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Flying the unfriendly skies.

The benefits of deregulation are almost too numerous to

mention: high prices., old planes,, bad maintenance

and layovers in Newark

One recent Friday evening, David Brown boarded United Airlines Flight 103, nonstop service from Philadelphia to San Francisco. So did Andy Skibo, Don Seigrist, Brad Weaver, and Judith Benson.

David Brown sat in coach. So did the others.

He dined on California lasagna and beef roulade. The others did, too.

But there was one major difference between David Brown and his fellow passengers.

David Brown paid $586 for his seat.

Andy Skibo paid $483.

Don Siegrist paid $358.

Brad Weaver paid $229.

And Judith Benson, one row in front of Brown and just across the aisle, paid $124.

"It's an amazing thing," said Brown, a sales representative for a California wine company, shaking his head, "The mysteries of airline pricing are unbelievable." This array of prices, one of the most wide-ranging in the whole American marketplace, is the direct result of an experiment launched by Congress I I years ago. The experiment was called airline deregulation.

The idea was that there would be more airlines. In fact, today there are fewer. The theory was that there would be more competition. In a lot of places, there is less. The expectation was that the airlines would compete primarily through ticket prices. For the most part, they don't. The promise was that there would be better service. To many passengers, air travel has never been such a hassle.

Lords of the skies

In deregulating the airlines in October 1978, Congress decided to stop treating the industry as a public utility. No longer would the government tell the airlines what routes they could fly and what they could charge, as it had for 40 years. The carriers, and the marketplace, would make those decisions.

For a time, deregulation worked just the way its champions had predicted. New airlines popped up all over, and consumers reaped the benefits of spirited competition. Air fares declined, service increased, and the number of passengers mushroomed. But those days are gone. Today nearly all of the upstart, low-fare carriers have disappeared, along with some long-established ones-more than 200 casualties in all. Their assets have been redistributed by bankruptcy courts or gobbled up in a wave of merger mania that reached its crest during Ronald Reagan's second term.

Now there are eight mega-carriers"-American, Delta, Northwest, Pan American, Texas Air (the parent company of Continental and Eastern), TWA, United, and USAir-and there are rising fares.

Average domestic air fares increased by 12 percent in the first half of 1989 compared with the first half of 1988, according to the Air Transport Association, the industry's trade group. Fares have been rising faster than the cost of living for the past two years. While budget fares remain available to vacationers willing to lock in itineraries far in advance, business travelers have seen fares on their discounted tickets rise 47 percent just since last fall, according to Runzheimer International, a travel management firm.

Those unregulated fares-along with the ongoing array of airline mergers, consolidations, takeovers and bankruptcies-have spurred debate about whether the time has come for the government to reassert some control. "The issue is not deregulation or re-regulation," said Senator John C. Danforth, the ranking Republican on the Commerce, Science, and Transportation committee, an intervention advocate. "The issue is lack of competition." The trend in the airline industry is toward a marketplace controlled by the large and the few.

"The fact that we have fewer carriers is obviously of concern to me," says Secretary of Transportation Samuel K. Skinner. "I don't like the fact that we're losing airlines. I don't like the fact that there's some feeling in the industry that we've got less competition than we had before."

Only two significant airlines formed after deregulation have survived-America West and Midway-and they account for well under 3 percent of the national market. "Big won, small lost," said Vance Fort, senior vice president of World Airways. Small is still losing. Presidential Airways filed for bankruptcy protection last October. Braniff Airlines suspended passenger operations in November. And no new carriers of consequence are on the horizon. "If you are looking to come into this business today as a new carrier, you're out of your mind," says George James, president of Airline Economics, a Washington-based consulting firm. "The barriers are so high. You can't put together enough in the way of resources to get a full running start."

The effect is clear, as Wall Street demonstrated with a vengeance last year when stocks of the largest airlines, which posted record profits in 1987 and 1988, soared and became subject to frenzied wheeling and dealing.

Some of the advocates of deregulation originally believed that the old, established airlines would fail to adapt to the new environment and rapidly become extinct. A few did fade away. It took the others a while to adjust. But eventually they figured out how to turn their bigness into an asset by creating a new game in which only they could afford to play. "The field was open, and they could make the rules," said Chris Witkowski, who heads the Aviation Consumer Action Project, an organization funded by Ralph Nader. "There was no understanding of the marketing devices that would be developed and no will to keep them in check."

The major airlines poked gaping holes in the two theories on which airline deregulation was based. One theory was that there was no inherent advantage in bigness, no "economies of scale." The other was that the mere threat of competition on a route was enough to keep fares in line.

The carriers destroyed these suppositions by creating an intricate web of marketing devices to attract and hold customers-regardless of ticket price. Devices so radically different from anything that had come before that a whole new language had to be invented to describe them: Frequent-flier programs. Computer reservations systems. Yield management. Commission overrides for travel agents. Hub-and-spoke route systems.

These marketing devices served two fundamental purposes: They deterred price competition among existing airlines, and they discouraged the formation of new competitors.

By working in concert, they have created a market in which there is little incentive for a traveler to patronize a new airline, of for an investor to finance the venture in the first place.

The airlines set up hub-and-spoke route systems to capture traffic and dominate regional markets. They locked up airport departure and arrival gates with 40year leases so that, in some cases, there literally was no room for competitors to come in they took nearly all the landing slots at the four airports where the government limits air traffic-Chicago's O'hare, Washington National, and New York's Kennedy and Laguardia-thereby limiting the ability of any new entrant to set up a national route system.

And they bought up other airlines to eliminate competition and to achieve "critical mass"-the size and reach they needed to survive in the world they had created. Northwest consumed Republic, its prime competitor in Minneapolis-st. Paul. TWA merged with Ozark, its rival in St. Louis. Delta gobbled up Western. American absorbed Air Cal. USAir consumed Piedmont, Empire, and Pacific Southwest. And Texas Air bought Eastern Continental, People Express, New York Air, and Frontier.

Unnatural selection

The big airlines used control over information, rooted in their computer systems, to help kill off the low-fare carriers that seemed to be the wave of the future in the early years of deregulation. The demise of People Express, the best known of the low-fare operators, was "a classic, textbook case of information technology as a competitive weapon," said Donald Burr, that airline's founder. Information technology-the capacity to assemble and manipulate complex combinations of fares and schedules-gave airlines the ability to target different ticket prices to different kinds of passengers with remarkable sophistication and precision. Only the established airlines had enough money to put that technology to use. It allowed them to match the low fares of the upstart carriers on a selective basis, thereby taking away those carriers' reason for being.

"The computer is such a refined tool for pricing," said Louis A. Marckesano, who monitors the industry for Janney Montgomery Scott, a Philadelphia based investment firm. "It allows a rifle-shot approach that can be deadly." That approach continues to this day, allowing the major airlines to limit price competition among themselves-even on routes where they do go head-to-head.

This past fall, four major carriers-American, Continental, Delta, and United-were operating 22 daily nonstop flights between Denver and Dallas-fort Worth, a distance of 654 air miles. All four charged the identical coach fare, $300, one way.

Why didn't one of the airlines drop its price and grab the business? "If I know that if I cut my fare $20 today, you're going to cut yours $20 tomorrow, then it's stupid for me to do it," said Randall Malin, executive vice president of marketing at USAir. "Why would I do that?"

Some airline executives-and some economists argue that the airlines had no choice but to insulate themselves from unfettered price competition. They say that the product being sold, the airplane seat, has one distinctive trait that makes such competition inherently destructive-its perishability. An unsold seat becomes worthless the moment the plane departs. At the same time, the actual cost of putting someone in that seat at the last minute is almost nothing-just the printing of a ticket and the providing of a meal.

"We went through a period of bashing each other's heads in over fares," said James Lundy, a spokesman for Delta Airlines, looking back at the early years of deregulation. "It took us a while to learn how to compete."

One lesson the deregulated airlines quickly learned was that they did not have to charge every passenger the same fare for comparable seats on the same flight, as they had to when the government set the fares. Or charge the same fare on every flight to the same city. Or even charge similar fares for flights of similar length. They set up a new fare structure designed to separate the business traveler who has to fly-and whose fares are usually paid by a company-from the vacation traveler who, if the fares are too high, will drive to the shore rather than fly to the West Coast.

The average airline fare, when adjusted for inflation, is slightly lower today than in 1978. It should be noted, though, that average fares declined slightly in the decade before deregulation as well. The postderegulation average is the combination of two pricing trends: Sharp declines for travelers who can book their trips far in advance-declines which have made flying more accessible to people with modest incomes-and sharp increases for people who must make their plans at the last minute.

Full coach fares are high, as anyone knows who has had to rush off on short notice for a business meeting or family crisis. So are fares to small towns. Both types of fares have risen faster than the cost of living and are higher now than they would have been under the fare-setting formulas imposed by the government before 1978. And business passengers have found themselves more and more often paying full fare or something close to it; the industry eliminated the most widely used business discounts in the fall of 1988. Economists and lawmakers worry that diminishing competition will cause fares to rise even more quickly in the future.

The number of people traveling on airlines has increased about 65 percent since 1978, fulfilling the promise that deregulation would make flying accessible to the masses. The number of flights is up about 35 percent. But it could be argued that much of the increase in air traffic would have happened anyway-that it is more a result of economic prosperity than of deregulation.

Besides prices and volume, something else is up-public dissatisfaction. Survey after survey has found widespread unhappiness with the experience of flying. Those surveys indicate that the people who travel the most are the most upset. They complain about poor service, delayed flights, aging airplanes, higher fares-and about how often they have to make a stop and change planes to get from one place to another. That is the result of one of the most dramatic changes of the deregulation era-the airlines' push to build up their hubs.

Lambert International Airport in St. Louis is the main domestic hub for Trans World Airlines. And anyone who happens to be there at 9 a.m. gets the impression that all the commercial jets in the world belong to Twa-and that all of them are within view. Thirty-some jets of varying size and type each painted white with red stripes, each bearing the airline logo-stand motionless at their gates, noses in, tails out, engines off.

Meanwhile, inside the terminal, 4,000 travelers are playing commercial aviation's version of musical chairs. They have flown in from 30 points east of St. Louis-philadelphia and Pittsburgh, Newark and New York, Tampa and Toledo. And most of them are headed for destinations west of St. Louis-Los Angeles and Little Rock, San Francisco and San Antonio, Denver and Des Moines. By ten o'clock, those TWA jets and passengers are in the air, headed west. The airport is empty-no planes, no people. And it stays that way for a few minutes, until the next group of planes descends on Lambert.

Systems like Lambert's are at the heart of the debate over airline deregulation. Nearly every major carrier has adopted a hub-and-spoke route structure: That's a system in which an airline offers one-stop service between hundreds of pairs of cities-the spokes-by funneling passengers through a central airport-the hub.

The problem is that once a carrier establishes a hub and becomes dominant at that airport, the airline can use its economic power to keep others out and to create a virtual lock on the local business. And there is considerable evidence that airlines convert such dominance into higher fares. Which explains why some travelers who live in the St. Louis area feel they have become the hostages of TWA, which does 82 percent of the airport's business.

"I resent it bitterly, and it's more than an issue of money with me," says Hal Kroeger, who runs a paper products distribution business from offices in suburban Florissant, and is so frustrated that he is considering having his company lease a private jet. "In the last three years, we've seen less courtesy, less reliability and much higher fares. And the service is as bad as the fares. The impact of having a monopoly is so deep."

These troubles aren't limited to St. Louis and TWA. USAir has 92 percent of the business in Charlotte, North Carolina, and 86 percent in Pittsburgh. Northwest Airlines has 84 percent in Memphis and 79 percent in Minneapolis-st. Paul. American Airlines has 70 percent in Nashville, Tennessee, and Raleigh-Durham, North Carolina. And Delta has roughly three-quarters of the market in each of Cincinnati, Salt Lake City, and, most significantly, Atlanta, the largest hub in the South.

Three other hub airports-Dallas-fort Worth, Denver, and Chicago O'Hare-are controlled by two carriers apiece. American and Delta share 89 percent in Dallas-fort Worth; United and Continental together have 85 percent in Denver; American and United jointly have 80 percent at O'Hare.

At several others-including Detroit Metro, Houston Intercontinental, Chicago Midway, Newark, Syracuse, Dayton, Baltimore-Washington, and Washington Dulles-one airline controls more than half the traffic.

"The problem is concentration at individual airports causing lack of competition," says Senator Danforth. "When you're up to 82 percent, as we are |with TWA~ in St. Louis, how much worse can it get? I'd say that's intolerable."

Study after study has shown that passengers beginning or ending their trips at most of the nation's 35 hub airports pay higher fares. One analysis done for the Boeing Company last year showed that average fares to hub cities were nearly twice as high on a per-mile basis as flights going through the hubs. Severin Borenstein, a professor of economics at the University of Michigan, reached a similar conclusion, as did Morton Beyer, president of Avnark Inc., an airline consulting firm. Last year, the General Accounting Office studied 15 airports dominated by one carrier and reported to Congress that-surprise-those airports had 27 percent higher fares than airports of similar size that did not have a dominant airline.

"I used to be able to fly to New York for $180 round trip," said Alice Burgess, whose St. Louis company makes medical videos. "Now it's $592, and that's with a seven-day advance purchase and a 25 percent penalty for changes."

"The fare to Boston is unbelievable, and Philadelphia is very high, even if you're willing to take connecting flights. It just doesn't pay us to work in those cities. There's no one competing with TWA oil any of those routes. This is a monopoly, and it's just not fair," she said.

Some early advocates of deregulation recognized the possibility that fares would get out of hand on monopoly routes. There were provisions in the original version of the deregulation bill-language ultimately deleted by Congress-that would have imposed price ceilings on routes where a single carrier had 90 percent or more of the traffic. Airway robbery

If you live in a hub city, your reasonable options often begin and end with the dominant airline. In St. Louis, that is TWA.

TWA has a monopoly on nonstop service between St. Louis and 54 destinations, among them all three airports serving metropolitan New York, all three airports serving the Washington, D.C. area, Los Angeles, San Francisco, Philadelphia, Boston, HartfordSpringfield (Connecticut), Orlando, Miami, Tampa-St. Petersburg, New Orleans, Phoenix, Las Vegas, San Diego, and Seattle. Before deregulation, TWA had nonstop monopolies on only six of those routes.

It is not just that TWA now accounts for 82 percent of the total St. Louis market and 62 percent of the passengers for whom St. Louis is the origin or destination. Flights that pass through or begin or end in St. Louis account for nearly 80 percent of the airline's entire domestic system.

The other major airlines offer St. Louis residents what amounts only to token service: they operate a few flights a day between Lambert International and their own hubs. In fact, the number-two carrier in St. Louis is Southwest Airlines-a low-fare carrier that offers no food other than peanuts, no assigned seats, no connections with other, bigger carriers, and no service east of Detroit. And Southwest has only 3 percent of the market.

Rarely do the major airlines invade hubs already dominated by other carriers. They prefer, instead, to expand their own hubs or create new ones at airports they can dominate. "The risk of trying to compete at another carrier's hub is enormous," Transportation's Shane said.

That explains why American Airlines, when it decided to expand its north-south route system a few years ago, chose to set up two medium-sized hubs in Nashville and Raleigh-Durhmn, rather than one big hub in Atlanta-Delta's stronghold.

"Two hundred flights a day for a carrier coming into Atlanta may not make you competitive," explains Al Kolakowski, vice president for sales at Delta Airlines. "Two hundred flights in Nashville makes you king." A wing and a prayer

Ever since Congress enacted airline deregulation, lawmakers have repeated these words as if they were a mantra: "Congress didn't deregulate safety." Indeed, the Airline Deregulation Act eliminated only the Civil Aeronautics Board, the agency that passed judgment on routes and fares, not die Federal Aviation Administration FAA), which concerns itself with operations and maintenance.

But deregulation has had an impact on safety. Inadequate government oversight has allowed the increase in passengers to strain the nation's air travel system severely.

* Hundreds of jets built in the mid-1960s are still flying, years beyond their design lives.

* Experience levels of pilots and mechanics have dropped, and airline executives wonder where they will find the crews of the future. The military, the traditional source of pilots, is producing fewer at a time when the airlines need more.

> Pressure on the air traffic control system has increased. The system suffers from outmoded computers and too few controllers.

> Flight delays have become routine. The system's way to ease the strains imposed upon it is to make planes sit on the ground and wait.

The FAA has come under criticism as too ponderous and inflexible a bureaucracy to adequately monitor a dynamic and growing industry. "The rules under which the FAA operates may be perfectly acceptable for building a Veterans Administration hospital in Kerrville, Texas," gripes Herbert D. Kelleher, chairman of Dallas-based Southwest Airlines, "but not for a high-tech aviation industry that functions 24 hours a day, seven days a week, and changes from minute to minute."

"I think it's fair to say that the airlines, in the rush to merge, acquire, or expand, did not put safety at the top of their ladder of considerations," admits James Oberstar, chairman of the House Public Works and Transportation subcommittee on aviation. "Safety wasn't neglected, but it wasn't the highest priority."

The result has been a decline in public confidence in the airlines. A Roper Poll conducted in the fall of 1988 found that fear of flying was higher than at any time since deregulation began in 1978.

And yet, while the system has been strained, it has not broken. The safety record of the major airlines has been better in the decade since deregulation than in the prior decade. Fewer people have died in airplane crashes in the 1980s than in the 1970s, even though the number of people flying has increased by two-thirds. The overall accident rate for the past 10 years is about half what it was for the previous 10, according to the National Transportation Safety Board-even though 1989 was one of the industry's worst-years in this decade.

"The system is bulging at the seams, but the record shows that it is the safest in the world and has never been safer," claims Transportation Secretary Skinner. "I can't see where deregulation has had any impact on safety."

But Arnold Barnett and Mark K. Higgins of the Massachusetts Institute of Technology studied all the safety numbers and reached a slightly different conclusion, one that meshes with the opinions of several independent experts. "One can plausibly contend that safety has improved despite deregulation," they concluded, "and would have improved more in the absence of the policy."

Like other aspects of the airline industry under deregulation, safety often comes down to a matter of dollars and cents. "I think we've reached a point where airlines that make higher profits are safer airlines," asserts John Galipault, director of the nonprofit Aviation Institute. So the higher fares and increased profits of the last two years should mean that more money is now available for new planes and quality maintenance-at least for American, Delta, Northwest, United, and USAir, the five most profitable major carriers.

But other airlines-Pan American, TWA, and Continental-are not doing too well. And one of the healthier carriers, Northwest, has just taken on several billion dollars in added debt as the result of a leveraged buyout. United, the object of an unsuccessful takeover attempt earlier this year, may yet be headed down a similar path. Or consider Eastern Airlines. Even before Eastern was crippled by the mechanics' strike last year, it had lost passengers and revenue as the result of charges from its employees that the airline was cutting comers on maintenance and overworking its pilots-thereby putting safety at risk.

And this is all happening in a generally healthy economy. When the next recession comes, all the airlines will be tempted to further cut comers on maintenance-and to delay the overhaul of old planes and the purchase of new ones.

The real fruits of deregulation could be just such a total breakdown of service and safety. Two Democratic senators, Howard Metzenbaum and Robert C. Byrd, have introduced a bill that would put the government back in the regulation business. "I don't know if complete reregulation is the answer." Metzenbaum said. "But I do know it's time we owned up to the fact that airline deregulation was a mistake. Unless Congress steps in, airlines will continue to pilot the industry toward disaster." Northwest, United, and USAir. the five most profitable major carriers.

But other airlines-pan Amerrican, TWA, and Continental-are not doing too well. And one of the healthier carriers, Northwest. has just taken on several billion dollars in added debt as the result of a leveraged buyout. United, the object of an unsuccessful takeover attempt earlier this year, may yet be headed down a similar path. Or consider Eastern Airlines. Even before Eastern was crippled by the mechanics' strike last year, it had lost passengers and revenue as the result of charges from its employees that the airline was cutting corners on maintenance and overworking its pilots-thereby putting, safety at risk.

And this is all happening in a generally healthy economy. When the next recession comes. all the airlines will be tempted to further cut corners on maintenance-and to delay the overhaul of old planes and the purchase of new ones.

The real fruits of deregulation could be just such a total breakdown of service and safety. Two Democratic Senators, Howard Metzenbaum and Robert C. Byrd. have introduced a bill that would put the government back in the regulation business. "I don't know if complete reregulation is the answer." Metzenbaum said. "But I do know it's time we owned up to the fact that airline deregulation was a mistake. Unless Congress steps in, airlines will continue to pilot the industry toward disaster."


In evaluating the Bush cabinet, Washington's insiders award their lowest ratings to Manuel Lujan, Dick Thornburgh, and Lauro Cavazos. The latest on Cavazos and his wife, Peggy Ann, who readers will recall likes to stay close to her spouse, is that, because Peggy Ann can fly free on TWA, where her son is employed, the secretary of education's travel plans incorporate an unusually high proportion of TWA flights. "Lauro and Peggy Ann will," according to our favorite Cavazos watcher, Charlotte Hays, fly "all over the map to stick with TWA. A delay? Well, the two have been known to fly through a passel of airports and devote the better part of the day to travel to avoid buying a ticket for Peggy Ann.".. .

Another cabinet member whose reputation is in danger is Edward J. Derwinski of Veterans' Affairs, who tried to nominate as inspector general of his department one Raymond "John" Vogel, whose previous performance as the department's chief benefits officer was so marginal that Derwinski had decided to replace him. This reminds Washington observers of Richard Darman's appointment of Janet Hale to oversee HUD for OMB after Hale, while a HUD official, had ignored warnings that something was a bit amiss in her department....

William Webster is said to be in peril of replacement at CIA by a president who never wanted him there in the first place. The only thing that may save him is that Bush's two favorite candidates for the job, James Lilly, the ambassador to China, and Donald Gregg, the ambassador to South Korea, could not be confirmed by the Senate without having to answer embarrassing questions-in Lilly's case, about Bush's policy toward China, and in Gregg's, about Bush's Iran-contra connection, which Gregg, as national security adviser to thenVice President Bush, knew better than any other person....

For those who have wondered how anyone could afford to serve as an unpaid campaign manager" in a major campaign, we offer the example of Ron A. Ober, who while performing that role for Dennis DeConcini's 1988 reelection campaign, received more than $80 million in unsecured loans for his firm from Lincoln Savings and Loan even though the firm had assets of no more than $2 million and liabilities of about $200 million. . .

In-Agriculture: Assistant Secretary, AdministrationAdis Maria Villa. Commerce: Assistant Secretary for Technology Policy-Deborah Wince-Smith. Defense: Assistant Secretary, Command, Control, Communications, and Intelligence-Duane Perry Andrews. Housing and Urban Development: Assistant Secretary, Fair Housing and Equal Opportunity-Gordon H. Mansrield. Justice: Deputy Attorney General: Donald Betton Ayer. Energy?: Assistant Secretary, Nuclear Energy-William H. Young. Transportation: Administrator, National Highway Traffic Safety AdministrationJerry Ralph Curry. Treasure v: Treasurer of the United States-Catalina Vasquez Vilialpando. Inspector General-Donald E. Kirkendall. Veteran Affairs: Assistant Secretary for Acquisition and Facilities-David E. Lewis. Agencies and Comissions: Director, ACTION-Jane A. Kenny. Chairman, Consumer Product Safety Commission-Jacqueline Jones-Smith. Commissioner, Commodity Futures Trading CommissionW~lliam P. Albrecht. Inspector General, Nuclear Regulatory Commission-David C. Williams. Assistant Administrator, Environmental Protection AgencyJames M. Strock.
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Title Annotation:deregulation, United Airlines
Author:Eichel, Larry
Publication:Washington Monthly
Date:Feb 1, 1990
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