Would a return to regulation be good for airlines?

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Would a return to regulation be good for airlines?
Difficult market has industry looking for solutions

By KELLY YAMANOUCHI
The Atlanta Journal-Constitution
Published on: 06/27/08

No denying it: Combine astronomical jet fuel prices with a weak economy, and the U.S. airline industry faces severe financial challenges.

But does it lose its viability as a market-based enterprise? Some say yes and are calling for a return of regulation. The airline industry has been deregulated since 1978, a move that led to the rise of a number of low-cost carriers, heavy competition, low fares and more choices for consumers.

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Deregulation also has made it more difficult for many airlines to survive.

One of the most prominent people calling for re-regulation is former American Airlines Chief Executive Robert Crandall.

"It is time to acknowledge that airlines look and are more like utilities than ordinary businesses," Crandall said during a speech June 10 at The Wings Club, an industry group in New York.

"I think a dollop of regulation, along with new government policies and appropriate investment, would help the carriers get back on the right track."

Politicians including U.S. Rep. Steve Cohen (D-Tenn.) have suggested the idea of re-regulation, and labor unions including the International Association of Machinists and the Air Line Pilots Association argue that the federal government should step in to bring stability to the airline industry.

Others praise the benefits of deregulation.

Delta President and Chief Financial Officer Edward Bastian said he believes deregulation "has been a great success."

"Air travel today has never been more affordable and significantly lower in real dollar costs," Bastian said. "It's almost half what it was prior to deregulation."

AirTran general counsel Richard Magurno said deregulation allowed discount airlines like his to develop and helped airline hubs like Atlanta grow into economic powerhouses.

"In a regulated environment, AirTran would not be able to provide the deep-discounted fares that presently have exploded in the Atlanta market," Magurno said.

But Crandall believes deregulation has "worked poorly" in the airline industry.

"Market forces alone cannot and will not produce a satisfactory airline industry, which clearly needs some help to solve its pricing, cost and operating problems," he said.

He proposed regulation limiting airline schedules to address congestion, creating financial standards, addressing labor issues, managing bankruptcies and revising anti-trust laws.

Crandall suggested establishing a minimum-fare threshold.

He also proposed an alternative requiring passengers with connecting flights to pay the sum of what those fares would be if purchased as individual flights.

That would mean nonstop flights often might be cheaper than itineraries with a connection, while today nonstop flights are often more expensive. Flying nonstop is the cheapest way to carry passengers, Crandall said, and airlines face a need to increase their fuel efficiency.

It "turns the conventional wisdom about hubs on its head," Crandall said.

Such a dramatic change in the established hub-and-spoke airline system would affect major cities, like Atlanta, which have grown because of their airport hubs, as well as rural areas that could end up with fewer flights — or perhaps no service at all.

At a conference of airport executives in New Orleans earlier this month, "the anxiety and angst among airport managers large and small about the future of the industry — it was palpable," said Roger Cohen, president of the Regional Airline Association, a Washington-based trade group representing small feeder airlines.

Many communities have an economy boosted by airline service, with Atlanta as a prime example, Cohen said.

"All that is in jeopardy," he said. "And the cascade effect of that on everything from manufacturing to tourism to traveling salesmen, it's just real scary."

AirTran's Magurno said with re-regulation "people are looking for some sort of easy solution that doesn't really address the problem.

"The problem is not regulation or deregulation of the airline industry. It's fuel prices," Magurno said. "What minimum fare covers $200 a barrel fuel? ... You raise fares until nobody can afford to travel."

"If the government would stand up and address the fuel issue, that would address the problem," Magurno said.

The Air Transport Association, an airline lobbying group that lists AirTran and Delta among its members, has called for regulation, not for themselves, but for the energy commodity futures market to control "excessive oil speculation."

"If Congress does not act soon, this country will not have a viable airline industry," Air Transport Association Chief Executive James May testified before a Senate committee this month.

Last week, Delta CEO Richard Anderson in a message to employees called on Congress to take action to control oil speculation.

Alfred Kahn, who as chairman of the federal Civil Aeronautics Board presided over deregulation in 1978, said that though airlines face challenges, "I just don't know what regulation would do."

To Kahn, the scenario in the airline industry today is akin to what he saw in 1977. "At a time when we were increasingly worried about the energy problem, I didn't view it has my highest aspiration to make it easy for people to jet all over the world cheaply," Kahn said.

The only way to preserve the level of airline service the public has come to expect, Kahn said, is to subsidize it. "And I'm not ready to subsidize it, especially given our energy problems. I'd rather subsidize rail transport or even bus transport."

Crandall, the former American CEO, predicted change will come.

"Our country's need for energy conservation and our airlines' need for profitability will inevitably generate an intensive search for new approaches," he said.

But at a Merrill Lynch conference this month, Northwest Airlines chief executive Doug Steenland didn't see re-regulation in the future.

"Anybody who looked at [re-regulation] seriously, I think, has concluded that the genie is out of the bottle," he said, "and I don't think it can go back in."

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Comments

By SE1

Jun 30, 2008 4:35 PM | Link to this

Delta hasn't had good customer service for a long time and it would truly be a disservice to Northwest which is a good airline if they were bought. It is also important to maintain Memphis and Charlotte as alternatives to Atlanta with different airlines to maintain competition and even the level of service we have right now. The less competition Delta has, the worse they'll get. Thank god for AirTran, Southwest, US Airways, American, and Northwest. They are all better than Delta.

By HERBIE

Jun 30, 2008 11:55 AM | Link to this

DEREGULATION HAS BEEN A FAILURE IN THAT IT WAS SUPPOSSED TO INCREASE COMPETITION; INSTEAD--WE NOW HAVE FEWER CARRIER CHOICES--AND NO QUALITY STANDARDS OF SERVICE...

DELTA ALWAYS MADE MONEY AND TOOK CARE OF THEIR CUSTOMERS AND EMPLOYEES; IT HAS FALLEN TO THE LOWEST LEVELS AND I PREDICT THAT THE MERGER PROPOSED WITH NORTHWEST WILL ABOUT FINISH IT OFF; AIRCRAFT AND CULTURES ARE MISFITS AND THE NUMBERS DO NOT WORK---

THE USA HAS NO VIABLE TRANSPORTATION SYSTEM; INTERSTATES FALLING APART; NO VIABLE RAIL SYSTEM; AND AIR TRANSPORT IN TERRIBLE SHAPE--- IN 1978 AT THE MOMENT OF DEREG THE USA HAD THE BEST AIRLINE SYSTEM IN THE WORLD--- AND NOW LOOK AT IT--- THAT SPEAKS FOR ITSELF--

By SE1

Jun 30, 2008 11:48 AM | Link to this

I think re-regulation would be great! Crandall is a smart man and I don't think that it would mean an end to Southwest and AirTran, but rather a boost to everyone else so that they could co-exist which each other. Delta SUCKS and Atlanta is one of the most ego-driven cities in the southeast so if the both of you have to right-size to the benefit of the rest of the region and country that's fine with me. We don't pay nearly as much attention to you or need your airport as you think we do.

By zorrotech

Jun 28, 2008 5:50 PM | Link to this

The first is treating employees like family, something Kelly insists has been true at Southwest since it was founded 37 years ago.

http://www.suntimes.com/business/lazare/1015690,CST-FIN-Southweb20.article

By zorrotech

Jun 28, 2008 5:46 PM | Link to this

Delta President and Chief Financial Officer Edward Bastian said he believes deregulation "has been a great success."

No wonder Delta stinks with idiots like Ed. Great success when? When Delta went bankrupt, when Delta was almost taken over by USAir? When employees were thrown to the streets? Ed, you are and will continue to be a moron.

By Nick

Jun 28, 2008 4:14 PM | Link to this

How could you regulate an industry that has grown exponentially since deregulation occurred 30 years ago. You can't. The problem we have today is artificially hyper inflated oil prices. The solution we need is getting planes to fly without so much expensive oil. Find a solution to this problem, but don't blame it on the hub system or the huge variety of aviation options we have available to us in the US. Remember the old cliche, don't throw the baby out with the bathwater.

By Jimmy

Jun 28, 2008 11:51 AM | Link to this

Agree. Need a short flight (1 hour or less) Southwest is fine. Kind of like fast food to kill the hunger. Is that the only option you want? No! If I'm flying and It's going to be a long trip I really would like (and am willing to pay for) something better. It would be a very crappy world if McDonald's was the ONLY option for dinning out in the entire country. A little variety is always nice. Also If there ends up being only one airline what would the incentive be to provide a descent level of service? None!

By Brian

Jun 28, 2008 9:51 AM | Link to this

You don't want Southwest in Atlanta. You have a good thing going with AirTran, who keeps Delta honest with fares and offers a nice service in return.

Southwest will put AirTran out of business in a matter of months by offering ridiculously low fares to markets AirTran already serves, forcing AirTran to match or lose passengers. Ultimately, Southwest has enough cash to fly those routes at a big loss for a number of months until AT pulls out. Then fares go back up.

We've seen it here in Denver with Southwest and Frontier.

I'm OK with Southwest for short-haul flights , like ATL-BNA, but I'd rather get a lap dance from Aretha Franklin than fly Southwest for longer than an hour or so. Awful. Terrible.

And if you're a business, count on adding an additional 1 hour to each flight to check bags, get there early enough so you don't have to sit in a middle seat, etc.

By turvy

Jun 28, 2008 9:35 AM | Link to this

Of course Robert Crandall wants regulation again. His airline, American, was in direct competition with Southwest there in Dallas, and clearly the only way American can beat Southwest is with help from the government. And as for Steve Cohen, the Democrat from Memphis, he's never met a government program he hasn't liked.

While de-regulation has hurt some small airports, over-all it's been good for consumers.

By Bill

Jun 27, 2008 11:20 PM | Link to this

Let's look back at the real affect of de-reg. Gone are the names of the pioneer carriers. How many of you out there every flew a Pan Am 707 on the JFK-LHR? great service even in coach. Remember Pan Am was the lead customer for the 747-100. Without those orders the greatest airplane the world has ever seen would never have gotten off the ground. The long range 747-400 had Northwest as the lead customer and that was the airplane that gave them fantastic range to expand their trans pacific operation. I can't recall all the carriers that have come and gone since de-reg came on the scene. As for Professor Kahn, his theory could be argued at the lectern. To bad he wasn't "qualified" to change a tire, check the oil level, work a weight & balance sheet or watch the end of the runway approach as the nosewheel was a bit slow coming up taking off heavy out of Hong Kong watching checkerboard mountain approach. Too many unqualified airline managers had pipe dream visions on how to run an operation....we're in major trouble with oil at $140 per bbl, what will happen when it hits $200? That will be a crisis point when a major global recession takes over. I left a major carrier in 1994 and I worry each month that my pension hits my bank account. Sad that this has happened in America.

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