Airline Re-regulation

The process of airline re-regulation is about to start with DOT's decision to fine airlines that keep passengers waiting in planes for more than three hours before takeoff. Airline deregulation started in 1978 and there are two views about how successful it has been. The first view, advanced by neo-liberal and neo-conservative economists is that airline regulation has had "... overwhelmingly positive results." Any small problems (poor service, bankruptcy, safety violations, monopoly practices, overloaded traffic control systems, NIMBY constraints on more airport construction, lack of profitability, luggage fees, TSA shake-downs, intransigent unions, terrorist attacks, etc.) would be solved by more free market fundamentalism.

The other view is that airline deregulation has been an unmitigated disaster--for all the same reasons. Environmentalist would also add that air travel has a very large carbon footprint (even higher than automobile travel). In fact, airlines will be the first industry (even before coal-burning power utilities) to face cap-and-trade requirements in the European Union.

Which side of the argument you favor depends to some extent on your view of the future. If the future holds unrestrained exponential growth in air travel with continually decreasing prices, your projections about the future are probably based on assumptions about how increasingly free markets generate unlimited economic growth. If the future doesn't look that positive, you probably favor some kind of airline re-regulation. You might also favor a broader perspective that looks at a range of transportation alternatives (you probably recall that the Penn Central railroad failed a few years before airlines were deregulated and marked the end of long-haul private-sector passenger service in the US).

So, how well does the airline free market work and what are the predictions for the future? The figure above (data from the US Bureau of Transportation Statistics) shows a forecast for the airline market with airfare prices on the bottom graph and airline operations on the upper graph. Prior to 2009, there was a huge expansion of airline operations peaking in 2008 with very modest price movements (actually, prices have been highly variable, increasing to 2001, decreasing to 2005, increasing again to 2008 and then collapsing during the subprime mortgage crisis--the time plot is just compressed due to the large forecasted price increase).

The forecast suggests that we haven't seen anything yet: prices are going to skyrocket and operations are going to stagnate. If this happens, travelers are going to divert to automobiles (my wife and I are already doing this for long trips in the US). We would use long-haul passenger train service (as we do in Europe) but that was dismantled in the late 1970's. If only the system had not been dismantled in the brave new world of economic deregulation. Do you think we'll all ever have personal jet packs?

P.S. My forecasting model finds that there is very little interaction between quantities and prices in the airline market. That shouldn't be surprising since operations are flow-constrained. Market fundamentalism won't remove the current network and environmental constraints so the neo-liberal dreams of unconstrained growth in air travel are just dreams.