Tuesday, February 9, 2016
$$On a Wing and a Prayer$$
The price of jet fuel has plunged by more than half. You’d think that the cost of commercial flights would have dropped significantly as a result, since fuel represents roughly 30% of their operating costs. But instead, prices have barely budged, and we still face the new baggage charges, food-for-sale (except on really long international flights), less seat-room, shorter leg-room, few or no pillows or blankets and generally a less-satisfying travel experience. What’s going on?
We call it “consolidation,” mergers that limit consumer choices, particularly at smaller airports or less-traveled routes. With these mergers, there is very little price elasticity. All the arguments to our antitrust regulators, when these mergers were proposed, of “better consumer services” and creating “economies of scale” that would be “passed on to consumers” were bunk at the time the words were uttered before the regulators, fabrications that remain bunk today. The difference? The bunk is our new reality. And you can bet when oil prices rise again, the prices will soar to new heights.
So U.S. airlines keep the difference when they benefit from the price of oil but push consumer airline tickets to the limit anytime costs rise. That’s what you get when companies merge. The Republican-led deregulation efforts have created a very different reality here in the United States, where business is favored over people, as compared to the deeper regulatory oversight we see in the European Union, where people are favored over business.
Further, funds in the U.S. financial sectors wedged their way into the airline industry when fuel prices were pressing the carrier into difficult financial decisions and occasionally formal reorganization. So the decisions being made at the top of the airline industry today are, for the most part, being dictated by these new financial manager-shareholders who are cashing in from their restructuring. And given the dilution of ownership of the big carriers, it doesn’t take that much ownership to control the airlines’ policies.
The January 23rd Economist explains: “Unsurprisingly, then, the [United States’] four biggest airlines—Southwest, Delta, American and United—are coining it. On January 19th Delta kicked off the results season for the airlines, announcing record fourth-quarter profits and forecasting that first-quarter margins in 2016 would be twice as high as in 2015. Analysts also expect its rivals to report bumper earnings for the most recent quarter. In July the US Department of Justice launched an investigation into allegations of collusion over pricing and capacity between the big four (which they deny). But arguments abound on why air fares are so high in America—and what regulators should do to cut them.
“Some think the fact that America’s five biggest fund managers happen to be among the largest shareholders in each of the big four airlines discourages the carriers from competing vigorously. Together, for example, the five investors own around 17% of both American and Delta. In a paper published in April José Azar, an economist, and two co-authors looked at the data and concluded that this common ownership means ticket prices may be up to 11% higher than they would otherwise be. Mr Azar was the lead author of another study, published this month, which found similar effects from overlapping shareholders in American banks.
“In Europe the industry’s falling costs will translate into cheaper tickets (see ). Low-cost carriers such as easyJet and Ryanair compete fiercely with older airlines such as BA and Air France, and young upstarts such as Norwegian Air Shuttle and Wizz Air of Hungary are muscling into the market. The overlap among institutional shareholders in all these carriers is much smaller than in America. It is clear, to say the least, that the same economic forces are not present in North America as they are in Europe, says Jonathan Wober at CAPA, an aviation-research firm [Centre for Aviation]. Operating margins for North American carriers are likely to exceed 14% this year, around double those of airlines from Asia and Europe, reckons CAPA.”
In the United States, our business-friendly GOP majority hands-out-all-the-time-House-representatives-since-we-have-an-election-every-two-years Congress, responds to big business lobbies like puppets on a string. Just as big business rails against regulation, they ply the halls of Congress to make sure that the loopholes and “benefits only for the rich” statutory provisions remain and even expand. Consumers lose big time. Again and again and again.
“One reason for American carriers’ fat profits is a rule banning foreigners from owning more than 25% of voting shares in a domestic carrier in America. Besides preventing the likes of Ryanair and AirAsia from creating wholly-owned American subsidiaries, the rule starves domestic challenger airlines of foreign capital. Analysts say Virgin America would have attacked the domestic incumbents more vigorously if Virgin Group, a British firm that holds an 18.6% stake, were able to inject more capital. Even an increase in the limit to 49.9%, as in the European Union, might encourage more foreign carriers to enter America in joint ventures with locals.
“Perhaps a greater problem is that a shortage of take-off and landing slots at America’s busiest airports makes it hard for challengers to achieve a decent share of the market. At 40 of America’s 100 biggest hubs, a single carrier now operates more than half of the seat capacity. This pushes up prices. For instance, the merger of American and US Airways in 2013 increased American’s market share at Philadelphia’s airport to 77%, resulting in fares there rising from 4% below the national average in 2013 to 10% above it now.” The Economist. Competition appears to be the carriers’ biggest enemy, and they are totally committed to make sure true competition doesn’t happen anytime soon.
Contrary to the cries of the Republican right, we’re not creating new jobs (nor are we able to create more jobs in the airline industry); airport capacity isn’t allowing the airline industry to grow. Our relevant infrastructure – from viable airports to air traffic control – is limited, and we are not spending enough to upgrade and expand. What our Congress and their regulators are doing is helping that heavily polarizing richest of the rich to maintain their massive wealth holdings… at the expense of almost everybody else.
Even with a Democrat in the White House, regulators have to look over their shoulders at a GOP-controlled Congress that is pulling back funding to those regulators. The airline industry, and particularly the relevant fund managers, calling the shots. “The Department of Justice has started to wake up to this. In November it blocked the sale of 24 slots at Newark airport to United, already its biggest operator. But so far there have been few other signs that the authorities are ready to brave the wrath of the incumbents and take the sort of vigorous action that is needed to make American air travel a competitive market.” Economist. We elected them. They lied to us. And they are running on the same-old, same-old “our path will fix the economy” mantra… after years of controlling both houses of Congress.
I’m Peter Dekom, and the willingness of American voters to embrace clever but erroneous slogans and mythology over cold, hard facts never ceases to amaze me.