COMMENTARY: MICHAEL MACDOWELL Antitrust case against airline industry

June 24th, 2015 9:28 am

First Posted: 8/21/2013

The tremendous growth in the airline industry that resulted from its full deregulation in 1985 was not unexpected. Alfred Kahn, an economist at Cornell University, predicted so in papers he wrote and in testimony he gave before Congress. He said if the Civil Aeronautics Board, (CAB), which had for many years regulated all aspects of the airline industry, were dismantled the public and the airlines themselves would benefit.

Kahn’s predictions came true. While there were causalities in deregulating the industry, such as Allegheny and Eastern Airlines, there were also tremendous benefits due to the entry of low-cost carriers like Southwest and Jet Blue. Deregulation resulted in the lowering of fares and a significant increase in the number of people able to fly.

Naysayers’ predictions that small airports, such as the ones that serve Wilkes-Barre, Pa., and Ithaca, N.Y., would be closed due to the lack of customers did not come true. Innovations, such as the hub-and-spoke system, where smaller regional carriers fly passengers to hub cities for transfer to big-city destinations evolved rapidly. Airline passenger counts doubled and then doubled again.

When asked if deregulation would result in the consolidation of airlines, Dr. Kahn suggested that the market would not allow that to happen. He also was quick to add, however, that the U.S. had passed a series of antitrust laws in the late 1890s that could be relied upon to protect consumers and smaller carriers alike from the vagaries of monopolies.

It has been quite a while since the dismantling of the CAB began in 1977 under Kahn’s chairmanship. The agency closed its doors for good in 1985 and full deregulation of the airline industry was in full swing. Many airlines have come and gone since then. The price of airline tickets have diminished significantly in real terms over the past 28 years and many more Americans are flying. Air travel is no longer a method of travel enjoyed only by the elite. It simply has become a mode of transportation for the masses.

Congress and the courts have therefore been standoffish about imposing restrictions on airlines, particularly in the case of mergers. However, the Department of Justice recently filed a lawsuit blocking the proposed $11 billion merger between US Airways and American Airlines, which is in bankruptcy. The reason: “the deal would hurt consumers and lead to higher airfares and fees,” the government is arguing. The merger, if successful, would create the world’s largest airline.

The federal government concluded that American Airlines and US Airways compete directly on thousands of routes, representing business worth tens of billions of dollars in annual revenue. The new combined airline, the lawsuit alleges, would result in higher fares and less service to many airports and regions of the country.

The Government Accountability Office’s (GAO) June report boosted the Antitrust Division of the Department of Commerce’s case. The GAO’s study said the new merged airline would be the sole carrier on seven of 12 routes in which competition currently exists.

It does not seem coincidental that the Justice Department, whose employees live mostly in-and-around Washington, D.C., and therefore would be hit the hardest by the proposed merger, filed the suit. The proposed mega airline would become the dominant carrier at Reagan National Airport and would control 69 percent of the landing slots in our nation’s capital. Remember, it was our Congressmen and Congresswomen, who as a group probably fly more than any other in the country, that recently amended the sequester legislation to assure that the furloughing of TSA gate inspectors would not hamper them and the traveling public in airports.

Regardless of the impetus for the decision, American consumers received good news when federal Judge Sean Lane told lawyers for American Airlines he will not approve the company’s planned merger with US Airways without seriously considering the merits of the government’s case.

The decision offers some hope that airfares will not rise significantly due to the lack of competition and that other annoying fees placed on the traveling public by the airlines will be somewhat mitigated.

There’s no doubt Kahn was correct. Left somewhat to its own devices, the market will create the optimal schedules and prices for airline passengers. Without some oversight directed at containing the tendency toward over consolidation, however, the airline industry will behave like other concentrated industries in the past. In the end, limited competition equals higher prices and fewer services.

- Michael A. MacDowell is a former economics professor, retired president of Misericordia University in Dallas, Pa., and managing director of the Calvin K. Kazanjian Economics Foundation. He is a resident of Harveys Lake, Pa.