Tyler Cowen reviews Thomas Philippon’s The Great Reversal: How America Gave Up on Free Markets. Philippon sees market concentration in the airline industry,
…we see a sharp increase in concentration in the airline industry after 2010. That is enough to trigger our interest, but not enough to conclude that competition has weakened. We must first check that concentration has also increased at the route level. We find that it has. We can further show that it came together with higher prices and higher profits.
While there’s certainly been consolidation in the airline industry as America West acquired US Airways and then American; Delta acquired Northwest; Continental acquired United; Southwest acquired AirTran and Alaska Airlines acquired Virgin America this hasn’t led to higher prices for consumers. Government should remove barriers to competition, but it’s a stretch to suggest that the several large airlines in today’s industry constitute anything close to monopoly.
I’d point out that choosing 2010 as a starting point for airline prices – coming out of the Great Recession right before oil prices start spiking, and shortly after the introduction of first checked bag fees – is what’s doing the work here, the long run story of lower real airfares over the longer run has largely continued and first class fares are lower, too.
With oil hovering around $100 a barrel we did see airfares rise 2011-2014 but then return to long run trend, and indeed real airfares inclusive of fees were lower 2016-2018 than in 2010.
Indeed the drivers of increased airline profits are:
- lower fuel prices
- richer co-brand credit card deals.
As I’ve pointed out in many recent quarters the entirety of American Airlines profit has been accounted for by its co-brand credit card deals and not flying. The richness of these deals for airlines has grown markedly. This may be partly attributable to industry consolidation (fewer airlines for banks to negotiate with) and partly due to American Express losing its deal with Costco which set off a chain of renegotiations at higher price points.
Consolidation has improved airlines’ bargaining position vis-a-vis banks more so than consumers. And indeed with fuel prices up from three and four years ago profits are down.
The airline industry has certainly consolidated, creating stronger players that aren’t serial candidates for bankruptcy. But what’s the theory here on how many competitors can exist in a claim about monopoly? To name just a few:
- Eastern Airlines, Midway Airlines (1991, 2003), Aloha Airlines (2008), Independence Air (2009) among others went through Chapter 7 bankruptcy.
- Continental Airlines (1983), America West (1991), Pan Am (1991), TWA (2001), US Airways (2002, 2004), United Airlines (2002), Northwest Airlines (2005), Delta (2005), American Airlines (2011) went through Chapter 11 bankruptcy.
Delta, United, and American are all about the same size (United has the most seats, American the most planes, Delta the most revenue in the latest quarter) while Southwest Airlines carries the most domestic passengers. And as much as I miss Virgin’s domestic first class product hasn’t Alaska’s acquisition of Virgin America just made the Seattle-based airline a more robust competitor in more markets, rather than reducing competition?
Moreover it’s the ultra low cost carriers – Spirit, Frontier, and to a lesser extent Allegiant – that have been the driving forces in the U.S. airline industry. As American Airlines President Robert Isom told employees last year,
[T]oday there is a real drive within the industry and with the traveling public to want to have really at the end of the day low cost seats. And we’ve got to be cognizant of what’s out there in the marketplace and what people want to pay.
The fastest growing airlines in the United States Spirit and Frontier. Most profitable airlines in the United States Spirit. We have to be cognizant of the marketplace and that real estate that’s how we make our money.
We don’t want to make decisions that ultimately put us at a disadvantage, we’d never do that.
Philippon suggests allowing foreign competition on U.S. routes (or foreign ownership of U.S. airlines) and I agree with this but it is insufficient to meaningfully increase competition because the scarce resource is gates and in a few cases slots at major airports.
Government-owned and run airports effectively grant perpetual property rights in gates and slots to incumbent airlines, locking out competitors. Indeed a driving force behind Alaska’s Virgin America acquisition was access to congested airports where they couldn’t replicate themselves.