Airline industry: Consolidation calls for regulation

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Merging and antitrust exemptions have brought the airline industry to a crossroads: One path leads to removing barriers to competition and reasonable regulation, the other to cartels with government-s

Merging and antitrust exemptions have brought the airline industry to a crossroads: One path leads to removing barriers to competition and reasonable regulation, the other to cartels with government-sanctioned price fixing, high taxes, debasement of customer service and flight reductions.

As the airline industry has undergone major consolidation in the last decade, what is left is four airlines (American, Delta, United and Southwest) that control 86 percent of all domestic flights. Simultaneously, airline costs have plummeted for labor, debt service and especially for jet fuel, the No. 1 operating expense. This has allowed the major U.S. airlines to become immensely profitable; with nearly all posting record gains in 2014 and stock prices increasing.

A study by the Government Accountability Office attributed this success to three primary factors: 1) an increase in passenger traffic; 2) capacity restraint by limiting the supply of available seats and reducing flights despite rising demand; and 3) significant increases in fees.

Capacity restraint has left us with ever-fuller planes. In 1991, planes flew on average at 56 percent full, but now average over 85 percent full. This has led to higher airfares and increased passenger complaints. Revenue from baggage, cancellation and change fees for US airlines nearly quintupled from 2007 to 2014.

Consolidation has occurred globally with airlines entering into joint ventures that control most international flights via Star Alliance, SkyTeam and oneworld. The Department of Transportation granted antitrust immunity to many of these alliances allowing airlines to “coordinate fares” (i.e. price fixing), services (reducing them) and capacity (restricting destinations and schedules). But the big airlines and their unions are not satisfied with these advantages. They now actively seek to block competition, especially from three Middle East airlines and several low-cost European airlines. They are lobbying the Obama Administration and conducting an expensive propaganda campaign to renegotiate existing open skies agreements.

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Open sky agreements cut government interference in international air travel and lead to more routes and destinations, as well as increased capacity and lower prices. The U.S. has signed 114 such agreements since 1992, including nations in the Middle East. Meanwhile, as U.S. airline profitability has skyrocketed, customer service took a nosedive, with American Airlines ranking 89th, Delta 49th, and United 53rd globally, according to Skytrax.

The U.S. Department of Transportation (DOT) has taken some positive steps with the three-hour rule for tarmac delays, upping compensation for bumped passengers and creating tougher fare advertising and disclosure rules.

But much more needs to be done.

DOT needs to regulate international air fares and fees. In February, filed a rulemaking petition requesting an examination of the cost of change fees for international flights, which went from $50 in 2008 to as high as $750 today.

Another issue is airlines altering flights schedules after passengers have bought their tickets, forcing them to scramble to find accommodations for another night or end their trip early. Airlines are supposed to maintain published schedules and should be required to compensate passengers when a flight has been changed for commercial convenience.

Flight delays or cancellations are the No. 1 passenger complaint, with 20 percent to 33 percent of flights late and 1 percent to 5 percent canceled. As airliners are now mostly full, mass cancellations often result in several days’ delay.

Airlines know this but, instead of providing reasonable compensation or maintaining adequate reserves of equipment and personnel, have sought to absolve themselves of liability. This includes redefining ‘Act of God’ in their contracts to include equipment and crew shortages, then refusing to provide alternate transportation or even ticket refunds for canceled flights. Laws mandate compensation for flight delays up to $6,000 for international flights under the Montreal Convention, and up to 600 Euros under EU rules, but nothing under DOT rules, except for bumping.

Airlines should also have to adhere to the reciprocity rule, where passengers facing delays and cancellations are put on a competitors’ plane at no additional cost.

Airline consolidation is a fait accompli, but with a few highly profitable airlines comes a greater need for reasonable regulation and removal of barriers to real competition. Otherwise, the new normal will be an era of consumer abuse, unrestrained price gouging and supply restriction.
Air travel is the circulatory system of the global economy, and travel and tourism is the world’s largest employer. Congress and the DOT have an opportunity to reform airline regulation this year with mandatory reauthorization legislation of the FAA and DOT.

Much has changed in the 37 years since enactment of the Airline Deregulation Act of 1978 under President Carter and a Democratic congress. It is long past time for another overhaul. The U.S. traveling public is waiting, the rest of the world is not.

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About the author


Editor in chief for eTurboNew is Linda Hohnholz. She is based in the eTN HQ in Honolulu, Hawaii.

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