Consumer 12.0: Flight costs, measured in monopoly money

What ever happened to the “Southwest Effect,” where airline deregulation was touted as evidence that competition was working to lower fares?
What ever happened to the “Southwest Effect,” where airline deregulation was touted as evidence that competition was working to lower fares?
Posted: May 07, 2012

I had a nasty flashback when I booked a round-trip flight recently from Philadelphia to Pittsburgh. My choice was basically US Airways or US Airways, and the best nonstop fare for my Sunday-to-Tuesday trip was more than $550.

Only a few months ago, I could have taken the same trip for less than $200, and the reason for the difference was obvious. In January, Southwest Airlines called wheels up on the route for the last time. The next month, it quit flying from Philadelphia to Boston, and fares for US Airways’ flights on that route leaped, too.

For two decades, proponents of airline deregulation have touted the “Southwest Effect” as evidence competition was working for consumers. The idea was that low-cost airlines — not just Southwest, but a slew of new market entrants — would give the nation’s old-line carriers a run for their money, driving down fares on routes dominated by the so-called legacy airlines such as US Airways, Delta, and United.

Southwest’s pullback here — you might call it the “Reverse Southwest Effect” — shows how fleeting such gains can be, and you can probably guess why. That slew of low-cost carriers in the Southwest mold? Thanks to mergers and failures, it doesn’t exist beyond a handful of survivors such as JetBlue and Spirit Airlines.

For Philadelphia travelers, Southwest has been crucial to moderating fares. Until the Dallas-based airline began flying from Philadelphia International to Pittsburgh, fares on that largely monopolized route, which then linked two US Airways hubs, were among the highest in the country. Seven years later, they’re back in that same stratospheric class for passengers who don’t stay over a Saturday night — the mark most carriers use to separate less-price-sensitive business fliers from leisure travelers with more options.

Philadelphia air travelers remain relatively lucky — for now. Southwest still serves much of the country from here, and US Airways still uses the airport as a key transfer point in its hub-and-spoke route map. But that could change — Philadelphia could gain or lose service — if a proposed merger with American Airlines goes through.

Cincinnati learned about the downside of airline mergers the hard way when Delta Airlines pulled back there after combining with Northwest. Just a few years ago, Cincinnati’s airport offered nonstop flights to 129 cities, including Frankfurt, Germany; Amsterdam, the Netherlands; London; and Paris. But according to a report prepared for the New America Foundation by Phillip Longman and Lina Khan, the number of flights serving the airport has fallen by two-thirds, and an entire concourse stands empty.

Longman and Khan, who published a short version of their paper in April’s edition of the Washington Monthly, have come to a provocative conclusion: They argue that the late-1970s deregulation of the airline industry, a bipartisan effort aimed at benefiting consumers and unleashing the power of the market, was a costly mistake that the nation should finally get around to correcting.

Before the 1978 deregulation championed by President Jimmy Carter and Alfred Kahn, the economist who then ran Carter’s Civil Aeronautics Board, “the United States viewed airline service as a ‘public convenience and necessity,’?” say Longman and Khan.

The CAB assigned routes and set fares, trying to ensure that people in places such as Cincinnati received service roughly equal, in quality and price, to that provided to comparable communities. Essentially, airlines were regulated much like public utilities, on the assumption that even smaller cities relied on links to a crucial national network.

Your view of airline deregulation may well depend on where you live, work, and fly, which is one reason it’s hard to argue that airline deregulation has been a total failure. But for Philadelphians, it’s been, at best, a mixed blessing.

In the third quarter of 2011 — before Southwest dropped its flights from Philadelphia to Pittsburgh and the Boston area — travelers here had access to low-cost carriers on nearly two-thirds of the routes they flew, and paid a premium of about 7 percent more than average travelers on comparable routes. And it’s clear that deregulation’s success has long been questionable in places like Cincinnati.

When Delta’s hub still dominated their airport, Cincinnati passengers had lots of service but paid a large premium — 54 percent more than passengers on comparable routes in 1999, according to a Department of Transportation study.

Cincinnati passengers still paid a big premium last year, after Delta’s pullback. In the third quarter of 2011, they had no access to low-cost carriers and paid 38 percent more than passengers on comparable flights elsewhere — the worst premium among 121 airports.

Without a major hub, Cincinnati suffers doubly. It has lost at least one major corporate headquarters, with the decision by Chiquita Brands International to relocate to Charlotte, N.C.

Empty concourses in places like Pittsburgh and St. Louis are a reminder of similar threats to other cities as airlines’ seemingly endless financial woes threaten further consolidation.

Why has airline deregulation failed — or at least failed to deliver all its promise?

Longman says the biggest reason is wishful thinking among deregulators — including liberals such as Ralph Nader and the late Sen. Edward M. Kennedy, who worried that industries often dominate the agencies overseeing them, and conservatives, who were overly confident in Adam Smith’s “invisible hand” but often overlook his warnings on the dangers of monopolies.

Longman says Americans have long realized correctly that some vital, network-based industries, such as electricity and railroads, can’t be left entirely to the market. Airline service is every bit as crucial, he says.

One downside of reregulation is that travelers now saving on cheap, cross-country routes might have to accept the idea of paying to subsidize service to the heartland. But they’d get something in return, Longman says.

“Sometime, they may want to go to Cincinnati. That’s the network effect: We’re all better off if we can go where we want to go.”

Contact Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.

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