out of the market. As long as prices are not too high, then those who want to fly will be able to comfortably.

Do you have any thoughts? I welcome your comments. Best, Nonthruths

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