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First in a series on Deregulation

For the past couple of months I have been doing a fair amount of public speaking. Appreciating that this month/year represents the 30th birthday of the passage of the Airline Deregulation Act of 1978, most of my engagements have focused on the industry's evolution over the past three decades. Over the coming days on this blog, I will focus on where deregulation got it right; wrong; indifferent; or maybe even backwards. Today, I am going to start with one idea that just might be backwards.

Between Airlines and Airports: Who Really Creates the Economic Impact?

Do a Google search for the economic impact of aviation. The impacts on North Carolina, Oklahoma, Wyoming, Oregon, Nebraska and Texas will all populate the first page of that search. On the same page of the search you will find the Air Transport Association’s study of the economic impact of commercial aviation on state economies. As the ATA’s study and other studies say in their own ways: commercial aviation is inextricably linked to the health of the local, national and global macro economies.

The first page of ATA’s report quotes Pulitzer Prize winner Daniel Yergen:. "Every day, the airline industry propels the economic takeoff of our nation,” Yergen observes. “It is the great enabler, knitting together all corners of the country, facilitating the movement of people and goods that is the backbone of economic growth. It also firmly embeds us in that awesome process of globalization that is defining the 21st century."

My question: Are the airlines themselves enablers? Or facilitators? Yergen is probably right in suggesting a combination of inputs are necessary to create the commercial aviation industry. Any economic assessment of the impact of commercial aviation will measure direct benefits of the service; indirect benefits generated from the service; and induced benefits derived from air service on the economy as a whole.

In the most simple form, direct impacts are the earnings and employment generated by the service. Indirect benefits typically measure expenditures driven by the passengers who travel to the destination on the service. And induced economic activity is measured by related industries that benefit from the direct and indirect economic activity of the service – typically a multiplier of the direct and indirect activity.

Can Airlines Make Themselves Profitable on a Sustainable Basis?

Given estimates that the US airline industry will lose nearly $20 billion since deregulation, while local and national economies have expanded, could it be argued that the model is backward? Government policy is hell-bent on promoting competition in each and every market. The industry has delivered a network platform comprised of carrier-to-carrier competition, hub-to-hub competition, and the competition between network legacy carrier and low cost carriers. There is not a single airline flying for which the current revenue model works if only the fares charged passengers are counted.

In an article published in the current edition of Foreign Policy magazine, I note that US carriers of all ilks lose money per enplaned passenger when only passenger revenue is counted – a simple but telling analysis. Counting only passenger revenue, both the legacy and low cost carrier sectors have lost money per passenger since 2001. In fact the low cost carrier sector has only made money based on this metric three times since 1995. Thus the industry absolutely needs to raise fares, charge ancillary fees and/or continue its efforts to cut fixedcosts - or all of the above - as the loss per enplaned passenger calculations exclude interest expense and direct investments in the business.

Airlines have a long way to go before they find a sustainable operating model that manages to “feed” various stakeholders. In some circles there are calls for re-regulation. But this ignores the fact that the federal government already heavily regulates this so-called “deregulated” industry, so it is unlikely that further regulation is the answer.

Now the Question?

Maybe it is the communities that realize the economic benefits of commercial airline service that should subsidize the airline’s losses?

After all, it is not the airlines that are realizing millions– and in some cases billions - of dollars in economic benefits – profits that they would otherwise use to pay higher wages or invest in new equipment. Rather, most of the gains go to the communities in the US and around the globe that depend on air service to drive direct, indirect and induced benefits, even while many complain that air fares are too high. Some of these economic benefits go to support airports and the infrastructure around them, but most subsidize the local economy without direct gain for the airlines that generated benefits.

It Is All Local – Until You Have to Pay For It?
Let the Local Market Wet-Lease Service

If all politics are local; and local economies depend on airline service; then shouldn’t politicians in local markets explore ways to “buy” the air service they believe is necessary to support the regional economy while also satisfying the expectations of their constituencies on the price of that air service? In effect we already have a similar model in place in the practice of network carriers that purchase capacity from their regional providers that includes a cost plus arrangement.

If politicians and the communities they represent protest higher fares, fees and reductions in service, then the answer should be a simple matter of economics. Have the community pay the difference between the ticket revenue and the cost-plus of maintaining the air service, plus some reasonable profit for the airline to reinvest in its business. Already, politicians and community leaders boast about the the economic benefits of air service; alternately, those facing air service reductions are the first to cry foul based on their estimates of economic costs. The decades old airline-airport/community operating model of today could be reworked to meet the financial realities of tomorrow’s aviation market.

Economic activity stemming from commercial aviation service is already calculated every day. What is suggested should be a simple investment decision for communities. There is a price to pay for being a node on the global trading map and decisions to be made about what type of service best meets the need of a community. But it is not the responsibility of airlines to ensure your dot remains on the map.

Today many think that the low cost providers would be the answer to end all discussion. We would see, wouldn’t we?

More to come.

Reader Comments (3)

You are 100% correct. I've been telling people this for years, but no one wants to hear this from an airline pilot. The airline industry is one of the most highly regulated industries in the U.S. It is also more heavily taxed than the Alcohol, Firearm, and Tobacco industries combined. The industry is a “cash cow” for the U.S. government. Additionally, thanks to our hands on government, the so called “free enterprise system,” has little to do with the airline industry. I can explain that in more detail, but it is beyond the scope of this comment section.

10.23.2008 | Unregistered CommenterAnonymous

What deregulation?
As fares and routes became de-regulated, the airline industry became somewhat like a game of baseball with no "rules." The ensuing greed for market share and growth was like removing the foul ball lines and strike count.
Then the DOT (Dept Trans) simply transferred responsibility for the industry to the DOJ (Dept Justice) where airlines have been allowed to be sustained on artificial resuscitation for years on end. The same lawyers who regulated the DOT simply walked across the street and set up shop at the DOJ. Can anyone really call that "free enterprise" or "deregulation?"
Furthermore, airlines are so heavily taxed, that the government makes more money on each dollar than the airline itself! The cost of an airline ticket is so ridiculously low relative to inflation that it has become a public "right," not a business model. Lets not forget that air service outshines highways (40,000 deaths a year, congestion in every major city) and rail service (How many millions spent subsidizing Amtrak?). The revenue is there from cargo - sometimes more so than passenger revenue - and mail service. It just has been couched behind the veil of bankruptcy judge's decisions and uncontrolled greed.

10.28.2008 | Unregistered CommenterAnonymous

The air transport sector is one of the most regulated industries in the U.S. It is also paying more taxes than the industries of alcohol, firearms, and snuff together. The industry is a "cash cow" for the U.S. government. And thanks to our hands in the government, the so-called "free enterprise system," has little to do with the airline industry. I can explain that in more detail, but is outside the scope of this section of comments.

11.15.2010 | Unregistered Commenterseminyak villas

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