NPR did a piece this morning on the loss of airline service by many communities as a result of higher oil prices. The basic point is that the higher prices can make service impractical because it raises costs. If the airline charges enough to cover its costs, then it will get fewer passengers, which would force further price increases. The result could be that there is no fare at which regular service can profitably maintained. The piece then noted the economic harm that many communities fear if they lose regular air service. This was exactly the rationale for the regulatory structure that was in place prior to 1978. This structure deliberately kept prices on main routes higher than necessary in order to allow airlines to cover the cost of serving less heavily trafficked areas. In effect, the system of regulation had passengers on the main routes subsidizing the service to smaller cities. If loss of service to smaller cities proves to be a major problem, it may be desirable to return to a comparable system of cross subsidies. The history would have at least merited some discussion in this piece.
--Dean Baker
