Friday, July 9, 2010

The Glory of Deregulation

The other day, our friend and foil at To Get Rich is Glorious put up a couple of posts, one called "Questions for Progressives" and the other "What Inflation?" both included references to the airline industry.  What Inflation purported to demonstrate that airfares have decreased in real terms over the last decade while Questions for Progressives included this bit: "Deregulation of the airline and trucking industries are widely credited with producing lower costs and improved service. What are the lessons should be taken from this experience?"  Both of these items raised my hackles, particularly for the reference to the airline industry.  I had set about to write a post describing, contra the premise in Questions for Progressives, the long decline of the airline industry since deregulation.  But, TIME has done my work for me, relating the history of decreased service and increased prices since deregulation.

Highlights:
And, the best part of most of these added fees?  Well, the best part is that they occur after ticket purchase meaning the Bureau of Travel Statistics does not count them as airfare--leading to the apparent real decline airfares!

31 comments:

Colin said...

First off, I applaud the use of these fees. I would much rather pay for what I use than pay more for something more inclusive that I don't use as much. If I can get a lower ticket price and instead have to bring my own food, that's a trade I'll make.

In any case, it is plain that -- even accounting for such fees -- prices are far lower than when the industry was regulated:

http://www.wwaytv3.com/node/1314

Air travel analyst Terry Trippler conducted a random survey of schedules and airfares comparing ticket prices of today with those from 25 years ago for 27 different cities.
When 1982 prices are adjusted for inflation, Trippler found that today's prices are actually lower.

In 1982 there were three roundtrip flights from Boston to Los Angeles, with the lowest fare costing $298. Adjusted for inflation, that ticket should cost $635 today, but Trippler found that, not only are there nine roundtrip flights instead of three, the lowest fare was just $199.

Flying from New York to Miami? In the eighties there were 21 flights, with the lowest fare costing $188. That same ticket should cost $400 in 2007, but Trippler found that the lowest fare was actually $158 and there are now 25 nonstop flights.


But don't just rely on these anecdotes, check out this chart:

http://cavehicdragones.files.wordpress.com/2008/04/picture-1.png

Airline prices have been in perpetual decline since deregulation.

Colin said...

Furthermore, consider that the airline industry has struggled with profitabilty since deregulation. As wikipedia notes:

http://en.wikipedia.org/wiki/Airline

The entry barriers for new airlines are lower in a deregulated market, and so the U.S. has seen hundreds of airlines start up (sometimes for only a brief operating period). This has produced far greater competition than before deregulation in most markets, and average fares tend to drop 20% or more. The added competition, together with pricing freedom, means that new entrants often take market share with highly reduced rates that, to a limited degree, full service airlines must match. This is a major constraint on profitability for established carriers, which tend to have a higher cost base.

As a result, profitability in a deregulated market is uneven for most airlines. These forces have caused some major airlines to go out of business, in addition to most of the poorly established new entrants.

...Since 1980, the industry has not earned back the cost of capital during the best of times. Conversely, in bad times losses can be dramatically worse. Warren Buffett once said that despite all the money that has been invested in all airlines, the net profit is less than zero.


This lack of profits is a sure sign that money charged by airlines is simply going to meeting their costs rather than lining pockets with profit. Just further evidence that if you want to stick it to corporations, deregulation is the way to go.

Colin said...
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Valentina Pasquali said...

My sense, from personal experience, is that flying today compared to flying even just in the 1990s is a miserable endeavor: over-crammed, under-staffed airports; outrageous security-related regulations that force passengers to head to the airport hours ahead of an already long flight, to abandon bottled water, and to sustain hours-long security lines; nonexistent costumer service, on the ground and on-board; ridiculous fees that need to be paid every step of the way; and, at least as far as this summer, skyrocketing prices (direct r/t to major European capitals from June to September are in the ballpark of $1200-1500, while they used to be no more than $800-900). Even if overall prices adjusted for inflation might have slightly decreased in the last thirty years, this is still not a good deal. In fact, sometime I think airlines should pay me to fly...

Ben said...

First of all, the industry was already deregulated in 1982. Second, the fees highlighted by the TIME article are not comprehensive nor do they encapsulate the overall decline in service. Perhaps a better measure than the number of flights between hubs and major destinations would be an examination of the number of direct flights from non-hub locations to non-hub locations, or even connecting flights between those destinations. Simply paying less is not the point, you're paying less but lower quality service. How much lower quality? According to the American Customer Satisfaction Index, customer satisfaction with the airline industry has declined 8.3 points or nearly 12% since 1994, the first year data was collected.

As to your last point, struggling with profitability is not necessarily an indicator of costs being well spent. It could, instead, indicate the failure of a business model: hub-based air service.

Finally, I'm surprised by your defense of the air industry. I would think such a market evangelist would be blue in the face over the monopolistic behavior of airlines: owning hubs, keeping competitors from using their hubs through cost-prohibitive leases.

Colin said...

Also see this paper from a Federal Reserve economist:

http://www.u.arizona.edu/~gowrisan/pdf_papers/airline_competition.pdf

Conclusion
The airline industry today operates in an environment where firms set prices and domestic routes given market conditions, but where access to some key inputs, such as airport boarding gates, are determined by non-market mechanisms. While profits have fluctuated a great deal, the industry in the U.S. has been characterized by steady growth, falling
prices, and moderate concentration, suggesting a
positive impact of deregulation. Policies to allocate some key inputs on a market basis may yield even more efficient outcomes.

Gautam Gowrisankaran
Economist


In other words, prices have fallen, deregulation has been good, and even more deregulation would be better.

Colin said...

Valentina,

I agree that there are many things wrong with airline travel. Security, however, is the fault of the government (at least here in the US) which runs this operation. Airports also in the US are almost invariably run by a public authority rather than the private sector.

I can't speak to airline customer service as I don't really have any horror stories from the past few years to share. I usually just show up get on board, deplane, and that's about it. Not a great deal of interaction with the staff.

As for prices, I flew to Europe in the summer two years ago for around $650, and ten years ago went to Amsterdam from Baltimore for $220 roundtrip. A friend of mine just got back from three weeks in Europe and he paid under $400.

We can swap anecdotes all day, but the data still shows a significant decline in airline prices.

Ben said...

It also shows a significant decline in satisfaction, service, and the services provided for those prices.

You write that deregulation is good--that's a really normative statement, Colin. What's good? And good for whom? Clearly the customers are displeased--and more displeased than they were 15 years ago. And, as you note, the airlines are struggling.

Colin said...

First of all, the industry was already deregulated in 1982.

Look at the chart I linked to. It begins in 1978 with deregulation. Prices have fallen ever since.

Simply paying less is not the point, you're paying less but lower quality service.

No, it absolutely IS the point. Direct flights are available, but you have to pay a lot more. The revealed preference of consumers, as indicated by the dollars they choose to spend, is that the delays and lowered prices of the hub system are more attractive than the time savings and higher costs of direct flights. I mean, I would love cheap direct flights, but I am also not naive and realize that the hub and spoke system is more efficient and thus produces lower costs.

How much lower quality? According to the American Customer Satisfaction Index, customer satisfaction with the airline industry has declined 8.3 points or nearly 12% since 1994, the first year data was collected.

Thankfully I don't have to shop with an industry but rather individual airlines. I'll note that SouthWest and Continental have higher ratings now than 10 years ago. If consumers don't like a particular airline there are always alternatives. That's one of the many beauties of the marketplace. Consumers can make their own trade-offs between service and price.

I would think such a market evangelist would be blue in the face over the monopolistic behavior of airlines: owning hubs, keeping competitors from using their hubs through cost-prohibitive leases.

Except, airports are not an example of the free market at work, as they are most often run by public sector entities. Thus it is little surprise that we find cozy anti-competitive arrangements.

Colin said...

It also shows a significant decline in satisfaction, service, and the services provided for those prices.

You write that deregulation is good--that's a really normative statement, Colin. What's good? And good for whom? Clearly the customers are displeased--and more displeased than they were 15 years ago. And, as you note, the airlines are struggling.


Deregulation is good using metrics such as choice and price. Consumers now have more flights to choose from and lower prices. Those are metrics with hard numbers.

Service is a nebulous concept which is not easy to measure. You can poll people all you want, and my experience is that people like to complain. As they say, however, money talks. And it seems that for all of the complaining about service, people keep shelling out to fly. They could pay more, and get more, with upgraded classes for example, but most often choose not to.

Under regulation, perhaps I would get improves service, but it is beyond question that prices and choice would be diminished. At least under deregulation I make the choices I want and the desired mix of price vs service.

Airline deregulation has brought air travel to the masses, and is an unquestioned success. Problems still remain with the continued security mess, disastrous airports and flight delays due to an ancient air traffic control system. But this is unsurprising when all three are run by the government.

Ben said...

First of all, price is only clear when what is delivered is unchanging through time. We've been through a long discussion demonstrating what has been delivered is not comparable. Further, you yourself describe the airline as a service industry. Therefore, one of the things you're paying for is service. Our only ability to measure service is through polling. And while you're dismissive of it, its very value is found in your statement: "my experience is that people like to complain." Let us assume that you're right. Further, let us assume that people today like to complain at a similar rate as they did fifteen years ago. If both those things are true, then we've sufficiently isolated the bias to compare the survey numbers from today and those from fifteen years ago--demonstrating in absolute terms a nearly 12% decline in service over that period.

Ben said...
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Jason said...

The deregulated airline industry service standards: http://travel.nytimes.com/2010/07/11/travel/11prac.html?ref=travel

Colin said...

Ben, I have cited a number of sources which indicate prices have substantially declined. If you have any sources which indicate the contrary, please feel free to cite them.

I will further note that the new fees which you mention have largely appeared in the past few years as a response to higher fuel prices. Presumably even under a regulated model prices would have had to go up to accomodate for this as well. Based on airline profits we certainly know the new fees aren't going to line their pockets. There is little reason to think prices would be lower under a regulated model unless one thinks that companies are more efficient under regulation than competitive markets, which flies in the face of both theory and experience.

Our only ability to measure service is through polling.

No, not true at all. We can also look at what people actually pay for. If people claim to dislike a product, but they purchase it, it makes one suspicious of their claims. Again, talk is cheap, listen to the money.

Also, again, under the current system the customer is free to purchase the level of service they want. If service is really that important, then customers should fly with airlines rated higher in their level of service. You're free to choose. No one is holding a gun to anyone's head forcing them to fly a particular airline or in coach class.

Personally I want the cheapeast fare possible. I will gladly bring my own food, my own entertainment and fewer bags if I can get a cheaper fare. It's just like with other aspects of traveling. You can go on vacation and pick the hotel, activities and food based on price. Or you can go to Club Med and get it all inclusive. It's your choice.

Deregulation means consumer freedom. The regulatory model means higher prices and fewer choices. How that could be in any way preferable is beyond me. In any case it is instructive that we don't hear any voices calling for a return to airline regulation.

Jason said...

I'd note that you can't simply look at what people pay for. If someone wants to go from DC to LA they can take a 5 to 8 hour flight (direct versus stopover) or drive for several days or take a ship from Baltimore through the Panama Canal around to LA taking, again several days to potentially more then a week.

If you consider opportunity costs associated with modes of travel other then by plane you find a situation were it costs several times more to take any mode other then a plane. Hence, choice is pretty limited. You fly or you don't go.

And taking the choice argument from another angle. Let's say I want to fly home to see my parents in Decatur, IL and would like to land at an airport within 100 miles of their house (avoiding opportunity costs associated with farther flung airports) then I have very few options for carriers. The Central Illinois Regional Airport in Bloomington, IL (45 miles from my parents house) is the largest, busiest regional airport within that 100 mile radius and has just 4 carriers servicing the airport. There are no direct flight from any of the Washington Metro Area airports. So I have "choice" from the 4 airlines, but surely they know my choice is limited. They know the competitive landscape of that regional airport and they quote my prices accordingly.

Suddenly my "choice" is beholden to an oligarchic market structure which does not typically present consumers with the fair market price.

Ben said...

Colin, I have pointed out the problems with your decrease in price data. A very slight drop in price has been accompanied by both a decline in service (as determined through customer satisfaction) and through the stripping out of line items previously contained within the price, arbitrarily lowering the airfares recorded by BTS and making the comparisons in apt at best--we're not talking apples (1979) to apples (2010), we're talking apples to the skin, seed, and some of the meat of the apple.

As far as your argument that people keep paying for it therefore they like it argument, I think Jason does a good job pointing out the problems with it. The fact is, in many cases the choice that you point to is effectively nonexistent, either between competitors within the industry or between this service sector and an alternative service sector. A hyperbolic comparison might be to a person thirsting to death but still drinking water tainted with cholera--your argument might be that they're still drinking the water so it can't be that bad. An answer might be that they drink the water because the opportunity cost of not drinking it (death) is too high. I apologize for the hyperbole but that line of argument is simply not convincing.

Colin said...

A number of points:

No, you absolutely can look at what people pay for. While someone dying of thirst in the desert can't realistically avoid drinking less than pure water, it is a perfectly reasonable alternative simply not to fly anywhere (as Jason noted). And indeed, under regulation this is what occurred, as airline passenger travel rates were far lower.

http://www.bts.gov/programs/airline_information/air_carrier_traffic_statistics/airtraffic/annual/1954_1980.html

Let's look at "Revenue Passenger ton-miles" in 1977, the last full year before deregulation was implemented. It was 20,608,129. In 2007 that had rocketed up to 84,097,643 -- an increase of greater than 400%. (In 1977 US population was around 225 million, and is now 307 million, an increase of 36%)

Talk to people alive during the 1960s and 70s and you will hear stories about how flying was so unusual that passengers actually dressed up for it. Now it has been democratized/commoditized for the masses -- just another example of capitalism giving luxury goods to the masses.

Jason, leaving aside whether 4 airlines constitutes an oligarchic market structure, the better question is whether the price you pay is lower or higher than it would have been in the pre-deregulation era. Common sense would seem to dictate having 4 airlines compete for your business is likely to guarantee lower prices and more choice than a Civil Aeronautics Board setting fares, routes and schedules (as occurred under regulation). Further, did you know that one task of the CAB was to ensure that airlines earned a "reasonable rate of return"? Think about that: the government was ensuring they would be profitable. Now the market reigns and airlines struggle with profitability due to competitive pressures. Another example of deregulation benefiting the consumer and regulation benefiting corporations.

Ben, your contention that there has only been a slight decrease in price is factually inaccurate. Again, look at this chart:

http://cavehicdragones.files.wordpress.com/2008/04/picture-1.png

The decline is more than 50%, which is anything but slight. Lastly, you have offered up only your theory as to why this is not apples to apples comparison, but have offered no proof.

First off, again, due to increasing costs airlines would have had to raise their prices regardless of the regulatory model. Personally, I would rather have an a la carte model rather than be forced to pay all-inclusive in recovering those costs. But to each their own I guess.

Second, I don't how big of a difference those fees make. Let's take US Airways for example, which charges $60 for two bags checked in at the airport (it's cheaper online). Let's then assume you are charged $10 for the inflight meal, $5 for a movie rental and $5 for a pillow. For one, those fees can be easily avoided by simply not checking your bags. For most of my trips one carry on bag and a backpack is sufficient. You can also make yourself a sandwhich and read a book to avoid the other fees.

Second, how big of a factor is this? In this scenario the extra fees are $80, or 40% of the cost of a $200 ticket. Given that costs have declined by more than half, I still come out ahead.

And, yet again, at least under the current model I have some choice. Under regulation I got my in-flight meal, movie, peanuts, and checked bag included -- along with an inflated price. Now I get a cheaper price and only pay for those services I need or want.

Colin said...

Lastly, with regard to service, you know there are plenty of airlines which pride themselves on exceptional service. Singapore, Virgin Atlantic and Emirates are some that spring to mind. Guess what? Due to government regulation, they are prohibited from serving the domestic US market. Thus, an easy way of improving service is further deregulation. I'm all for it -- are you?

Frankly, I don't see how anyone can argue with a straight face that airline deregulation has been anything other than a success. The regulatory was a disaster, and the failure was so apparent that even Sen. Ted Kennedy was a vocal proponent of deregulation along with Ralph Nader. It's an unquestioned public policy success.

Ben said...

It is, of course, ironic that you point to Singapore Airlines as an example of an excellent airline--notably, Singapore Airlines also own 49% of Virgin Atlantic.

As to allowing foreign air carriers to compete in the US domestic market, I am all for it. You see, Colin, it's not that I'm hostile to deregulation, it's that I'm willing to subject it to critical examination. I can argue (with a straight face) that airline deregulation hasn't provided a bonanza of benefits to the consumer because . . . it hasn't. I have, in fact, provided data to back up my points. But let us revisit it:

In 1995, according to BTS, the average Q4 ticket price was $288, in Q4 2009 (in 1995 dollars) that price was $227. But the Q4 2009 price does not include, meal price, pillow, blanket, and baggage. So let's use your numbers: $60 for two checked bags, $10 for in flight meal, $5 for movie, $5 for pillow. As you note that’s an additional $80 in 2009; in 1995 that would have been an additional $56.83 (let’s call it $57 for the sake of nice numbers). So, our 2009 ticket price is actually $284—that’s a real decrease in cost of $4 or 1.3%. Now, at the same time, consumer satisfaction—and let’s just assume that this is the best way to measure all the intangible ills of flying—has decreased by about 12%. Thus, you’re paying 1% less for a product that is 12% inferior or, in monetary terms, in 2009 you’re paying $284 for a product that’s worth $253.44.

Colin said...

You see, Colin, it's not that I'm hostile to deregulation, it's that I'm willing to subject it to critical examination.

As am I. Under deregulation we have more choice and lower fares. To me that is the definition of success. As for customer satisfaction, many airlines are lower than 10 years ago while some are higher. Customers can fly the higher rated airlines if it means that much to them.

As for the data you have provided, thus far it has consisted of one measurement which indicated a slight (8.3%) decline. That's it. And that measurement doesn't even include the regulated era, so we are simply comparing one deregulated era to another. Forgive me if I find this less than overwhelming.

In contrast I have offered travel stats, price stats, and even a freakin' econ paper which all indicate vast improvements.

As for the hypothetical I presented, it was also a worst case scenario. Each one of those fees can be avoided. Indeed, I have literally never paid for a pillow, movie or a meal. I can count on one hand the number of times I have paid to check a bag. Furthermore, your comparison is flawed because in 1995 the price of jet fuel was lower, which is an exogenous factor you do not account for. If you are truly interested in an apples-to-apples comparison then you will account for not only the new fees, but the cost structure faced by the airlines in these differing eras.

But let me conclude by asking you if you favor a return to the regulated model? Should we return to having a government body determine fares and schedules rather than the market?

If your answer is no, then you implicitly concede the point the deregulation has been a good thing.

In addition, I'll note that while in your post you referred to the "long decline of the airline industry" and "increases prices since deregulation" that you have yet to cite any evidence in support of either claim. In fact, we find more passengers miles are being traveled than ever before (which belies your first claim) and declining prices (documented in several places, which belies your second).

Ben said...

Colin, the question isn't which of those fees could or could not be avoided, the question is whether prices have dropped. The only fair comparison of price is to include everything that came with that price (whether you idiosyncratically took advantage of it or not) in 1995. On those terms you must admit--because I demonstrated in the post above--that average fares, when rightly compared, have increased since 1995.

As to statistics, well I've given you BTS statistics, I've given you ACSI statistics, and of course our launching point was a rough catalog of the "long, slow decline of the airline industry"--a point that, until you attacked it yesterday, I honestly thought was uncontroversial. From my experience, and the experience of others around me, and from the ACSI it appears that consumers are less satisfied with the service the domestic airlines provide than they were in 1995.

I wish we had data from the 1970s and 1980s so that we could do a better comparison of the regulated and the deregulated industry.

Let me conclude by noting that your question is a false dichotomy--it is not regulation or no regulation. Instead, the question should be what is the appropriate level of regulation? My question to you is what is the goal of deregulation? Better prices? Well, prices aren't better at least over the last ten years. Better service? Again, over the same period service has declined--and, from the TIME article, it would appear to have been declining since deregulation began. Increased efficiency? That's a mixed picture (see BTS). Whatever your ideology, deregulation can't be an end in itself. It must serve some purpose. The purposes you outlined--lower price and better service--seems not have been met.

Colin said...

Colin, the question isn't which of those fees could or could not be avoided, the question is whether prices have dropped. The only fair comparison of price is to include everything that came with that price (whether you idiosyncratically took advantage of it or not) in 1995. On those terms you must admit--because I demonstrated in the post above--that average fares, when rightly compared, have increased since 1995.

Ben, again, look at the cost structure faced by the airlines. If you are truly interested in an apples-to-apples comparison as you say you are, you will take this into account. Thus far you have declined to do so. Until you do so, your comparison between now and 15 years ago does not hold water.

If you can present any papers, rather than just your own back of the envelope calculations, that prices have not fallen I am all ears. In any case here is yet further evidence of price declines, which includes scholarly work from none other than the Brookings Institution, which isn't exactly the beating heart of the vast right-wing conspiracy:

http://www.econlib.org/library/Enc/AirlineDeregulation.html

Airfares, when adjusted for inflation, have fallen 25 percent since 1991, and, according to Clifford Winston and Steven Morrison of the Brookings Institution, are 22 percent lower than they would have been had regulation continued (Morrison and Winston 2000). Since passenger deregulation in 1978, airline prices have fallen 44.9 percent in real terms according to the Air Transport Association. Robert Crandall and Jerry Ellig (1997) estimated that when figures are adjusted for changes in quality and amenities, passengers save $19.4 billion dollars per year from airline deregulation.

So, Ben, I refuse to admit anything given that I have presented source after source from respected economists, while you have simply presented your own calculations which do not account for the shift in cost structure faced by airlines. After all, jet fuel is an airlines' number one cost source:

http://www.cbsnews.com/stories/2008/03/19/eveningnews/main3952729.shtml

Jet fuel prices are soaring - faster than gasoline. Last March, jet fuel was $1.85 a gallon. This month, it hit $3.48. That's nearly double the price in just one year, CBS News correspondent Nancy Cordes reports.

"On top of that, it exceeds by three to four times the amount of profit this industry made in the last two years," said Jim May of the Air Transport Association.

Just a $1 increase in jet fuel can cost an airline an extra $60 million a year. Fuel is now the No. 1 expense in major airlines - more costly than employee salaries or the airplanes themselves.


After all, the best way to evaluate a policy is to consider the alternatives. I see absolutely no reason to think that a regulated system which guaranteed airlines a profit would result in lower costs in an era with higher jet fuel costs.

Colin said...
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Colin said...

As to statistics, well I've given you BTS statistics, I've given you ACSI statistics, and of course our launching point was a rough catalog of the "long, slow decline of the airline industry"--a point that, until you attacked it yesterday, I honestly thought was uncontroversial. From my experience, and the experience of others around me, and from the ACSI it appears that consumers are less satisfied with the service the domestic airlines provide than they were in 1995.

The BTS stats actually prove my point not yours. You have only cited them to argue that they are flawed, and that if an adjustment is made to account for higher fees that we find an actual price increase. However, I have shown that in order for your apples-to-apples comparison to hold, you must also account for other costs, which you have declined to do.

The rest of the evidence, meanwhile, consists of a poll which indicates an 8% decline in consumer satisfaction, some anecdotes and a Time magazine article. I don't think I am going out on a limb stating that Time magazine is hardly the arbiter of all that is good.

It's hard to take you seriously when you look at an industry with most customers than ever before, which has seen constant expansion and constant increases in usage, and declare it to be in decline. The horse buggy industry is in decline, not airlines.

As to statistics, well I've given you BTS statistics, I've given you ACSI statistics, and of course our launching point was a rough catalog of the "long, slow decline of the airline industry"--a point that, until you attacked it yesterday, I honestly thought was uncontroversial. From my experience, and the experience of others around me, and from the ACSI it appears that consumers are less satisfied with the service the domestic airlines provide than they were in 1995.

The BTS stats actually prove my point not yours. You have only cited them to argue that they are flawed, and that if an adjustment is made to account for higher fees that we find an actual price increase. However, I have shown that in order for your apples-to-apples comparison to hold, you must also account for other costs, which you have declined to do.

The rest of the evidence, meanwhile, consists of a poll which indicates an 8% decline in consumer satisfaction, some anecdotes and a Time magazine article. I don't think I am going out on a limb stating that Time magazine is hardly the arbiter of all that is good.

It's hard to take you seriously when you look at an industry with most customers than ever before, which has seen constant expansion and constant increases in usage, and declare it to be in decline. The horse buggy industry is in decline, not airlines.

Let me conclude by noting that your question is a false dichotomy--it is not regulation or no regulation. Instead, the question should be what is the appropriate level of regulation?

It's not a false dichotomy, as -- if nothing else -- the airline industry is not a case of no regulation (there are plenty). But if you do not advocate returning to the old system, and your only complaint is over the degree of deregulation and not deregulation itself, then you concede the point that deregulation has been beneficial. Indeed, you yourself in this post have advocated for more deregulation (the lifting of regulations prohibiting foreign airlines competing for domestic flights). So I'm not even sure what you are upset about, with your post seemingly borne out of a reflexive opposition to deregulation.

Colin said...

My question to you is what is the goal of deregulation?

The goal is cheaper air fares, expanded consumer choice and improved service. With regard to the first two metrics I have cited several economic studies and charts which indicate the decline in price is real and substantial. Choice has unquestionably expanded. There is evidence of a slight decline in overall service, but then again at least some airlines have seen improvements in this regard which customers are free to fly with if they choose. Furthermore, we also see that government regulation is part of the problem here which prohibits foreign airlines with reputations for superior service from operating in the domestic US market. Lastly, we have no idea what customer satisfaction levels were like during the more regulated era.

Colin said...

Apologies for the multiple posts, duplication and general messiness.

Ben said...

Again, the BTS stats do not prove your point. Taking your numbers in conjunction with the BTS stats, I've shown that you're paying more today than you paid in 1995 for a comparable product.

Mine is not a reflexive opposition to deregulation. In fact, like you've noted, and I've noted, I'm in favor of deregulation in a different regard (foreign competition to domestic air routes). Again, this is a question of where regulation provides benefits and where deregulation provides benefits. My problem is with the claim that deregulation is an unmitigated good. That's not the case.

Colin said...

Again, the BTS stats do not prove your point. Taking your numbers in conjunction with the BTS stats, I've shown that you're paying more today than you paid in 1995 for a comparable product.

Ben, please show me any analysis other than your own which shows a price increase since 1995. Because right now I can point to any number of papers, while you can only highlight your own back of the envelope calculations.

You're a smart guy and all, but I'm going to have to take the professionally trained economists here.

Plus, yet again, you decline to address the role played by higher gas prices. In order to truly account for the impact of deregulation vs. regulation you need to hold all other factors constant. This is basic economic analysis. Gas prices are the number one cost of airlines and they have surged since 1995. You refuse to acknowledge or address this point.

Mine is not a reflexive opposition to deregulation. In fact, like you've noted, and I've noted, I'm in favor of deregulation in a different regard (foreign competition to domestic air routes). Again, this is a question of where regulation provides benefits and where deregulation provides benefits. My problem is with the claim that deregulation is an unmitigated good. That's not the case.

Well, the evidence suggests it is an unmitigated good. I can't think of one bad thing that has occurred due to deregulation. I'm not sure you can either. Lower prices? Check. More choice? Check. More people traveling than ever before? Check. The only negative item you have attempted to establish is a slight decline in customer satisfaction over the last 15 years. But given that deregulation occurred over 30 years ago, and we have no idea what customer satisfaction rates were like at this time, the data isn't terribly useful.

Airline deregulation has been a success. I am literally aware of nobody advocating for a return to the old system. And it isn't just the US -- in Europe, which has deregulated more than we have, cheap flights are ubiquitous. Indeed, to the extent we find continuing problems in air travel they are mostly due to government -- the TSA, air traffic control (unlike the privatized system in Canada), publicly-run airports and rules which limit foreign competition.

Ben said...

Presumably the cost of fuel is built into the ticket cost. The notion of doing a direct comparison: average ticket price to average ticket price, services provided to services provided, I think is uncontroversial. Unless you think that between 1995 and today, airline ceased attempting to operate at a profit and those prices have become decoupled from fuel expenditures.

Now, assuming that I'm wrong in this supposition, attempting to account for fuel cost variations would be exceedingly difficult as airlines do not purchase fuel at the spot price. Instead, they enter long-term supply contract designed to insulate themselves from fluctuations and steep increases in fuel. I think we would have to know the time-step of such contracts to properly conduct an analysis.

Colin said...

Presumably the cost of fuel is built into the ticket cost. The notion of doing a direct comparison: average ticket price to average ticket price, services provided to services provided, I think is uncontroversial. Unless you think that between 1995 and today, airline ceased attempting to operate at a profit and those prices have become decoupled from fuel expenditures.

I don't think you understand what I am saying. Fuel is the airlines' #1 expense. When that expense rises, so too must revenue sources.

If I charge $200 for a flight and my expenses are $180 per passenger then I am in the black. If fuel increases so that my costs become $210 per passenger, I must either raise revenue through increased fares or fees or operate at a loss.

So if I compare one time period with low fuel costs with another time period with high fuel costs the ticket cost doesn't tell me a great deal about how efficiently the airline is operating. You need to control for this cost structure to make the comparison valid.

If you look at airline fuel costs back in the mid-1990s you will see they are much lower.

http://www.economics.neu.edu/morrison/research/house050928.pdf

Check figure 4. The cost of a gallon of fuel has increased from around $0.55 in 1995 to about three times that by the third quarter of 2005 -- which is about the same time we saw all of the new fees introduced.

A much better clue, however, is found in figure 3, which shows revenue per passenger mile in real terms. Since deregulation was introduced in 1978 it has declined by roughly half. Note that this is not labeled as "fare revenue" but simply "revenue," which implies it includes all money made by airlines including fees, etc. This figure alone would seem to end the debate once and for all over whether overall airline prices have increased or not since deregulation.

Now, assuming that I'm wrong in this supposition, attempting to account for fuel cost variations would be exceedingly difficult as airlines do not purchase fuel at the spot price. Instead, they enter long-term supply contract designed to insulate themselves from fluctuations and steep increases in fuel. I think we would have to know the time-step of such contracts to properly conduct an analysis.

Well, that may be the case now, but I don't think it has always been so. After all, Southwest Airlines made a name for itself by using futures contracts, which indicates to me that this was not a common practice. Even while it may be now, in an era of permanently high gas prices it becomes less and less valuable. Indeed, in 2008 SWA lost money on its fuel hedging strategy:

http://en.wikipedia.org/wiki/Southwest_Airlines#Hedging_fuel

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