Wednesday, May 31, 2017

Michael A. MacDowell: Airlines need realignment of corporate culture

In the face of unprecedented negative airline publicity, House Transportation Committee Chairman Bill Shuster, a Republican from Pennsylvania, told airline executives that if they didn't improve customer service, "We're going to act and you're not going to like it." The threat may be real, but the timing is late.

Congress had a real opportunity to ensure better airline service between l978 and l985, the years in which deregulation of the airline industry took place. As the father of airline deregulation and chairman of the Civil Aeronautics Board, Cornell economist Alfred Kahn predicted deregulation would lead to a plethora of new low-cost airlines. This competition would in turn lower prices on all airlines.

Also, as predicted, the resulting lower airline ticket prices that followed deregulation increased the number of passengers, particularly among those who could not previously afford to fly. Kahn's theories became fact as upstart airlines forced major carriers to lower ticket prices. So many new passengers were now able to fly that while airlines made less on each passenger, they significantly increased their overall revenues.

There were two major concerns during those early years of airline deregulation. First, because the Civil Aeronautics Board had previously forced some airlines to serve smaller markets where profit margins were thin or non-existent, many thought deregulation would force those small airports out of business. With a few exceptions, this has not come to pass. New airlines spawned by deregulation often chose smaller airports to avoid high landing fees at larger airports. Lehigh Valley International Airport is a case in point.

The second concern was that deregulation would eventually lead to consolidation in the industry, which would constrict competition, raise prices and lower service. As Adam Smith, the father of market economics, said in 1776, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Price fixing has not seemed to be as evident within the industry as some thought it would be. However, what has evolved is a sense of collective arrogance among airlines and their employees when companies no longer feel the pangs of competition.

These massive new combined airlines operate with a sense of indifference to customers spawned by a culture of corporate self-importance and the knowledge that passages have few alternatives. They operate under lock-step procedures sanctioned in the executive suite. They give flight attendants and agents little leeway to apply common sense.

Such was apparently the case when United physically removed a properly ticketed and seated passenger by dragging him off the plane. By the way, the use of cameras and iPhones that record such treatment is prohibited under the airline's procedures manual.

In the l980s, when the authors of airline deregulation considered what would happen if a lack of competition led to price fixing or poor service, their fallback was to say they would use existing anti-trust legislation to enforce competition, lower prices and enhance services. Unfortunately, this part of the airline deregulation game plan has never been used. Congress and the Justice Department steadfastly refused to apply anti-trust laws to airlines.

For instance, when the Justice Department and congressional committees looked at the proposed merger between US Airways and American Airlines in 2013, they found in seven of 12 markets where US Airlines and American competed that the merger would result in only one carrier serving that market, which would result in higher airfares and poorer service in those markets.

However, the case against the merger by members of Congress disappeared after the two airlines agreed to sell some landing slots to competitors. It is hardly coincidental that one of those seven markets was Reagan National Airport close to Washington, D.C., which is used by more congressmen and D.C. bureaucrats than any other.

So, when threats such as those issued by Congressman Shuster are made to airline industry officials, the public sees few changes in the service and attitude they experience when flying. The use of anti-trust laws may just be the 2-by-4 necessary to get the attention of the airlines and give their corporate culture a little attitude adjustment.

Michael A. MacDowell, who lives in Harveys Lake, Luzerne County, is managing director of the Calvin K. Kazanjian Economics Foundation and president emeritus of Misericordia University

Original article can be found here:  http://www.mcall.com/opinion

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