Comment: Useless Airways

The latest corporation to file for bankruptcy is not another fraudulent telecom, but US Airways. The airlines were among the sectors hardest hit by September 11. And with its concentration in the Northeast, US Airways was among the hardest hit of all. But it would be a mistake to blame the airlines' woes on the terrorist attacks. Airlines and the telecoms have one big thing in common: Both are casualties of deregulation.

As Paul Starr points out in "The Great Telecom Implosion," networked industries such as telephone companies have trouble competing in a wide-open market. One company is pretty much like another; new competitors tend to build a lot of excess capacity in order to grab market share, and pretty soon nobody is making a living.

Airlines are a similar story. Since they were deregulated in 1978, U.S. airlines as a whole have lost several billions of dollars. What's a little hard to grasp is that deregulation could be bad for shareholders, workers and consumers alike -- and that regulation is necessary to protect each of these constituencies.

Like telephone dial tones, seats on airlines are virtually identical commodities. There is little brand loyalty, and consumers make choices based mainly on price. For the airlines, cut-rate tickets available on the Internet are the last straw -- and airlines have resorted to a variety of gimmicks to defend their revenues. They've devised "fortress hubs," frequent-flyer programs and byzantine fare structures. They've snuffed out low-cost competitors and made implicit deals with one another to carve up markets, the better to raise prices on monopoly routes. But nothing has been sufficient.

What's truly amazing is that US Airways could go bankrupt, despite tactics that would make an old-fashioned robber-baron monopolist blush. For instance, US Airways has a monopoly on nonstops between Washington and Boston. It charges around $670 for a basic roundtrip fare. It controls 74 percent of flights in and out of Philadelphia, and charges as much as $550 for a roundtrip flight between Pittsburgh and Harrisburg, Pa. It is literally cheaper, and almost as fast, to take a taxi.

The airlines are suffering (along with the passengers) not because of bad management but because this industry, like telecommunications, was never a good candidate for deregulation. Either there is genuine competition -- in which case passengers get good deals and carriers go broke -- or the airlines find ways to accumulate monopoly power and consumers get snookered. Competition just doesn't produce a happy medium. Sometimes, as in the case of US Airways, there is simultaneously the worst of both worlds: monopoly power over and exorbitant prices on some routes without enough income to make up for the ruinous competition on others.

It's instructive to compare the politics of regulatory failure in accounting and corporate governance with that in telecommunications and airlines. In the former case, the financial results were catastrophic and the political reverberations almost instantaneous. In the space of a few weeks, even the most diehard champions of a free market turned around and decided that Congress needed to legislate tougher standards for accounting and corporate self-dealing, and to beef up the Securities and Exchange Commission.

But even though the cases of airlines and phone companies are every bit as much a failure of deregulation, we are not yet seeing second thoughts. The debates about the US Airways bankruptcy involve questions of whether labor made enough concessions, who the bankrupt carrier might merge with and how federal loan guarantees should be applied. Airline deregulation, like that of telecommunications, was a bipartisan creation and neither party is yet ready to disavow it. Even consumer groups, looking at the monopoly power in both industries, mostly think that the cure is more competition rather than a fundamental revision of the premises. But true competition would just push more carriers into bankruptcy.

Face it: There are some industries where the ideal of pure competition just doesn't work. Try to pursue it and you get a crazy quilt of scams, monopolies, bankruptcies, random bargains and opportunistic price-gouging. A couple of decades ago, free-market economists were thrilled that lawmakers finally saw the light. Now, both need to go back to class.

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