Things in the Sky

The idea of re-introducing regulation to the airline industry has been bounced around a little bit this week, first by former American CEO Bob Crandall. No one should be surprised by this considering the fact that he fought deregulation tooth and nail way back when.

For a good analysis of Crandall’s speech, head over to Evan Sparks’s blog. I agree with most of what he says and there’s no point in essentially repeating nearly identical opinions on the speech over here, though I will share one point.

Crandall says that we need regulation to “establish minimum fares sufficient to cover full costs.” One argument I have heard in favor or regulation is that airlines in a deregulated market will charge fares that don’t cover costs, and that’s a bad thing. But is it? It certainly isn’t for the consumer, but it can be good for the airlines as well. When an airline will enter a new market, it will often charge low introductory fares to encourage passengers to try the new service (even at a small loss) in hopes of earning loyalty and making that small loss back in the long-term. And while I don’t know this for sure, I am willing to guess that Southwest’s Ding fares are slightly below or very close to cost. But selling a really cheap fare at the last minute fills a seat that would be empty otherwise, and adds some revenue. The fact is though, that an airline can’t continually sell fares below costs, and will eventually raise fares, otherwise the company fails.

In other regulation news, a spokesman for the International Association of Machinists and Aerospace Workers was quoted in the Houston Chronicle on the regulation/deregulation debate:

“The cities that are going to be losing service as a result of Continental’s cuts are casualties of an unregulated airline industry. Airlines cannot be profitable and competitive without government regulation. And until the government intervenes, additional communities will lose service as our air transportation system becomes dismantled.”

It isn’t shocking that a union spokesman would say this. Labor unions exist to help fight to keep jobs, whether it is economically viable or not. But this is a bit extreme. Airlines can’t be competitive or profitable in the deregulated market? Apparently Southwest doesn’t count. Nor is there a huge loss of service due to station closures by Continental. The vast majority of these stations will still be served by other airlines, many by Skyteam partners. I did a quick check of the stations losing service, and the only one losing all service is Monclava, Mexico, which only had one ERJ flight a day five days a week. (Please correct me if I missed a station.)

In a deregulated market, airlines must be allowed to make independent actions. But they must also be allowed to fail. Airlines cannot fight regulation when times are good and then expect the government to help (i.e. regulation). Though US Airways doesn’t seem to be expecting any help.