No Harm No Foul?

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[Guest Editorial by Timothy J. O’Neil-Dunne – The views expressed herein are those of the author and do not necessarily reflect those of AirInsight]

The US DoJ has flexed its not inconsiderable muscle and has opened an investigation into the nefarious capacity habits of the 4 largest airlines in the USA.

The argument their “legalnesses” are making is that the US airline have artificially constrained capacity, restrained trade and are gouging the public. But we have to ask do they have evidence? Actually no, because the statements are being driven by interpreting in public comments from the IATA AGM which happened on American soil last month (June 2015). Not quite a smoking gun?

It is more than likely that there are the usual suspects, rabble rousers, who have managed to get one of the members of the House to raise the flag; (Senator Richard Blumenthal from Connecticut). He sits on the Senate Transportation committee and is the ranking Democrat on the Consumer protection sub committee.

Here is a quote from the definition of the Sherman Anti Trust Act:

The prevailing economic theory supporting antitrust laws in the United States is that the public is best served by free competition in trade and industry. When businesses fairly compete for the consumer’s dollar, the quality of products and services increases while the prices decrease.

That the top four airlines are now in a position of oligopoly (perhaps even monopoly) power is not in doubt. But whether or not that is legal or illegal depends on a large number of questions and legal mazes that have to be navigated.

In my view it is really quite simple. You have to ask yourself two fundamental questions.

  • Q1 is any one of the 4 airlines under investigation now too big to fail with the ensuing chaos that will result to communities across the nation?
  • Q2 who enabled/caused/approved the mergers of these companies and created the oligopoly situation with such strong economic power?

For the first question, now, any single one of these carriers if they fail will cause significant hardship to the USA Market. Thus indeed each of them is too big to fail and that bankruptcy protection for these companies is vital if the general interests of the country are to be safe guarded. Thus their ability to act with impunity and without sufficient regard for the consumer base seems to be protected by the market situation. Please note that I am not actually saying that they are behaving illegally but I am pointing out a logical conclusion that if the freedom to operate without regard to competition is now assured then the natural conclusion is there is too much of a temptation to abuse that position.

For the second question – the core issue is how did we get here and who would be to blame for this. Here discerning analysts conclude that the US DoT is clearly to blame for this mess. The true economic cost to the nation comes in several forms:

  1. Actual cost of the economic activity (i.e. paying for the airline tickets)
  2. Costs associated with oligopoly markets.
  3. The opportunity cost that by depriving and pricing out of the market certain activities such with the sphere of Travel – those who are dependent on the Travel and Tourism industries are adversely affected.

For example hotels and tourism based businesses. It does not stop there. For air travel the value of the savings in time cannot be diverted.

Of course a Skype call or Facetime conversation is getting close to alleviating the need for travel. The reality is that the direct interaction of the human kind is superior and always will be.

The difficulty of getting access into and out of the US air transportation system means that we must not forget the communities left and right who are losing service or have lost service. Airlines efficiencies are now such that the aircraft optimization is best suited to longer haul. Airline models discriminate against short haul business. There too lies a question left unanswered. i.e. the discriminatory nature of airline cost models.

The Bête Noir therefore has to be the entity that approved these mergers and given the jurisdiction then there is only one culprit – the United States Department of Transportation. The economic cost of the decisions made over the past 8 years is almost incalculable to the detriment of the US economy and population as a whole. One has to question whether the stewardship of the DoT has been sound or if the DoT has consistently devoted itself to fostering the airlines at the expense of the country.

Before the mergers happened (commencing with the DL take over of NW), the US DoT had a core philosophical belief that there was a market player who would always act as a disrupter and a relief valve on the market. That was Southwest. That ended circa 2005. Except the policy of DoT did not change to accommodate the new strategy at Southwest. Today Southwest is now one of the most expensive airline operators and further many of its advantages of market performance – commonly known as the “Southwest effect” (whenever it entered a market that lowered fares and stimulated traffic) are no longer achievable. Southwest no longer acts as a disruption force. Indeed, while it has both the equipment and the capability to offer greater competition it has deliberately chosen not to.

Let me illustrate this with Southwest’s most recent order for Boeing current generation aircraft. At a stroke it retired an entire fleet of Boeing 717 (88 aircraft). So the vast majority of its new aircraft it ordered became replacement ships (for its legacy 737-300 and 500s models) rather than market expansion. The same holds true with the 737MAX order. These will replace the remaining legacy 737s and then early model -700s. One just has to examine the orders of all the carriers in recent years operating in the USA market and almost without exception – new equipment did not translate into more competition rather it translated into a replacement focus.

So is there a remedy?

I believe that there is. And now we have to start to review how best to right the economic wrong. That has to be how do we get competition back into the US market? This involves a three pronged attack.

  • Stimulating new entrants
  • Introducing external competition
  • Reducing the opportunities for “super” profits

It is clear that stimulating a new entrant into the marketplace is going to be very hard indeed if one looks back to the end of regulation. There have only been 4 major new carrier (of significance) launches that are still with us since the landmark Deregulation Act of 1978. What other business sector has such a poor record of success? Here is the list:

  • JetBlue
  • Allegiant
  • Spirit
  • Virgin America

A review of airlines who have failed along the way both new and old is a very long and pitiful one.

Thus I would like to propose a series of alternative solutions to correct the current economic imbalance.

Each one of these proposals has merit but taken as a package – I believe they can stimulate a change and bring back competition and achieve the goal of the aims of the free American Capitalist system.

Here is my 10-point plan for the reformation of the US Air Transportation System:

  1. A cap should be imposed on any single city pair of markets be ascribed a regular profit. ROCI not to exceed a metric that is governed by conventional profits. Any surplus profit goes into a fund for alternative market stimulation.
  2. Introduction of two funds
    1. A beefed up EAS and
    2. A startup airline fund
  3.  End to all Anti-Trust Immunity. This would end all international joint venture agreements that had protection under the law. There is no need for international protectionism. Correct me if I am wrong but isn’t protectionism the reason we have GATT? And isn’t that normally a sacred cow of any US Administration?
  4. End to all Code Share Agreements – Interlines are fine but consumers have been consistently lied to on code shares. We could allow code shares if ALL consumer facing metrics are 100% identical.
  5. Any such code shares would be available on an interline basis to any other carrier.
  6. International routes must be served on a regular basis and becomes a criterion. Not just in the bid but performance. All routes must be rebid each year and carry a price that must be paid if one is in a monopoly situation.
  7. If the traffic on any international route is more than 1 million pax a year then an allocation of routes services must go to smaller airlines.
  8. An outlawing of all GDS Full Content agreements – i.e. no restraint of trade or MFN clauses in the GDS agreements
  9. Reciprocal Open Skies must remain without question.
  10. When the top 5 airlines reach 50% of all traffic in the USA – then on all major trunk routes any foreign airline will be allowed to participate up to 2x flights a day. Reciprocal home country must have Open Skies with USA and permit same capability of cabotage.

I believe that while some of these are politically unpopular (with the politicians and those who support protectionism). We must remember that how we got here. Consequently, we need to return competition to the market in order to lower the overall cost to the country and restore some of the more vibrant parts of its economy.

The US Air transportation system is a national asset. So far the stewardship of the system has been less than exemplary by successive Administrations. It is time to wake up to a global economy and put an end protectionism and cronyism within our industry.

© 2015, admin. All rights reserved.

3 comments on “No Harm No Foul?
  1. Chris Kjelgaard says:

    Good points all and your 10-point plan makes a lot of sense. Unfortunately, I can’t see much if any of it being put into effect, at least not in the foreseeable future. The Big Four (I include Southwest, which is basically a 700-aircraft airline and is increasingly becoming an international carrier) have too much lobbying power and I think the likes of JetBlue, Allegiant and Spirit won’t want the boat rocked too much as they are also making record profits as they tighten the screw on “ancillary” fees and packing as many people into planes as they possibly can. (JetBlue is still putting out plenty of Kool-Aid to the public about its industry-leading level of economy-class comfort, but always seems to forget to mention in its news releases and other public statements that it told analysts last year it was going to add 15 more seats in each of its A320s.)

  2. AB says:

    A far less complicated solution is to undo the mergers.

  3. iamlucky13 says:

    “Airlines efficiencies are now such that the aircraft optimization is best suited to longer haul. Airline models discriminate against short haul business.”

    Service to smaller markets isn’t as relevant to the oligopoly issue as the editorial tends to suggest.

    Certainly aircraft efficiency favors larger aircraft than many cities can support, and operational efficiency favors larger bases of operation rather than small ones.

    That’s not directly relevant to small cities, however. All airlines share the poor economy of scales at airports that can only fill a couple smaller regional jets per day, if that. The basic issue is the high operating cost, which itself creates motivation to funnel traffic to relatively close by connecting airports, puts airline operations at smaller cities in closer competition with other modes of travel, including cars and buses. The time penalty (especially when factoring in time getting to and from the local airport and through security) of ground-based transportation is minimal, and the cost premium becomes higher for flying than it is on longer, higher density routes.

    If passengers were willing to pay the costs of supporting service at those smaller airports, the airlines would certainly serve them, even if only through regional partners.

    So, the Essential Air Service subsidies mentioned in suggestion 2.1 are not a matter of airline competition (generally the opposite, in fact, as they favor one airline per destination), but of ensuring service to airports the DOT thinks merit the cost.

    As for suggestion 2.2’s “launch aid,” I’m at a loss how that would be managed to be effective while keeping costs reasonable (how many billions in losses did Virgin report before they were able to stem the drain on investor cash?) and ensure recipients are actually viable and in it for the long haul. The last thing the US needs is yet more businesses jumping into the market to capture a subsidy, then collapsing while the executives walk away with the attractive salaries they collected in the interim.

    Suggestion 10 is a huge can of worms. I’m sure Ryanair and others will think it’s a wonderful idea, though. They won’t be the least bit worried about any US airline taking away their existing business, and they’d love a crack at, not just any US routes, but routes cherry picked for them as high volume and likely to succeed – incidentally also routes where competition usually isn’t a problem.

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