August 15, 2005,
Despite heavy traffic levels during this summer’s tourist season, the airline industry is expected to lose at least $2 billion in 2005 alone. Such a performance may not surprise most stock analysts, who consider the commercial aviation sector to be “cyclical” in nature, but the “cycle” for most airlines all too often seems to run from bad to worse.
Although business earnings reports might not seem like an immediate matter of concern for taxpayers, the recent decision by United Airlines to drop $9.8 billion in obligations onto the government-backed Pension Benefit Guarantee Corp. is only one reason why reforming federal policy toward the airlines should be a top priority for taxpayers and airline passengers alike.
For most Americans, the era prior to airline deregulation in 1978 is either a distant memory or something they may have only seen portrayed in movies like The Aviator. Unfortunately, although deregulation did democratize air travel (in turn saving air travelers an estimated $20 billion annually), the federal government regulates the industry with what can only be described as a very heavy and clumsy hand.
Since 9/11, Washington has provided no less than $9.5 billion to the airline industry in the guise of grants, loan guarantees, and tax waivers. Although one could argue over the fairness of such actions, given what occurred on 9/11 and the ensuing fallout, the reality is that industry experts cite excess capacity as one of the biggest problems of the air carriers. Worse, when airlines act to reduce overcapacity and save costs, federal regulators often stand in their way.
The pre-9/11 proposed merger between United and US Airways is just one example. At the time the two companies were forced to call off their planned merger when the U.S. Justice Department threatened to block the deal. The latest merger effort involves US Airways and America West. This deal will also face federal scrutiny that could once again bully the industry into retaining an unhealthy oversupply of capacity.
Yet another area in desperate need of reform within the aviation marketplace is air traffic control. According to Russell Chew, chief operating officer of the Air Traffic Organization within FAA, air traffic control is facing an $8.2 billion funding gap over the next five years. This shortfall mainly is the result of inefficiencies inherent in the unionized, government-operated system, combined with the ongoing decrease in ticket prices. The latter effect means that revenue from the 7.5 percent tax on airline tickets continues to dry up despite surging traffic.
The solution to these problems is obvious: the federal government should “commercialize” air traffic control services and allow a private organization to manage them. Private management would be able to implement a more market-based pricing scheme and invest in new technologies to increase safety and reduce costs. Congress’s Government Accountability Office has studied air traffic control operations in 5 of the 38 countries that have commercialized operations Australia, Canada, Germany, New Zealand, and the U.K. and has determined that commercialization has brought on reduced operating expenses, improved efficiency through modernization, and a drop in unit costs, all without compromising safety.
Aside from the systemic flaws plaguing the government’s policy toward the air travel sector, Congress’s tendency to meddle is also readily apparent in the existence of the so-called “Wright amendment.” This federal rule restricts flights into and out of Love Field near Dallas. The cities of Dallas and Fort Worth, and the Dallas/Fort Worth airport (DFW), which opened in 1974, tried unsuccessfully to force Southwest Airlines to move its operations from close-in Love Field out to DFW.
Although they failed to force Southwest to move, the existing carriers convinced House Majority Leader Jim Wright (from Fort Worth) to push through Congress a measure designed to stifle the growth of Southwest and punish the up-and-coming carrier for not moving to DFW. The Wright amendment originally restricted interstate service from Love Field to cities in just four states Louisiana, Arkansas, Oklahoma, and New Mexico. In 1997, senators wanting to bring Southwest’s low fares to their constituents altered the Wright amendment to allow flights to Alabama, Kansas, and Mississippi. But, if you want to fly Southwest from Love Field to Los Angeles, you must buy a ticket to Albuquerque, collect your baggage there, buy another ticket, go through security again, and board another plane.
Policymakers claim to be concerned with creating stability in the airline industry and fostering the most favorable climate possible for passengers, yet much of the turbulence in commercial aviation is actually caused by federal interference. As the number of airline passengers continues to grow and the fortunes of the industry continue to sag, Congress needs to take a careful look at these and other ways to re-deregulate the airlines.
Paul J. Gessing is director of government affairs for the National Taxpayers Union. His previous writings include NTUF Policy Paper 129, “Flying Blind: How Tax-Financed Air Traffic Control Has Taken American Aviation Off-Course,” and NTU Issue Brief 144, “Air Traffic Control Commercialization: A Window of Opportunity?”