Herb Kelleher, the legendary founder of Southwest Airlines, proponent of low fares, and friend of deregulation, delivered the Charles A. Lindbergh Memorial Lecture tonight at the National Air and Space Museum in Washington, D.C. He reflected on his long career in aviation, on the fundamentals of Southwest, and offered a few comments about the future of the airline industry. As usual, Kelleher’s lecture was full of humor — most of it at his own expense.

Kelleher recounted a number of critical moments in Southwest’s history, from the four years of litigation just to get started to the fight to operate out of Dallas’s Love Field. When Southwest launched with $26 fares, its competitors undercut the price by half. Kelleher said that he would still offer the same fare, but that every customer would get a bottle of whiskey. “We became the largest liquor distributor in the state of Texas!” he chuckled.

Even though almost all the major airlines opposed deregulation, and although observers thought Southwest would get stomped in a competitive environment, Kelleher said, “Southwest Airlines supported deregulation of the airline industry throughout the 1970s.” A sign of deregulation’s success? When Southwest launched, only 15 percent of American adults had been on a commercial airline flight. Today, 85 percent have, although this is not only due to lower fares but also a growing economy and general better standards of living.

Kelleher then discussed Southwest’s culture and philosophy, encapsulated in its mission statement:

The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.

Employees come first, Kelleher said. “If you honor, respect, care for, protect, and reward your employees . . . they will treat each other and their customers with caring, respect, and hospitality.” Any airline can buy planes, but the “Southwest Spirit” is an intangible that cannot be purchased. It has to be cultivated deliberately. For example, Kelleher could be found answering the phones at Southwest, loading baggage, serving drinks onboard, checking passengers in — sharing the work of the employees. He argued that putting employees first and investing them directly in the company’s mission is a winning strategy: “Esprit gets things done, fast and well — just ask the U.S. Marine Corps.”

To promote that spirit, Southwest has a “culture” program to help spread the Southwest Spirit across a growing operational network. If, like me, you’re a regular reader of Southwest’s blog — which is sporting a great new look, by the way — you can see this culture seep through. The blog is professional, and it’s by definition a corporate product, but it reflects its employees attitudes and experiences so organically that nothing about it rings of corporatese. The airline used the blog to communicate forthrightly when the 737 inspection affair broke, and it let its readers take it to the woodshed, fairly or not, in the comments.

Kelleher said that he was often approached by consultants offering to help Southwest “refresh” its mission statement. He prefers to stick with the one he has, joking “that’s like wanting to refresh Deuteronomy or Leviticus!”

During the Q&A session, he delved deeper into some of the business and policy issues facing the industry today. Unlike previous oil price spikes, which were driven by shocks, he thinks the current rise is a result of long-term demand, and that high oil prices are here to stay. Regrettably, he said, a reduction in capacity is inevitable.

With acting FAA chief Robert Sturgell and former administrator Marion Blakey in the audience, Kelleher joked that the agencies that regulate his airline are fantastic, but other agencies, not so much. Even so, he said, “Our government needs a transportation policy with respect to aviation.” Since aviation is so important, he asked, why do we tax it more than any other industry — even more than alcohol and tobacco. “So they hit me on all three fronts,” he cracked. We must act quickly to improve our aviation infrastructure, he said, lest we fall behind.

And finally, in response to a question about airline consolidation, Kelleher offered a warning disguised as a joke: “It it looks like everything’s going down the tubes, sometimes you like to hold hands!”

Greenhouse gas emissions from domestic commercial aviation have fallen 13 percent between 2000 and 2006, according to recently released figures from the Environmental Protection Agency. I blogged about a USA Today article on this report last week, and I finally tracked down the original, cleverly obscured on the EPA website. (The aviation-relevant sections are here and here.) The pattern of greenhouse gas emissions from aviation mirrors consumption of fuel. Carbon dioxide is by far the most common greenhouse gas to be emitted, although relatively small amounts of methane are emitted , especially during takeoff and landing, along with nitrous oxides. (Newer engines have to comply with EPA rules limiting nitrous oxide emissions.)

The relationship between jet fuel consumption and all aviation emissions (including general aviation and military flights) is even more closely mirrored.

But did emissions fall just because of the 2000-2001 recession and September 11, both of which did a number on the airline industry? That is not clear. As the chart below shows, with the exception of a post-9/11 slump, passenger totals grew even as emissions declined:

This means that U.S. airlines have done a better job of transporting passengers on less fuel. This includes harmonizing schedules, increasing load factors, switching to more fuel efficient aircraft and engines, and generally undertaking fuel-saving measures. (Alaska Airlines, for example, bought lighter aluminum beverage carts to replace their steel ones.) The FAA also takes some credit for the drop in emissions, including the introduction of Reduced Vertical Separation Minimum and Continuous Descent Arrival, and it promises even greater gains with the NextGen program to transform air traffic control and allow planes to fly more direct routes.

It also shows that increasing the cost of fuel will force airlines to do with less of it. The several-times-over run-up in oil prices since 2000 has functioned like a de facto carbon tax, albeit one that does not generate government revenue or necessarily lead to investments in alternative energy or climate change mitigation.

I’m not convinced that we are close to “carbon-neutral” growth, as FAA associate administrator Daniel Elwell said recently. He is attributing a lot of the projected efficiency gains to NextGen, which is way behind schedule and way over budget. But all the same, I’m pleased and impressed with the U.S. performance in reducing its aviation-related greenhouse gas emissions.

From here, I turn it over to commentators who are better-versed in climate change and environmental policy.

U.S. Greenhouse Gas Inventory Reports [EPA]

• If it can get slots, Virgin America’s next destination will be Chicago O’Hare. [Today in the Sky]
• China unveiled the newly formed state-owned firm, CACC, that will construct that country’s large jets. See here for background. [Xinhua]
• Nigeria is acting to modernize its aviation sector. See this WSJ article for background on West Africa’s flying woes. [Aviation Safety Network]
• The European Commission has OKed the “grey market” in airport slots that has long been a feature of congested hubs like Heathrow. [ATW Daily News]

[Alfred] Kahn and the [Civil Aeronautics Board] were facing not just one but three airline mergers in the summer of 1978. In addition to the battle for National, Continental Airlines and Western Air Lines had filed for approval to merge, and two local service carriers — North Central Airlines and Southern Airways — also wanted to combine forces.

Kahn was deeply troubled by all this merger activity. After all, the CAB has in practice given carriers virtual carte blanche to serve any domestic markets they wanted. “This is the last time in the world anyone needs to merge to gain new routes,” the CAB chairman told a reporter later that summer. “We are strongly motivated to let anyone fly wherever they want. But instead of grasping the opportunities we’re offering, this disease, this psychology, is getting abroad that airlines ought to merge.”

– Barbara Sturken Peterson and James Glab, Rapid Descent: Deregulation and the Shakeout in the Airlines (New York: Simon and Schuster, 1994).

One of my favorite blogs, Strange Maps, posted an entry I submitted — Swiss International Airlines’s map of its American destinations, which is gloriously ill-informed about American geography. Apparently Hudson Bay is now a landmass, Sacramento is in Nevada, Memphis swapped places with Chattanooga, and . . . the errors continue. Just look at the map below. As a commenter on the blog noted, “Wow, this is almost beauty-pageant-contestant bad.”

I just hope Swiss’s navigational charts are correct, or else flights to “Pittsburg” better be equipped with pontoons.

According to an article in USA Today, an EPA report indicates that the U.S. commercial aviation industry, despite having expanded substantially since 2000, has reduced its greenhouse gas emissions by 13 percent. I’m trying to track down the EPA report (which is not readily available online) to probe these numbers further.

These findings dovetail with testimony provided by the FAA at Tuesday’s hearing on aviation emissions. Even so, I was surprised at the news. I suppose I shouldn’t be — airlines have a huge financial incentive to emit less by using less fuel.

I’ll write more about this soon.

UPDATE: Found it!

I recently recorded a podcast with Addison Schonland of IAG. Click here to listen!

At 2:30, the Senate voted down a cloture motion on the FAA reauthorization bill amendments offered by Senator Jay Rockefeller (see here). Majority Leader Harry Reid deployed a procedural tactic to prevent any amendments he didn’t approve, and, as promised, Republicans mustered forty-two votes (two more than necessary) to keep the Senate from ending debate on the legislation.

The House Aviation Subcommittee is holding a hearing today on the environmental impact of aviation, especially emissions. I won’t be able to cover the entire session, but I’ll give you what I can.

Representative Jerry Costello (D-Ill.) offers his opening statement. He emphasizes that the need to reduce emissions is a corollary of the need to increase fuel efficiency for financial reasons. He is interested in hearing about alternative fuels. “We provided historic levels of funding” in HR 2881 to improve environmental performance, upgrade air traffic control, improve efficiency, and support aviation research.

In light of the European Union’s emissions-trading scheme (ETS), he says, “due to the global nature of aviation, any effort to reduce emissions must be done through ICAO” without affecting economic growth.

Ranking Member Tom Petri (R-Wisc.) praises recent technological achievements that will improve fuel efficiency. Raises concern that including U.S. airlines in European ETS would violate the recently-signed Open Skies agreement.

Panel I

Costello introduces the first panel. David Fahey, a research physicist with NOAA, goes first. Results of his assessments are derived from IPCC studies (see here). Aviation contributes to climate change, he says, by alterating particles of greenhouse gases in the atmosphere, resulting in “radiative forcing” — “pushing the climate away from its natural state.” Three uniquely climate-related qualities of aviation emissions:

• Airplanes use fossil fuels
• Emissions at cruise altitute, allowing emissions to have greater effect than if they occured on the earth’s surface
• Emissions increase cloudiness, which contributes to climate change.

“Aviation has a unique role in climate change.” Current estimates indicate that aviation accounts for 3 percent of radiative forcing. “Uncertainties and knowledge gaps” are associated with aviation’s effects on climate change, especially on the impact of contrails on forming cirrus clouds

FAA associate administrator for policy, planning, and environment Daniel Elwell lists myths about the U.S. response to aviation emissions. “Myth: aviation is the fast-growing source of greenhouse gas emissions.” He says that 3 percent is not a huge effect. “The largest aviation market in the world is burning less fuel today than in 2000.” The effect of CO2 is the same at altitude as on the ground.

Fuel efficiency of aircraft has improved by 70 percent over the past decade. He says that European aviation emissions increased three times faster in recent years than U.S. emissions. He says that the U.S. is happy to participate in market-based environmental initiatives, as long as they are “based on mutual consent.” The European ETS is not.

Elwell says the FAA is currently pursuing the following:

• Improve our understandings of aviation emissions.
• Accelerate ATC management improvements and efficiencies.
• Hasten environment improvements in aviation technology.

FAA will pursue “science-based” program to address climate change.

Gerald Dillingham of the Government Accountability Office. Aviation emissions can have adverse effects. Emissions have been falling, but rising air travel has “partially offset” these cuts. Doubtful that technology to reduce emissions can keep up with demand for air travel.

Technology of NextGen can reduce aviation emissions, but NextGen needs to be implemented and deployed. Perhaps FAA should open a NextGen coordinating office.

Congress should stem decline in funding for “aeronautical research” by passing the FAA reauthorization bill. Congress should also consider “market-based mechanisms” for dealing with climate change.

Q&A:

Costello: How can we improve the science?
Fahey: “Any assessment of aviation’s climate impact . . . needs to have a scenario of what the future of aviation is going to be.” Government needs to work with industry and other stakeholders to craft vision and forecasts for the future. This will narrow and focus policy options and scientific research.

Costello: What are the implications of research gap for aeronautical technologies?
Dillingham: NASA has traditionally done this research. It readjusted its portfolio of activity, leaving a gap from what it does to where industry can pick up and run with the research.

Costello: What action would FAA take if the EU applies ETS to U.S. carriers?
Elwell: U.S. government is against effort to include U.S. airlines in ETS, but not opposed to emissions reduction programs across the board. “The problem with ETS has been in its unilateralism . . . the unilateral nature of it has been unacceptable to the U.S.”

Elwell: Aviation’s emissions so frequently occur in international airspace; a multilateral solution is needed. “The rest of the world still thinks ICAO has the mandate to lay out a global framework.”
Petri: Can positive incentives work? [Incentives are incentives. An emissions scheme penalizes an airline by incentivizing it to pursue improved technologies. --ed.]

Steve Kagen (D-Wisc.): Has the administration considered measures to include Chinese emissions in any cap-and-trade proposal? [He spoke of the problem of Chinese emissions drifting in the air over to the U.S. West Coast --ed.]
Elwell: Administration does not support a cap-and-trade approach.

Vernon Ehlers (R-Mich.): What are the effects of emissions at different altitudes?
Fahey: Altitude is a key element of the effect of aviation’s emissions. Effects vary. CO2 does not affect atmosphere any differently at altitudes, but nitrous oxides do, affecting ozone and methane. “That aspect of aviation is one that stands out.” Water vapor is another issue, as are contrails.

Panel II

Costello recesses the hearing, then moves to an open briefing by Ambassador John Bruton, who represents the EU to the U.S. He is a former Taoiseach of Ireland.

The inclusion of aviation in ETS is controversial, he acknowledges; but aviation emits far more CO2 than other industries included in ETS, such as steel and oil, making this an “equity” issue for ETS.

He notes several contributions that the EU has made to promote technological developments that will help aviation reduce its emissions. “Working along the same lines as the United States” in technological improvements. The EU is also working to improve air traffic management, especially in terms of routings and descent slopes.

Improve efficiency gains will be only 1 to 2 percent against industry growth of 5 percent, leading to emissions growth of 3 to 4 percent. The EU has pursued cap-and-trade. He says the EU tried but failed to get something working through ICAO. It seeks an ETS that is “interoperable” with other countries’ and regions’.

Q&A

Costello: What about environmental taxes, like those of the British or the Dutch?
Bruton: The ETS is intended to replace these “green” taxes when it is applied to aviation.

Subcommittee breaks for votes; Peter DeFazio takes the chair to continue the briefing. [Added: here follows a harsh argument.]

DeFazio: How would you assess the tax or levy on foreign carriers?
Bruton: It’s not a tax, but it would be associated with how much fuel is used.
DeFazio: How is the cost assessed on fuel?
Bruton: “I don’t have the rates that I can give you.”
DeFazio: How will the proceeds of the levy be applied?
Bruton: Finance activities that would further reduce emissions.
DeFazio: So you would levy a charge on a flight from Los Angeles to Heathrow for your own benefit? “You want to tax our airlines to improve your own system?” Says it’s a violation of international law to apply a tax on activities outside of a jurisdiction’s airspace.
Bruton: “We are confident that this proposal is legally robust.”
DeFazio: ICAO doesn’t think so. “Do you want a trade war?”
Bruton: Emissions from U.S. airlines are more than 2.5 times per head than in Europe. “Those emissions from the United States are damaging the environment for everyone else.”

DeFazio cuts Bruton off brusquely and changes the subject.
DeFazio: “Cap-and-trade failed.” A regulatory approach is better than a market-based approach [Yes, he said it! --ed.]
Bruton: “Our cap-and-trade system has not been a failure. It has worked very well.” We’ve reduced our greenhouse gas emissions, while they’ve increased “in the country you represent.”
DeFazio criticizes “speculative” market activity.
Bruton: All markets involve an element of speculation. “Markets work.”

DeFazio gets up and leaves. Bruton protests that he has not been given a chance to answer, and DeFazio invites him to address the empty room. The hearing recesses, and this is where my liveblog ends.

The Senate amendments to the FAA reauthorization bill include Section 714, which updates the law on “transporting musical instruments,” which is clearly an important issue for our elected representatives. I bet you’re on tenterhooks waiting to read this groundbreaking legislation. Here are some highlights from among the bureaucratic tedium:

• “An air carrier providing air transportation shall permit a passenger to carry a violin, guitar, or other musical instrument in the aircraft cabin without charge if the instrument can be stowed safely in a suitable baggage compartment in the aircraft cabin or under a passenger seat.” But if bags shift while in flight, the airline is not responsible for damage to your Stradivarius.
• “An air carrier providing air transportation shall permit a passenger to carry a musical instrument that is too large to meet the requirements of paragraph in the aircraft cabin without charge if. . . the instrument can be secured by a seat belt to avoid shifting during flight. . . .” Secure your own mask before assisting your instrument.
• . . . and if “the passenger wishing to carry the instrument in the aircraft cabin has purchased an additional seat to accommodate the instrument.” Would a cellist count as disabled for air travel purposes in Canada?

The House’s version of the FAA reauthorization bill has been on the Senate floor for the past few weeks, but it’s currently stalled (although scheduled for a cloture vote today, May 6, which if passed would move it forward for consideration by the full Senate without more amendments or if lost would hold up the bill further). The major hangup in the legislation was an amendment offered by Senators Dick Durbin (D-Ill.) and Kay Bailey Hutchison (R-Tex.).

Here’s the procedural history: on April 29, Senator Jay Rockefeller (D-W.Va.) proposed a set of amendments to the House bill. Section 808, which affected required funding a new accruals under airline pension plans, was a sticking point. Current law calls for airlines to fund their defined-benefit pension plans under the assumption of 8.25 percent growth; the amendment adds to the 8.25 percent rate the requirement to fully fund their pension obligations each year.

On April 30, Durbin and Hutchison introduced an amendment to eliminate Section 808. They argued that it would have disadvantaged their home-state airlines American and Continental, which continue to offer defined-benefit plans as obligated by their contracts. (This is absolutely the right thing to do. A defined-benefit pension is nothing more than deferred compensation. To shred it in bankruptcy is like asking an employee to give back part of his paycheck.) (N.B.: All airlines offer a small defined benefit to pilots, the “b-fund,” because pilots have until now been forced to retire at sixty.) Durbin says that this new, stricter requirement in Section 808 disincentivizes airlines from offering pension benefits and that it especially rewards Delta and Northwest, who slipped out of their pension obligations in bankruptcy and handed off the liability to you and me. “It seems to me instead we encouraged companies to freeze their benefit plans,” said Durbin in remarks on the Senate floor.

Last year, Durbin said, Hutchison proposed to give “the airlines that have not frozen their pension plans — and let me be specific which airlines: American Airlines, Continental, Hawaiian, Alaskan, and US Airways — the opportunity to assume a better rate of return on their investments.” Delta and Northwest have been able to assume a growth rate of 8.85 percent in planning to fund their pensions, unlike everyone else’s 8.25 percent. Being able to assume a higher growth rate means that a company can get away with setting aside less money to meet its pension obligations.

Section 808, he said, would do the opposite and put bigger burdens on the airlines that did not shed their pension obligations: “This section would once again widen the disparity between the rules that apply to some airlines versus the rules that apply to others. That does not make any sense. This section would require only the five airlines that I mentioned to fully fund all new pension obligations this year and every year going forward, only those five airlines.” This would unfairly single out airlines that have avoided bankruptcy and done right (at least in terms of their pension promises) by their employees and U.S. taxpayers.

Durbin said this was an especially onerous requirement in light of the airlines’ precarious financial positions: “why in the world would we put a provision in this bill which would require our airlines, these five airlines, to put dramatically more cash into these pensions, beyond what is required of other airlines, beyond what is required for 100 percent funding, and jeopardize them and endanger them so that they face bankruptcy?”

Hutchison echoed Durbin’s remarks: “Let’s not change the rules. Let’s not give advantages to one over another. Let’s try to help all of the airlines make it, be profitable, be robust, provide competition, and, especially, give the very best benefits to their hard-working employees they can possibly do. And, please, let’s do not penalize those that are going the extra mile and giving their employees what is becoming more and more rare in this country today, and that is defined benefits for their pension plans.”

The source of Section 808 was the Senate Finance Committee, which has jurisdiction over pensions and is chaired by Max Baucus (D-Mont.) Baucus was next to speak. He defended the legislation to make employers fill their pension funds — the Pension Protection Act of 2006 — and he outlined the breaks that it gave to airlines. Those in bankruptcy — Delta, Northwest — got more time and a more favorable rate to fully fund their plans than those not in bankruptcy. Baucus said that the rest of the airlines with defined-benefit plans were already benefiting from favorable exemptions, just not as favorable as Delta and Northwest. “They said they were doing the right thing. So we said: OK–that is what this bill does–OK, we will give you virtually the same interest rate as the others.”

Baucus said that the issue is not the airlines but the retirees, and that retirees from American and Continental deserve the same guarantees of pension funding as those at non-aviation-related companies. “The effect of the committee bill is to level things off. It is not perfect, but it is almost perfect; where the effect of the Durbin amendment is to make it much less perfect and basically help a couple airlines that, as a consequence, will not have to contribute to their pension plans for past liabilities, and will not have to in the future either, because of the interest rate they provide for in their amendment.” He continued: “The right answer is to keep it fair for everybody, have the same law essentially apply for everybody. The committee bill does that.”

Durbin replied that he and Hutchison “wish to keep the status quo. The section 808 amendment we want to strike changes it.”

Later that day, Rockefeller withdrew his amendments, including Section 808. The next day, May 1, Senate Majority Leader Harry Reid (D-Nev.) reintroduced the amendments on the floor — absent Section 808. He used a procedural device that allows only amendments he approves, meaning that Republicans may block a cloture vote. The disagreement between Baucus and Durbin continues, but the bill is tied up in other knots too.

Photo of Senator Richard Durbin. Credit: flickr user MNicoleM. Creative Commons license.

Alfred Kahn, the eminent economist and chairman of the Civil Aeronautics Board who oversaw airline deregulation in the 1970s, has published a fascinating new working paper on the AEI Reg-Markets Center site. He addresses the difference between “liberal” and “progressive” views on economic policy and regulation, and he argues that “progressivism” as defined by those who claim its mantle today is not truly progressive — in fact, that it runs against the mainstream liberalism of the mid-twentieth century and its signature economic reforms, such as airline deregulation.

What does Kahn hold up as liberalism? (He is himself a proud liberal, appointed to the CAB by Jimmy Carter and later serving as Carter’s inflation adviser.) “Liberals . . . have historically advocated an open market—private, free enterprise, free trade—economy, with consumers best served by competition among producers and sellers, both internationally and domestically,” he writes. Thus, liberalism in the nineteenth and early twentieth centuries consisted of fighting Republican tariffs, using antitrust laws to break apart monopolies, and supporting free public education and other social services designed to break down heightened income inequality. If this sounds suspiciously like the “progressive” movement of the late nineteenth and early twentieth centuries, you’re not wrong. Kahn argues that liberalism is progressive but that the label “progressive” has been hijacked by radical populists:

As I will argue, partly on the basis of my own experience as a regulator, deregulator, and advisor on inflation to a liberal President, there is nothing either “progressive,” “liberal” or desirable about—successively—populist protectionism, xenophobia, competition-suppressing regulatory cartelization, repression of energy prices, recourse to price controls as a remedy or preventive of inflation or a rush to rein in or hamper the dynamic market processes of technological change—the major areas in which authentic liberals will continue to clash with latter-day “Progressives”.

How does this apply to aviation policy? Kahn devotes part III of the paper to defending the liberal and progressive bona fides of airline deregulation in 1978, and how many of the parties that fought for it then are opposed now. You should read the full paper, but I’ll give you some of the highlights here.

According to Kahn, the nascent airline industry emerging in the 1930s was “cartelized” in the framework of a (usually illiberal) New Deal framework. Entry was limited and price competition was forbidden. Deregulation was supported by a broad-based coalition that included the Gerald Ford administration and its successors in the Carter administration, Senator Ted Kennedy, the Consumer Federation of America, Ralph Nader, Southwest Airlines, the National Association of Manufacturers, and others. It was opposed by interstate airlines and airline unions.

Kahn defends the record of airline deregulation:

No one who has looked at the facts of the last 25 years can fail to see that, on the contrary, the most dramatic and immediate effect of airline deregulation was the explosion of discounting, cutting average fares by about one-half, inflation adjusted, and bringing air travel at once within the reach of people of modest incomes. . . . The significant economic fact is that those discount fares, employed almost at once by the overwhelming majority of travelers, made possible, and, correspondingly, were made possible by the increase in the average percentage of seats sold—load factors—from the low 50s in the decade before deregulation, with comfortable spacing of seats, into the very high 70’s and now low 80’s—for torsos only. That release of price competition produced annual benefits to consumers that Clifford Winston and Stephen Morrison, the foremost academic students of this experience, have estimated at $20 billion a year. And it did this without in any way interrupting the long-term decline in accident rates, ensured by continuing safety regulation and improvement in technology—confuting the dire predictions of opponents that the pressures of price competition unleashed by deregulation would force managements to skimp on safety.

But not all deregulation’s supporters remained happy with it. Kahn notes the defection of consumer advocates from the coalition, and he documents devastatingly their willful and ideological rejection of the facts about the economic impact of fare competition. Deregulation has its enemies today in Congress: one cannot attend a hearing of the House Transportation Committee without hearing Chairman Jim Oberstar opine that it’s time to partially reregulate the industry. This usually has to do with consumer issues like delays (which is not an issue of industry regulation) or “the passenger experience.” Deregulation’s critics routinely lament the perceived decline in standards of comfort in air travel. What does Kahn have to say about this?

To be sure, the 25- to 30-point increase in airline load factors has meant increased crowding and discomfort, the intensity of which I have no intention to minimize. But it was precisely the failure of the industry under regulation to provide travelers of modest means with a choice of economy over comfort that constituted both the need for deregulation and the essence of its success. The airline experience wonderfully illustrates the principle that cartelization of a structurally competitive industry—in particular, the prohibition of price competition—sets off all sorts of other forms of competition, substantive and non-substantive—the fatal flaw of which is that it denies customers the choice of low-priced service free of those amenities.

This, translated, means that service has dropped to match the lower fares available today. The service environment of regulation-era airlines was artificially enhanced at the expense of excluding many low- and middle-income travelers — exactly the sort of people that “liberals” should want to help with consumer-friendly deregulation.

Kahn offers a perspective on how the CAB handled rules about bumping passengers off full flights. Some on the board argued that the issue was a moral matter of justice: it’s not fair to bump paying passengers, therefore bumping should be illegal. Kahn argues for a different policy: should bumping be necessary, airlines must offer passengers sufficient compensation — vouchers, etc. — to persuade enough of them to be voluntarily bumped. He saw it as an economic issue, not a moral one. The airline wants to overbook because it stands a better chance of having no empty seats, which once the plane takes off is money down the toilet. Some passengers are not in a rush and will freely give up their seats for vouchers. If the airline has to give away too many vouchers, that will signal that it is overbooking by too much with no government intervention needed. The market works, writes Kahn, who calls this “a perfect example of a no-loss no-loser arrangement.”

Kahn also lays out the case for congestion pricing of airport and air traffic control services. (This is not a new idea; Kahn points out that he and colleagues have been arguing for congestion pricing since the 1960s.) He is dismayed that instead of vigorously pursuing congestion pricing, the Bush Department of Transportation and Democratic senators are pursuing an illiberal policy: convening summits of airline and airport officials to negotiate voluntary traffic cuts. This smacks of “cartelization.”

As for a passenger’s bill of rights, Kahn argues that liberal policy would be to protect consumers and enact such legislation — but he says the problems such a policy would address have “little or nothing to do with economic merits of deregulation.”

I was interviewed for a segment on tonight’s CBS Evening News. The “Follow the Money” segment exposed the tens of millions of dollars wasted on empty flights to the middle of nowhere.

Here are links to:

• The text of the broadcast
• Video of the segment
• One of my posts about the problematic EAS program

In 1929, Juan Trippe, president of Pan American Airways, was competing for the lucrative airmail contract for Puerto Rico. (At that time, holding an airmail contract was virtually the only way for a U.S. airline to stay in business.) His competitor, West Indian Aerial Express, was already operating on the line and competing for the contract as well. Trippe’s cozy relationship with the postmaster general resulted in him winning the route, and West Indian closed down soon thereafter. “While we were developing an airline in the West Indies,” its owner said, “our competitors had been busy on the much more important job of developing a lobby in Washington.”

It’s still the same old story.

Source: T. A. Heppenheimer, Turbulent Skies: The History of Commercial Aviation (New York: John Wiley, 1995).

The main — and really only — important reason for publicly held airlines to merge is to increase the value for investors. The idea in the industry is that a theoretically well-designed merger will increase this value, which is why big airlines are pursuing tie-ups so ardently. Along comes Moody’s to throw a well-deserved wrench into the gears: mergers in the airline industry could result in lower credit ratings, an analyst wrote. Giant airline mergers are risky undertakings, and investors would be wise to avoid them. So, instead of merger talk goosing the stock price of an airline, it might doom it. Worse credit means less financing for a deal, and airline mergers require lots of cash — hard to come by in an industry with declining liquidity.

Delta and Northwest investors resisted the merger fervor, but talk of an even less auspicious United-US Airways pairing rose. Lowered credit ratings may put a big damper on continuing negotiations.

Moody’s: Airline Consolidation Could Hurt Credit Ratings [Dow Jones via CNN]

Now that Continental has turned down suitor United, the latter is weighing a desperation move: merging with US Airways to create the world’s new largest airline (surpassing Delta-Northwest, assuming that goes through). The airlines may announce a tie-up within the next fortnight. Therefore, it’s time for another Merger Mania 2008 antitrust evaluation.

As you’ll remember from several months ago, there are a few key criteria by which the Justice Department will assess this merger:

• Would a merger result in a significantly more concentrated market?
• Would a merger raises concern about potential adverse competitive effects?
• Would competitors be likely to enter concentrated markets in a timely manner and sufficiently to deter or to counteract the competitive effects of concern?
• What efficiency gains does a merger offer?
• But for a merger, will either party to the transaction would be likely to fail?

United and US Airways are unlike Delta-Northwest and United-Continental in that they are both concentrated in similar parts of the country: the West, the Northeast, and the South. Look at the map below:

The combined airline has five hubs in the West, two in the Southeast, and two in the Boston-Washington corridor, plus four US Airways “focus city” operations in the Northeast. Even though US Airways drew down its extensive Baltimore operations after 9/11, the combined airline would operate most of the flights at two of the region’s three airports, including the slot-controlled and uber-desirable Reagan National.

As with most mergers, United-US Airways would have market share on nonstop routes between hubs. But United-US Airways would also possess significant market share between these and other major city-pairs, regardless of nonstops. According to recent DOT figures, among the busy routes on which United-US Airways would have market share are:

Pittsburgh–Washington, D.C. (100%)
Washington, D.C.–Providence, R.I. (99%)
Charlotte–Washington, D.C. (96%)
Syracuse, N.Y.–Washington, D.C. (92%)
San Francisco–Phoenix (91%)
Denver–Ontario, Calif. (89%)
Washington, D.C.–Portland, Maine (87%)
Washington, D.C.–Charleston, S.C. (86%)
Washington, D.C.–Indianapolis (86%)
Chicago–Greensboro, N.C. (85%)
Washington, D.C.–Savannah, Ga. (81%)
San Francisco–Baltimore (76%)
Denver–Pittsburgh (73%)

This is a huge number of important routes on which there would be substantially reduced competition. United-US Airways would have a virtual stranglehold on Washington travel. Some of these routes may become fodder for low-fare competition, but this would be limited in Washington by slot controls at Reagan National. Furthermore, since few of these cities are other airlines’ hubs, it limits the potential pluses for network airlines to add these routes.

The airline would also dominate if not shut out a number of small communities in the East and the West, including Bakersfield, Calif.; Binghamton, N.Y.; Durango, Colo.; Roanoke, Va.; San Luis Obispo, Calif.; State College, Pa.; and Yuma, Ariz. Low-fare competitors are unlikely to enter these markets due to their business models and route structures, and they may not offer sufficient yields for network competitors to increase frequencies above or reduce fares below current levels.

As for efficiency gains, according to a former antitrust lawyer at the Justice Department, “DOJ has found that integration of airlines with complementary networks like these can achieve efficiencies that benefit consumers.” United-US Airways does not offer this, and the pairing is therefore unlikely to be seen as increasing efficiency by the antitrust division.

Finally, on a business note, this pairing would seem unlikely. US Airways is still struggling to integrate after its own recent merger, and the two airlines have some of the most toxic labor-management relations in the industry. Any merger would have to close hubs to achieve efficiencies in the regions in which the airlines are dominant, which is not appealing to consumers, labor, or Congress. International synergies do not seem apparent either: although US Airways would love United’s Pacific route network, both US and UA have relatively feeble (and overlapping) transatlantic networks. United serves South America, but neither airline is strong in Central America and Mexico.

This should be slam-dunk for the Department of Justice: No. In fact, DOJ already made this decision. Here’s that former antitrust official:

The last major domestic airline merger DOJ investigated was in 2000-2001, United’s proposed acquisition of US Airways. United-USAir provides several examples of competitive problems that can arise in airline mergers:

• United had a large base of operations at Washington Dulles, and USAir at Washington Reagan and BWI. Therefore they were the only two significant competitors for nonstop service from the Washington area to a number of cities, such as Rochester and New Orleans.
• Similarly, the two were the most significant nonstop carriers in a number of hub-hub markets, including Philadelphia-Los Angeles, Philadelphia-San Francisco, Philadelphia-Denver, and Pittsburgh-Washington.
• With their strong east coast hubs, these were the only two carriers, or two of three, connecting some northeastern cities (such as Burlington and Albany) with some southeastern cities (like Greensboro and Roanoke).
• More generally, the merger increased concentration in large business centers along the east coast, possibly affecting bidding for corporate and government contracts.
• Finally, the merger would have lessened competition in several transatlantic markets.

Competitive problems like these convinced us that this merger would substantially lessen competition in numerous markets. DOJ announced it would sue to block this transaction, and United and USAir abandoned the deal.

If anything, these conditions have only grown less amenable to a competitive merger. Since US Airways merged with America West, it has added hubs at Phoenix and Las Vegas, which would reduce competition further with United’s Denver, San Francisco, and Los Angeles bases. That the two airlines are both in the Star Alliance may count in a potential merger’s favor, but on net the Justice Department is unlikely to approve this combination without significant modifications to the airline’s structure.

• The big news of the day is that — contrary to many expectations — Continental Airlines has decided not to pursue a merger. CEO Larry Kellner conveyed the board’s decision in a letter to employees yesterday. This is probably the best decision Continental could have made here. [AP via MSNBC; see also PlaneBuzz and Today in the Sky]
• The Italian government’s €300 million “bridging loan” to flailing Alitalia is coming under European Commission scrutiny as “illegal state aid.” [ATW Daily News]
• The Senate has reached a compromise on the long-awaited FAA reauthorization bill by raising business-jet fuel taxes to increase that sector’s share of funding for the national airspace system. [Aero-News.Net]
• Foreigners are photographed and printed when they enter the United States . . . and now Homeland Security wants the same when they leave. And they want the airlines to do it. [BNET Travel Industry]

Image credit: Flickr user Cubbie_n_Vegas. Used through a Creative Commons License.

“. . . wrote St. Paul, ‘but not all things are profitable.’ And so it is with the proposed merger of Delta Air Lines and Northwest Airlines.”

My new op-ed on the Delta-Northwest merger is up on American.com.

Joke circulating among Northwest pilots: “They’re going to incorporate elements of both corporate identities in the merger. From Delta, we get ‘Delta.’ From Northwest, we get ‘Airlines.’”

Notes: I am leaving out redundant passages, which often occur in congressional hearings. Unless something is in quotation marks, it is a paraphrase of what a speaker is saying. Editorial comments are so noted.

The antitrust task force of the House Judiciary Committee is having a hearing to assess airline competition and the proposed merger between Delta and Northwest. Representative John Conyers (D-Mich.) is presiding. His opening remarks are meant to put the discussion in context. Claims to have an open mind. “We’ve had a recent history of widespread deregulation. . . . [Since deregulation,] We’ve gone from a highly competitive structure to an oligopoly.” Lists the typical litany of airline woes. “Culture where business executives have opted frequently to, resorting to bankruptcy to avoid their labor obligations” while enriching themselves. “So we live in a time when organized labor and the idea of collective bargaining are faced with some pretty stiff barriers to organization . . . aided and abetted by an administration that usually sides with business on major issues.” Mentions income inequality, lack of health insurance, poor retirees. [What does this have to do with airline competition? -ed.]

Conyers says that the antitrust division at the Justice Department approves mergers “right and left,” claims it has not blocked or modified any merger in the last seven years. “All I’m suggesting is we need to consider where this merger will take us. I’m afraid that if [it] is approved, it will result in a cascade of other mergers — United-Continental, American-US Airways. . . . If the merger is rejected, we could end up with more airlines in bankruptcy, negating more union contracts.”

Questions to be addressed: Is there a rush to process this merger? What guarantees can we give NWA pilots that they will not be disadvantaged by merger? How will merger affect hub communities, small communities, and the flying public.

Now we get to Steve Chabot’s (R-Ohio) opening remarks. He praises Delta’s contribution to the Cincinnati-area economy and recites the litany of financial challenges to the airline industry. “Free market principles tell us that competition is what makes markets thrive.” (He adds that Cincinnati has the highest fares in the country. [Lack of competition -ed.].) Wants to talk about “fair pricing” policies.

Now Lamar Smith (R-Texas). Delta-Northwest would be one of the world’s largest airlines but would not dominate aviation. Gets the distinction between city pairs and nonstop city pairs wrong. (More on this later.) Steve Cohen (D-Tenn.), my old congressman, says that his main concern is the NWA hub in Memphis. “We lost our free throws; we don’t want to lose our hubs.” Jim Sensenbrenner (R-Wisc.) expresses his concern over NWA’s stake in Midwest Airlines, his popular hometown carrier.

Conyers introduces Northwest CEO Douglas Steenland. [Is it just me or does he look like Dr. Z? -ed.] Then John Lewis (D-Ga.), a merger fan, introduces Delta’s Richard Anderson.

Steenland begins. “This merger will not reduce competition. . . . Industry is at crossroads.” Recites the usual litany of airline business woes: competition from discounters, well-funded foreign airlines, high oil prices. Standalone airline won’t succeed in this environment. “The other choice is to merge with Delta.” Expanded network, financially resilient. “No hubs will be closed.” International routes are complementary. US DOT granted antitrust immunity to NWA and Delta on transatlantic routes. [Was it DOT or DOJ? -ed.] “The most important fact regarding competition . . . is that we serve 800 nonstop routes together . . . and we overlap on only 12.”

Domestic airline industry changed a lot in past decade — rise of LCCs. Past perspective: without mergers of Southern and North Central to become Republic and Republic with Northwest Orient to become NWA, none of those carriers would have survived.

Anderson begins his talk. “This really creates the first U.S. global airline. . . . We need to be in a position to compete against global foreign flag carriers.” Foreign carriers are consolidated. Asks for freedom to do what’s best for Delta-Northwest employees, passengers, and shareholders. Merger “gives us the ability to compete and win” on global scale. [This is novel: Congress is talking about domestic competition; Anderson and Steenland are thinking about the world scale. Totally different outlooks. -ed.]

No layoffs because this is “end to end” merger. Help employees enjoy “pay progression toward industry standards.” Airline will have cost structure “to make investments for customers.”

Question Time

Conyers: American Airlines and TWA’s merger was not supposed to see hub closures? How do you answer that? [St. Louis didn't lose a hub; it was just downsized -ed.] What about no furloughs? How do you answer these questions.
Anderson: TWA had historically been international only. It had been through bankruptcy three times since deregulation. Its St. Louis hub was not viable, unlike all of Delta-Northwest’s hubs. “All of these hubs are economically viable hubs.”
Steenland: Historically, mergers happen to airlines in financial distress. We’ve been through restructuring and have good balance sheets. But we’re in “uncharted waters” with the rising cost of fuel. Because of complementary structure, employees can be assured of their jobs. There might be some reductions with redundant administrative/executive staff. [Steenland may be among them -ed.]

Chabot: What’s going to happen with customer service?
Anderson touts some accolades from DOT, JD Power, etc., for Delta and NWA. He blames air traffic control for delays — “number one issue.”
Chabot: Would combined Delta-Northwest have more market power in buying fuel?
Steenland: No.
Chabot: Will the merger help my constituents avoid having to drive to Dayton or Indianapolis? What’s going to happen to Comair (Delta’s Cincinnati-based regional subsidiary)?
Anderson: There really won’t be any change. In usual antitrust analysis, you look for overlap, but there’s so little overlap with Delta and Northwest. Cincinnati has strong business traffic, and that’s why fares are higher there. He reminds Congress of the dramatic drop in real values of fares (30 percent) since deregulation.

Cohen: How important is FedEx’s presence in Memphis in keeping the NWA hub there?
Steenland: Very important; FedEx is a top customer. They share costs at Memphis International Airport, making MEM a financially competitive hub.
Cohen: Will Memphis get more international service?
Anderson: I can’t make that commitment.

Ric Keller (R-Fla.): Tough time for airlines, but your approval ratings are still higher than Congress’s. [laughter] What will this merger mean for Orlando?
Steenland and Anderson: Nothing that wouldn’t happen without the merger.
Keller: Impact of merger/non-merger on ticket prices, consumer options, job opportunities.
Anderson: Ticket prices under merger will still be set by market forces. Route options dramatically increased.
Steenland: Merger will make more international service possible throughout network.

Betty Sutton (D-Ohio): Only management will be laid off due to redundancies? What about labor protection?
Anderson: Only managers, and on labor, we’re working with all parties.
Sutton: “When you say that ‘we have committed,’ who have you committed to?”
Anderson: To all employees of both companies.
Sutton: What is the commitment?
Anderson: Mentions Allegheny-Mohawk labor protection provisions for merging seniority lists. Mentions McCaskill-Bond. Also, we wrote it into the merger agreement.
Sutton: Why is Delta is heading off organizing of flight attendants? [Wouldn't you? -ed.]
Anderson: We would never engage in disruption of union organizing process. Democratic process.
Sutton: Are you neutral in the decision?
Anderson: [evasive] [evasive] [evasive]

Lamar Smith: I’m usually suspicious about mergers, but I see arguments in this one’s favor.
I’m incredulous that only “executives” will lose their jobs? [They earlier said "managers" -ed.]
Anderson: It’s headquarters functions that will be consolidated.
Smith: Estimate of total job losses.
Steenland: “We haven’t done that level of granular analysis yet.”
Anderson: “Under a thousand.”

Sheila Jackson Lee (D-Texas): “What is your commitment to helping us push a passenger’s bill of rights?”
Steenland: No objection to these sorts of requirements; we want to serve our customers well. [You see, it's the job the airlines' lobbyists to oppose the PBOR -ed.]
Lee: How would a moratorium on aviation/jet fuel taxes help you merge? [Wait till the guys at Common Tragedies hear this! -ed.]
Anderson: We would welcome a moratorium in fuel taxes. [Duh -ed.]
Lee: PBOR should be a “twin” to any merger.

Chris Cannon (R-Utah): Anderson’s predecessor Gerald Grinstein opposed US Airways merger. Why’s this different?
Anderson: That was a hostile takeover attempt. This is a “merger by agreement.” Also, it was a “merger of subtraction, not a merger of addition.” Would have caused lots of layoffs and reductions.
Cannon: We might go from six major carriers to three. “What’s going to happen to the market on the Internet” as a result of airline consolidation?

Darrell Issa (R-Calif.): “Deregulation has not been as logical in its selection of prices.” How will we see three to five carriers in every market?
Steenland: NWA serves San Diego (Issa’s hometown) through hubs — gives consumers great arrays of options. [It's flawed thinking to neglect one-stop flights, but I suppose congressmen are so accustomed to nonstops they need not think about the full picture -ed.]
Issa: Would merger analysis be different if we were looking at a less healthy balance sheet? [uninteresting back and forth here]
Anderson: Yes, we’re financially healthier now.

Conyers closes the first panel. I need to work on something else, so this closes the liveblog, but I’m sure the second panel will be interesting.