Airline complaint one-upmanship is an old standby of small talk—“You had to wait six hours at the gate? That’s nothing! I was wedged between two linebackers and the in-flight movie was the latest from Larry the Cable Guy.” But is air travel really this bad? Travelers seem to think so. One measure finds that customer satisfaction with airlines is at its lowest point in three years; and the 2008 Airline Quality Rating, an aggregation of consumer complaints to the Department of Transportation, reports that complaints were up 60 percent since 2007.
Airlines seem to give travelers fewer reasons to smile. By mid-2008, many airlines had begun aggressive campaigns to bring in more cash through fees. Several airlines devalued their frequent flier miles, hiked the fees to book a “free” ticket, and started charging for checked baggage. New fees were added so fast that Southwest Airlines began running ads touting the fact that they merely had not added any fees.
And if the fees weren’t enough, fares are rising as airlines follow through on promised capacity cuts, trimming routes and frequencies. With fewer seats, passengers have fewer options and face higher fares to match record jet fuel prices.
But it’s not just the airlines. The Federal Aviation Administration operates an air traffic control system that cannot keep up with demand for air travel, forcing delays in congested airspace and airports, especially in the northeast United States. Many airlines now add several minutes to a flight’s travel time, thus lowering the odds of having the flight reported as delayed and lowering passengers’ expectations.
The FAA is not the only agency aggravating travelers. The Transportation Security Administration, the hastily constructed bureaucratic response to the 9/11 terrorist attacks, has become what some experts call “security theater,” a show of rigorous inspection whose primary function is to make us feel safer.
So if we increasingly hate air travel, who’s to blame? The unlikely bogeyman du jour is airline deregulation, which culminated with the signing of the Airline Deregulation Act by President Carter 30 years ago on October 24, 1978. Long praised by economists as pro-competition and consumer-friendly, airline deregulation is now under attack for allegedly hurting airlines and travelers.
For example, James Oberstar (D-Minnesota), the powerful chairman of the House Transportation Committee, warned the airline industry in April that “public patience is running out” and that Congress might feel the need to “reregulate” the industry. And in a speech at the Wings Club in New York in June, former American Airlines CEO Robert L. Crandall called for just that: “Three decades of deregulation have demonstrated that airlines have special characteristics incompatible with a completely unregulated environment.” He proposed a slew of policy changes to ensure that airlines “earn the profits needed to sustain the huge investments essential to the industry’s future”—including “modest price regulation. . . and a more accommodating stance toward industry collaboration.”
But these assertions fly in the face of experience. Airline deregulation has had remarkable benefits. Alfred Kahn, known as the “father of airline deregulation” for his service as chairman of the Civil Aeronautics Board (CAB) as well as his forceful case for widespread deregulation in the 1970s, estimates the consumer benefits at $5 billion to $10 billion per year. Fares over the past 30 years have fallen dramatically in real terms—by as much as 40 percent since 1980—while passenger traffic has spiked.
To be sure, efficiencies gained through new aircraft, advanced computer reservation systems, and increased passenger totals also helped. But many of the productivity improvements in the post-regulation era stemmed from competitive pressures unleashed by deregulation. Indeed, Clifford Winston, an economist at the Brookings Institution, says recent shocks to the aviation system might have been even worse under regulation.
If airline deregulation is not responsible for the litany of woes expressed by passengers today, what might explain it? One hint can be found in a 30-year-old warning. In 1978, Kahn was under pressure to restrict airline operations to correspond with air traffic control and airport capacity. In a speech at the time he said, “There is no guarantee that freer competition on the airline side of the equation—that is the part that creates the demand for airports [and air traffic control]—alone will solve these problems. On the contrary, it will stimulate more air travel. . . . My moral is simply this to the FAA: If you are going to follow economically irrational policies, don’t ask the CAB to bail you out by doing the same thing.”
According to this view, airline deregulation is an unfinished reform: while unleashing airline competition, it did not provide for a competitive aviation infrastructure. Air traffic control, airports, and congestion management remain organized not much differently than 30 years ago. And despite deregulation’s benefits, this is where our current problems reside.
The good news for our aviation system is that many of its problems have solutions at the ready. These solutions—from airport management and congestion pricing to air traffic control reform—have been tested, often with great success, overseas. They may hold the key to bringing our aviation infrastructure into step with the promise of airline deregulation.
Airports for Sale
The United States lags behind the world in seeking out efficient airport management and investment solutions. Here, airports tend to be owned and operated by cities, port authorities, or other government agencies. The exceptions are so rare that they stand out: Indianapolis International Airport, managed until 2007 by British airport company BAA, and Chicago’s Midway Airport, now for sale.
Many other countries, from Latin America and Europe to East Asia and Australia, have experimented extensively with airport privatization, often with salutary effects on competition and infrastructure investment. The experiments comprise an innovative array of corporate arrangements, from independent government corporations to nonprofits and private companies with significant government stakes to entirely privately owned ventures.
Australia and New Zealand are home to some of the most advanced experiments in privatization. They have seen widespread private ownership and light-handed regulation of airports that “work quite well,” according to a recent volume on aviation infrastructure released by the Brookings Institution. In Canada, nonprofit corporations have achieved government goals to expand airport capacity, especially in Toronto and Vancouver. A list of the world’s busiest airports includes several that are privately owned and operated to some degree, including London’s Heathrow Airport (BAA), Bangkok’s Suvarnabhumi Airport (Airports of Thailand), Frankfurt International Airport (Fraport), and Amsterdam’s Schiphol Airport (Schiphol Group).
One of the most common arguments against airport privatization is the experience of BAA, which owns London’s three main airports—Heathrow, Gatwick, and Stansted, comprising 91 percent of the capital’s commercial aviation traffic. The UK Competition Commission has argued that its common ownership has stifled airport competition, neglected the needs of its airports’ users, and impeded adequate investment. The BAA case proves the importance of competition among airports. If privatized to promote competition, London’s airports would have had more incentives to invest in expanded capacity.
For a helpful stateside comparison, consider New York City and San Francisco. In the Big Apple, the three major airports—John F. Kennedy International, LaGuardia, and Newark Liberty International—are owned and operated by the Port Authority of New York and New Jersey. In the San Francisco Bay area, a similarly expensive and densely populated area, the three main airports are owned and operated by different authorities. The published average landing fee at New York’s airports is 73 percent higher than at San Francisco International Airport, which finds itself competing with the even cheaper Oakland and San Jose airports.
The skies are crowded—and I’m not just talking about legroom. In 2006 and 2007, snarled skies and tangled taxiways dominated headlines. A storm had thousands stuck in Dallas; snow stranded hundreds of passengers on JetBlue planes at JFK. A “passenger’s bill of rights” that would guarantee minimum levels of food, drink, air, and customer service picked up steam in Congress, and congressional committees dragged airline executives in front of C-SPAN cameras to berate them. And the costs of congestion are enormous. The New York City comptroller’s office estimated that delays at New York area airports ate up almost $200 million in lost productivity in 2007.
But while Congress pins the blame on aviation’s private sector, the real cause of congestion delays is structural and political: an unwillingness to charge the true value of in-demand space. In this case, the space is runway capacity. Airports currently charge airlines landing fees on the basis of weight. This has prompted airlines to favor smaller aircraft, like so-called regional jets, over larger aircraft. The current structure, says Kahn, “gives enormous advantage to planes with fewer passengers at peak hours at congested airports.” Hence the plethora of regional jets carrying fewer passengers at one of America’s most crowded airports, LaGuardia.
Congestion pricing is a sensible solution long advocated by aviation economists. As Kahn says, “We used congestion pricing in regulating electric utilities in New York in the ’70s!” In aviation, it has been studied since the 1960s. In practice, it would mean that crowded airports would charge higher runway use fees at the busiest times of day.
There have been signs of progress on the congestion pricing front, but significant obstacles remain. In July 2008, the FAA adopted a rule to allow crowded airports to introduce a revenue-neutral “peak pricing model” into current weight-based charges. But airlines and consumer groups remain dead set against full-scale congestion pricing, the latter fearing that airlines will only pass on to travelers the increased costs. “All this will do is end up taking more money from passengers to line the airport’s pockets, and that doesn’t help,” says Brett Snyder, an airline industry veteran and travel blogger. Yet, congestion pricing will impose on airlines, and by extension travelers, the true cost of their trips.
The 2006–2007 congestion brouhaha resembles that of 1999–2000, when there were nightmare stories of travelers spending hours on grounded planes and when a passengers’ bill of rights was also floated. That era of congestion ended with the September 11 attacks, which, in the months following, induced roughly a 20 percent decline in demand for air travel. This bought the aviation sector several years to deal with the underlying congestion problem: lack of capacity at airports and in air traffic control. These were not addressed, but the rise of $140-per-barrel oil may have a 9/11-style effect on the airline industry. According to Winston, “The ‘crisis’ of gas prices is going to end the ‘crisis’ of traffic delays.”
If the industry capacity cuts of 2008 lead to breathing room on the congestion front, will we move forward in increasing infrastructure capacity to match future demand? Don’t get your hopes up. Without an ongoing crisis, there is likely to be little public pressure for systemic aviation reforms. Congestion pricing should be thought of as a stopgap measure until we make deeper reforms, one of the most pressing of which should address the failure of the nation’s air traffic control system to keep up with the demand unleashed by deregulation.
Air traffic control in the United States is administered by the Air Traffic Organization, a division of the FAA that employs a cadre of 14,000 air traffic controllers and 5,000 air traffic managers. Controllers are trained professionals who are, even under taxing circumstances, capable of manually separating and shepherding dozens of planes in the sky. Happily, the FAA has seen accident rates fall markedly.
But ATO is a troubled entity: it lacks a source of funding that corresponds to the services it provides; its labor relations are toxic; and safety concerns are beginning to rise. More important in the long run is ATO’s persistent delay in making long-planned upgrades to the nation’s air traffic control system—a collection of technologies known as “NextGen.”
One explanation for ATO’s problems is its ill conceived financial structure. ATO is funded by taxes on jet fuel and airline tickets. Thus, revenue might fall if airlines introduce jets that are more fuel efficient. Aviation is a cyclical industry, so it sells fewer tickets during slowdowns, cutting ticket tax revenue. Moreover, ATO’s revenue has nothing to do with actual use of the air traffic system. Many non-commercial aircraft use controlled airspace but pay no ticket tax; their contribution is from the jet fuel tax.
The agency has not come close to keeping up with demand for air travel. In fact, the FAA is on the verge of its largest personnel crisis since Ronald Reagan fired striking controllers en masse in 1981. The FAA hired a huge wave of controllers in the early 1980s to replace the strikers, and this generation is near retirement—without sufficient reinforcements.
The result, according to controllers’ union president Patrick Forrey, is a “staffing crisis” leading to “an unacceptable compromise in safety.” The FAA is also moving more controllers from the line to management, further diluting the pool of qualified staff. According to Melvin Davis, a controller in Southern California, “The FAA will tell you that staffing does not affect safety, and that is simply untrue.”
At a hearing on June 11, air traffic controllers told Congress that their facilities are understaffed. They added that the chronic understaffing requires them to work six-day weeks, with new hires put in sensitive positions relatively early without intensive guidance. Fatigue, they said, is a growing concern. Concordant with the stretched situation, the rate of runway incursions—that is, an aircraft being on an active runway when it shouldn’t—is rising. But Steven A. Wallace, a controller in Miami, reports that the FAA is “cutting” rates by waving the magic wand of terminology and relabeling some runway incursions as “proximity incidents.”
“With User Pay Comes User Say”
The solution is not simply to raise controllers’ salaries and hire more of them; it is to follow through fully on the promise of NextGen. The FAA has bungled the crucial technological transformations that will modernize our aviation system. Is there an alternative?
Just as in the airport sector, many countries have privatized or partially privatized their air traffic control sectors. The United States is one of the few developed countries that still has a publicly owned and operated air traffic control system, unlike the autonomous government corporations of Australia, Germany, and New Zealand; the public-private partnership in Great Britain; and the fully privatized, nonprofit Nav Canada.
What has been the result of commercializing air traffic control? In a speech in Washington in February, Eugene Hoeven of the Civil Air Navigation Services Organization said: “The ability to set fees in line with the service provided has introduced a new dynamic to what has traditionally been a bureaucratic approach to service delivery. Airline operators have rightfully demanded greater accountability—‘with user pay comes user say’—and a greater sensitivity to customer needs has developed. There is no longer any doubt as to who the customer is.”As long as the charges airlines face don’t correspond to the costs they impose on the system, U.S. air traffic control will be under little pressure to serve the system’s users.
Is private-sector involvement in air traffic control a panacea? No one says so. For example, labor issues have not disappeared. Airservices Australia’s union recently claimed that some of their facilities are so understaffed that only a few sick controllers means that facilities must temporarily close down. But even if Airservices Australia has not properly projected staffing needs, it is a poster child for how commercialization can provide a solid foundation for technological investment. The company is currently implementing cutting-edge technology to allow automated air traffic control.
And while the United States may not be ready for a privatization of the kind in place in Canada, it needs at a minimum to implement user fees for ATO. Such a change would make the organization more responsive to its customers’ needs and concerns, provide a stable revenue source that corresponds to services used, and protect ATO from political influence. As Kahn concludes, “I don’t think this problem’s ever going to be solved until we take control away from members of Congress. . . . Government is simply incapable of doing it.”
The Good News
The news about aviation isn’t all bad. Airline pilot Patrick Smith, a columnist for Salon.com, talks up the good news about the cost of flying: “We have lost an appreciation for just how cheap and accessible flying has become. The fact that for a few pennies per mile we have the ability to zip ourselves halfway across the country, or halfway around the world, in a matter of hours, in nearly absolute safety, is almost entirely taken for granted.”
And we’ve been zipping halfway across the country with a lighter carbon footprint, too, according to recent figures from the Environmental Protection Agency. Benefits that aren’t even anticipated today might come from enabling innovation in aviation infrastructure. According to Winston, “What we learn from airline deregulation is just how much was suppressed from innovation under government control.” Neither he nor anyone else can fully estimate the benefits of, say, air traffic control privatization and the organizational and technological innovation that such a reform in the world’s largest aviation market might stimulate.
After 30 years, airline deregulation has been remarkably successful. The U.S. aviation sector’s very real problems are due not to the lack of regulation but to excessive or ineffective government involvement in other segments of the industry. By making its aviation infrastructure more competitive and efficient, the United States can spend the next 30 years building on deregulation’s unmet potential.
This article was originally published in The American‘s September/October 2008 issue.