Senator Wants to Play Airline Executive

Are airlines unfairly conniving to keep capacity low and thus drive up fares? According to Senator Richard Blumenthal, a Connecticut Democrat, they are—and he’s asked the Justice Department to investigate.

Unfortunately for airlines and their passengers, Blumenthal has succumbed to a particular Washington, D.C., affliction: thinking he can run a business better than the people actually running it. If they had their druthers, Elizabeth Warren would moonlight as a banker, Joe Barton as a college sports administrator, Jay Rockefeller as an oil company executive, and Hank Johnson as a geographer.

Based on a New York Times report on an airline industry meeting, Blumenthal is concerned that “many of these [airlines] publicly discussed their strategies to remain ‘disciplined’ in their decisions to manage capacity across their flight routes.” He adds that “most airlines have traditionally viewed capacity reductions as a highly valuable way to artificially raise fares and boost profit margins.”

The use of the scare quotes on “discipline” is telling. Discipline is normally a positive word, as it connotes sound management and prudent behavior—precisely what the airline industry has needed as it continues the long shakeout in the era of fare deregulation.

First of all, capacity has not been reduced in recent years. As the chart nearby shows, since air travel demand contracted during the recession, capacity has slowly but steadily climbed. The difference is that it has not climbed as fast as during the go-go years of the mid-2000s, when investors thought a low-fare, no-connections airline based in Columbus and a flying version of Hooters were good ideas. As airline industry analyst Brett Snyder says: “You’re only as smart as your dumbest competitor. And there were plenty of dumb competitors out there who threw a ton of capacity into a market only to make everyone unprofitable.”

Notably, revenue passenger miles have climbed faster than available seat miles—meaning that airlines are getting better at filling seats on the flights they already have. Capacity’s not going down. The “discipline” airline CEOs talk about with investors is making better use of their capacity and expanding available seat miles when they sense the market truly calls for it. Meanwhile, airlines are using the savings from these efficiencies to make crucial and long-overdue investments in in-flight entertainment and fleet renewal—which will benefit customers (as well as the environment) too.

Consolidation in hubs has made certain airports or markets appear less competitive, but the nature of connecting flights means that airlines are indeed competing with one another on virtually all itineraries. And even in an environment of discipline, we still see good old-fashioned airline wars. Seattle, for example, is seeing a massive infusion of capacity as Delta seeks to build a new domestic and international hub, while hometown airline Alaska responds with new flights to keep its premium business travelers from defecting to Delta.

Blumenthal’s other assertion—that “consumers are paying sky-high fares”—likewise doesn’t add up. As the chart below shows, inflation-adjusted fares ended 2014 at less than 2003 levels. Like capacity, fares are slowly but steadily rising. Fares tend to move in tandem with the broader economy, and the chart nearby shows that the highest fares in recent memory—20 percent higher than today’s when adjusted for inflation—were offered during the late-90s boom. Rising fares are to be expected in the nominal recovery we are experiencing, but they’re not rising at any rate or to any level that justifies Blumenthal’s fulminations.

In the end, the “discipline” Blumenthal fears so much isn’t collusion—it’s sound management. It’s an airline CEO recognizing that the best strategy is to right-size and optimize an existing network before going head to head with other airlines on particular routes. It’s the kind of discipline that is getting the airline industry back on a sound financial footing and make much-needed capital investments—to fliers’ benefit in both the long run and near term.

Our politicians like to think they can run businesses better than those businesses’ own leaders. But as Ronald Reagan might have put it, the trouble with senators isn’t that they’re ignorant; it’s just that they know so much that isn’t so.

This article originally appeared in The Weekly Standard.

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