Deregulation "clearly, definitely" a good idea: an interview with Alfred Kahn

Sorry for the light posting around here. I’ve been working on some major writing projects that will appear over the next few months. In the course of one of them, I had occasion to chat with Alfred Kahn, the chairman of the Civil Aeronautics Board in the late ’70s and the “father of airline deregulation” (although when deregulation’s record was questioned he would later joke that he wanted a paternity test). Here are a few highlights from our conversation.

Looking back, was airline deregulation a good idea? “It clearly, definitely was,” Kahn said, “even though circumstances have now changed abruptly and the response of the market to changed circumstances . . . are in a sense wiping out henceforward many of the benefits that flowed during the past 30 years.”

Why was it so successful? The answer, he said, is that it “sparked an enormous increase in competition and air travel affordable to people from a much wider spectrum of income than before . . . made possible by filling seats in the previous decade that had gone empty.” Furthermore, he added, airlines are providing the service demanded: “I don’t see any evidence even now that the industry is failing to provide service that is economically viable.”

Notwithstanding the high fuel costs that many analysts say will drive most airlines into bankruptcy and force an industry transformation, Kahn insists that introducing competition into the industry was a good thing to do. “That’s no reason for denying the benefits from competition.” There is nothing inconsistent to say that there was a $5-10 billion per year benefit to consumers and that today’s energy situation may be reversing those benefits. Furthermore, changes the airlines made in the past thirty years due to competitive pressures may help them in today’s climate: “The increase in competition clearly forced them to improve their productivity; I don’t see that those [gains] are being wiped out.” All industries are to some extent exposed to losses due to high energy prices, Kahn said, so “nor would it be desirable for [airlines] to be sheltered from the change in our energy situation.”

When I asked him about Bob Crandall’s speech in favor of some measure of reregulation, Kahn said that he was “disappointed.” Crandall was a “leader in taking advantage of the opportunities presented by deregulation,” he continued, “but I can understand his discouragement.” (Crandall pioneered the development of advanced computer reservations systems and yield management that made American Airlines an industry leader in the 1980s.) Even so, reregulation would constitute “restriction of competition,” with no reason to believe that it would make the industry more efficient, competitive, or progressive.

Should we expect airlines to be profitable in a deregulated environment? There is no reason to believe that airlines will ever match profitability of other industries, Kahn said. It is inevitable that airlines will lose money in down cycles. “Experience has told us. It was true before deregulation.”

We talked about deregulation’s bipartisan support. The initial steps came under the Ford administration.  In the Senate, liberal Democrats like Ted Kennedy (Mass.), liberal Republicans like Bob Packwood (Ore.), and conservative Democrats like Howard Cannon (Nev.) worked together to pass the bill, which was signed by Jimmy Carter. “Senator Kennedy played a major role,” said Kahn; Kennedy also urged him to take the job at the CAB. Ralph Nader, antitrust groups, the National Association of Manufacturers, and conservative think-tank intellectuals all supported airline deregulation. It is important to remember in these polarized times that deregulation of industry was a bipartisan initiative; airline deregulation was opposed primarily by the commercial airline lobby (with notable exceptions, such as Southwest) and airline labor.

Kahn demonstrated his liberal bona fides when I asked him more about labor issues. Is it fair for corporations to shed their benefit and pension obligations to make themselves more competitive? “It is an anomaly that the quality of medical care that people obtain depends upon their employment,” Kahn replied. “Similarly with pensions. These were artificially encouraged.”

“It’s very, very painful when competition comes into these circumstances,” he continued, articulating a side of deregulation that many on the right do not take into account. “Freedom in trade depends in finding means of helping people displaced by competition out of general public revenues.” He praised the provision of unemployment benefits and retraining for displaced workers.

So then, if airline deregulation is amenable to liberalism, why are many on the left agitating against it today? Drawing on themes in a previous paper, he said, “I fear that people who call themselves progressives now are not really liberal at all . . .  they tend to be opposed to competition, they tend to be supported by unionized labor . . . they’ve dropped out of the deregulation- and competition-supporting coalition that deregulated airlines and trucking in the first place.”

Kahn was also not necessarily opposed to an airline passenger’s bill of rights: “There’s got to be some sort of jurisprudence here, which a consumer protection agency has to decide.” But he expressed concern that consumer groups want to transfer to stockholders the risk that every passenger takes when booking a flight “like weather.”

As for what he would have done differently in 1978? “I can’t think of anything that would have done differently.”

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