09.15.2014

Neoliberalism at 30,000 Feet

  • Llewellyn Hinkes-Jones

Airline deregulation has wrought service cuts, endless fees, and reduced worker pay.

xlibber / Flickr

When United Airlines flight 1462 made an unexpected landing in Chicago last month, it was not due to mechanical issues, weather conditions, or flight logistics, but a battle over legroom in the aisles. As one passenger tried to recline her seat and another used a $20 device called a Knee Defender to prevent the occupant ahead of him from leaning back, the battle over personal space descended into a scuffle. The pilot opted to make an additional stop to remove the unruly passengers.

Flight 1462 hasn’t been alone. Not just the random dispute of irate travelers, similar flights have been diverted because of the airlines’ frenzied drive to wring as much money out of customers as possible. Airlines are increasingly cramming more passengers onto each flight, termed “densification,” and regularly overbooking flights. Any aspect of a flight that was once provided free of charge — from a checked bag to a complementary drink to using a credit card to pay for a ticket — can now be charged à la carte.

So relentless has this nickel and diming been that when news reports claimed the discount airline Ryan Air was about to start charging for in-flight bathroom use, many people took them seriously. But the story wasn’t true — it was all a ploy for free press from a company unwilling to pay for advertising, help disabled passengers, or provide ice for drinks.

Such frugality is only one of the problems wrought by airline deregulation. If the greatest benefit of deregulation has been that more people can afford to fly, it has come at the cost of increased tumult within the industry and reduced pay for workers.

Before the airlines were deregulated under President Jimmy Carter, the Civil Aeronautics Bureau (CAB) maintained flight pricing structures, airport gate access, and flight paths. There were rules that stipulated which airlines could compete in which market and what prices they could charge. Loosening restrictions meant abandoning the CAB and its pricing structures, and allowing an unmediated flow of competition.

With fewer restrictions, upstart fly-by-night airlines could compete against major airlines like American/US Airways, United, Delta, Alaskan, and Hawaiian Airways. Such competition, conservative and liberal advocates claimed, would bring down flight costs, providing more savings and convenience to the customer.

But allowing this level of competition also unleashed chaos. While the discount airlines would win over passengers for a time by offering flights half as expensive, the major airlines would respond by slashing their prices in an attempt to drive the upstarts out of business.

By drastically reducing ticket costs, the major airlines would take on an unsustainable amount of debt that, combined with the loss of business to the new entrants, would lead to layoffs or bankruptcy. Pension funds were then raided and labor contracts voided to pay for the price wars. With each airline company collapse, thousands of employees were laid off, decimating union membership.

To compete, the legacy airlines also drove down the salaries of their pilots, and cut benefits and vacation time. Besides a reduction in compensation, a two-tiered pay system has been set up with decent pay for incumbent pilots and markedly low wages for new entrants. Starting salaries for pilots are now as low as $15,000 a year, even as CEO pay rises inexorably. Remarking on a career in which he had seen his pay cut in half and his pension eliminated, captain Sully Sullenberger told the BBC in 2009 that he did not know “a single professional pilot who wants his or her children to follow in their footsteps.”

While unions were still strong in the industry, they were constantly embroiled in bitter labor disputes. Between the voided contracts and the hemorrhaging membership caused by regular bankruptcy, they were left fighting to maintain wage standards in an unnecessarily competitive industry.

The only way discount airlines could offer such low prices was by paying their workers less, using less experienced pilots and sometimes non-unionized labor, offering fewer frills, and running spartan operations that only serviced a handful of routes with a single type of jet liner (thus simplifying pilot and mechanic training). Instead of a single union representing employees across  the industry — typified by the Air Line Pilots Association (ALPA), which represented a majority of pilots — some discount airlines maintained relationships with offshoot unions with smaller membership rolls and less leverage.

The discount airlines also depended on secondary, class-B airports that charged less in landing fees. But those discounts eventually disappeared when the secondary airports no longer needed to cut their fees to attract business.

To maintain their dominance over the market, the major airlines shifted from a direct city-to-city flight standard to the hub-and-spoke system of today. The hub-and-spoke setup allowed large centralized airports like Dallas-Ft. Worth and Atlanta to be ruled by a single company that determines which flights can use which terminals and at what cost.

While the hub-and-spoke system has some benefits, it’s largely inefficient, dependent as it is on multi-stage connecting flights. Combined with the need to cut costs, it would also cause longer airport delays as planes were left waiting on the tarmac to make sure all passengers from connecting flights made it aboard. A single delay in a connecting flight could throw passengers’ itineraries askew, leaving them stuck in a random airport overnight.

The major airlines used other tricks to keep out nascent airlines. They paid off travel agents and travel reservation sites to give preference to their particular airline. They introduced frequent flier miles to maintain brand allegiance.

Upstart discount airlines like Southwest were able to survive the vicious price wars by leaning on quality of service and direct flights, but most did not. The list of companies that were liquidated, temporarily or permanently, as a result is impressively long considering what it takes to start an airline: America West, PanAm, TransWorld, Western, Piedmont, Frontier, Northwest, National, Texas International, People Express, ValuJet, Air Florida, Eastern, Braniff, Skytrain, Pacific Southwest, Western Pacific, and many more.

Once bankrupt, the major airlines then bought the upstarts, creating an effective oligopoly. So much for competition.

Already on a spending spree during the heady years of the 1990s dot-com boom, buying up failed companies only saddled major airlines with more debt. While most people assume that the airlines had to be bailed out in 2001 because of the decrease in traffic after the September 11 attacks, it was also because the airlines were insolvent from previous financial problems, largely as a result of the price wars.

The actions of the major airlines may seem ruthless, but they were largely protecting their position in a deregulated industry that allowed the discount airlines to undercut labor standards just to offer cheaper prices to customers. They were defending themselves from disruption.

Considering the skill, education, and investment needed to maintain a safe and reliable airline, it is not exactly a business that needs to be disrupted. Running an airline is labor intensive, and it only turns a profit at random intervals. There’s little money to be skimmed off.

With profit margins so thin, tickets on a half-empty flight have to cost twice as much as a fully booked one. Which is why, for a time, smaller cities that weren’t necessarily travel hubs bore the brunt of deregulation. Routes that weren’t fully booked experienced skyrocketing flight costs, which, for small-town travelers, was a huge disincentive to fly.

The bilking of transportation costs to and from smaller cities after a run of chaotic competition is eerily similar to what happened during the railway mania of the 1800s. Investors rushed to build rail lines everywhere and anywhere while money was flush. But once cash became tight, the rail industry used their monopoly power to charge exorbitant prices for anybody trying to ship in and out of smaller towns like Cincinnati. Such predatory pricing is what led to transportation regulation in the first place.

Since the 2001 airline bailout, things have calmed down a bit. It no longer costs $600 to fly from New York to Pittsburgh. Fewer discount airlines are entering the market, and the handful that are still in operation work with the major airlines on various routes (e.g. “flight provided by Frontier”). The price wars have settled to a quiet struggle played out on online travel registration websites like Kayak.com and Hipmunk.com, which have wholly replaced the job of travel agents.

But for airlines, the lower revenue from cheaper tickets has to be made up somewhere, and convenience may be the easiest element to remove. Airlines are pushing petty indignities on passengers and flight attendants by way of a million miscellaneous charges. Half the time, the discounts saved by cheaper tickets from deregulation are recouped in add-on fees. Eventually airlines may just offer extra-saver flights devoid of the most basic accommodations and simply force passengers who can’t afford first-class seats to be stacked in the cargo hold like cord wood.

So what’s the alternative? The airline industry is close to being a natural monopoly, there’s little reason to foster competition. Indeed, the industry would benefit from nationalization or a well-regulated public option. At the very least, more regulation is necessary.

Without subsidization and some rules about flight costs, there is little incentive for the airline industry to provide affordable flights to locations that aren’t fully booked. The irony is that we already subsidize airline travel. It just occurs through bailouts and bankruptcies after each airline has fought tooth and nail for market dominance. Public funds wind up paying for a wasteful, inefficient system characterized by irrational, destructive competition.

Through regulation or more aggressive means, it’s quite possible to ensure good wages and working conditions and safe, affordable, reliable service — all without blackout dates, three layovers, or all-out battles for legroom.