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

July 9, 2008 by Evan Sparks

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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Posted in Evan's Commentary | Tagged congress, history, labor, network airlines, regulation | 5 Comments

5 Responses

  1. on July 9, 2008 at 6:39 pm Kevin Mitchell

    Nicely done piece!


  2. on July 9, 2008 at 11:34 pm K.C.

    On the final point of a passenger bill of rights, I believe the key to consumer protection is access to useful information. The most frustrating aspect of air travel is the disconnect between a published timetable and actual flight times.

    With a published timetable comes an implied promise of timeliness, yet we all know there is hefty delay risk involved. If the risk was random and limited to unpredictable factors as the “like weather” comment implies, there would be some disappointment, but little resentment toward the airlines. The resentment comes because the risk is not random. It is knowable and likely well understood by the airlines, yet they do not share that information in a useful way in the booking process. Delaycast.com provides a free forecast of delays and cancellations for flights months in advance, to mitigate individuals’ exposure to those risks.

    If folks know a particular flight has a 60% chance of being too late to make a connection, but still book that particular flight rather than book direct because they can save several hundred dollars, they cannot be too upset. We make high-risk choices in lots of aspects of our lives. The trick is, we generally know the risk up front. Until people are empowered by information, they will call for someone else to protect them through a declaration of rights.


  3. on July 10, 2008 at 7:47 am Evan Sparks

    Great response, K.C. There’s a lot of information available out there, from the site you link to (http://delaycast.com/) to the DOT’s monthly air travel consumer report (http://www.dot.gov/affairs/dot07702.htm).


  4. on July 10, 2008 at 9:21 pm Rob Mark

    I interviewed Kate Hanni when all the consumer protection news hit last year and let’s be sure and realize that this call for help from her and others like her is about much more than simply being on time.

    No one at American had a clue what to do when thousands of people sat on the ramp at Austin a few Christmas’ ago, nor did JetBlue when the airplanes were sitting right in front of the HQ bldg. at JFK, not even United when an Airbus sat a Gary Chicago Airport for 6 hours a few weeks back with people being told they could not leave the aircraft.

    Keeping people caged up is part of the problem and one that none of the employees seem to understand.

    One of these days someone in seat 14A is going to lose it because they’ve been locked up with no food or water and have had it with backed-up toilets.

    And the day that happens and that guy or woman pops the emergency exit out, all Hell is going to break loose. About then, the airlines might realize this is about more than being late.


  5. on July 11, 2008 at 6:55 pm Occam's Razor

    Evan Sparks said…
    “Even so, reregulation would constitute “restriction of competition,” with no reason to believe that it would make the industry more efficient, competitive, or progressive.”

    Crandall’s speech touched on many Public Policy issues…

    I think that many in observers of the airline industry would say that the “improved efficiencies” are limited by ATC infrastructure upgrades.

    Additionally, the objective of Crandall’s call for “limited” regulation would establish stability to solve what he sees as a Pricing Dilemma. And it is this dilemma that is at the heart of this industry’s instability. Crandall seeks to preserve competition not eliminate….Certainly I don’t think you’ll will find many observers in this industry who will characterize the industry as needing MORE competition. Many so-called airline industry experts would say this industry is “Hyper-competitive”.

    It should be obvious to everyone by now that the airline industry is colluding on a global scale…..Anti-trust immunity among Alliance Partners. Many view this development as “progressive”. So…..why not do it on a limited scale domestically? Would allowing competitors to hold Capacity Conferences be considered “progressive”?

    Unfettered competition in the airline industry offers “no market solution”. Do you need more than 3 decades to figure this out? I don’t know, maybe Alfred Kahn views the mechanism of Bankruptcy Courts as a market based solution. In which case, “his” legacy is a huge win for market economics everywhere.

    Market solutions have at their “core” mutually beneficial exchanges between producers (airlines) and consumers(passengers). 30 years of instability, no market solution, no mutually beneficial exchange…..and you stick your head in the sand and say there is no Public Policy concerns here? Wow! And your a public policy expert. Do you need more than 3 decades to figure out, the airline industry is different from other industries?

    Crandall was right to ask our public policy makers this question during his speech…….”We used to be pretty good at solving problems in this country…..what happened?” I guess the first requirement is to have the ability to recognize a problem in the first place. Well Evan Sparks….What happened??

    I suggest readers here go back and re-read Crandall’s Wings Club speech. It’s a blueprint for building and maintaining an aviation infrastructure worth having as a nation. Do any of you really believe the Europeans have any interest in taking over our US airlines and preserving our domestic aviation routes? No….they want our access to our largest population centers for “feed purposes” to THEIR global networks. That’s all…..they could give a hoot about America’s domestic infrastructure needs. That a problem for Public Policy makers not British Airways or Luftstanza.

    Additionally, may I suggest that Evan Sparks interview Lester G. Telser in the future, father of Core Theory. Just a guess, but I don’t think Kahn, the father of deregulation, would be the person to ask if deregulation was a success. It’s not surprising Kahn would attempt to defend his legacy, despite 30 years of contradictory economic destruction.

    Maybe follow up with a Crandall interview next time…..maybe he could draw you a picture.

    Occam’s Razor



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