The U.S. Departments of Justice and Transportation have launched a wide-ranging probe of consolidation and anti-competitive conduct in air travel. What they will come to learn is that the federal government has fostered consolidation, and has made it nearly impossible to have competition in aviation as a matter of policy for decades.

A Request for Information has been issued by the DOJ Antitrust Division and the Department of Transportation on issues related to market consolidation, anticompetitive practices, and the overall state of competition in sectors impacting air transportation, such as airlines, airports, aircraft manufacturing, and air transportation sales channels, looking to asses how a lack of competition affects consumers, workers, and the overall economy.

Specific areas of interest include airline mergers, fare structures, airline rewards programs, airport access, aircraft manufacturing, labor markets, and the impact of federal actions on competition. The agencies are particularly interested in potential antitrust violations such as price-fixing, market allocation, and exclusionary practices. Comments are due December 23, 2024.

The Federal Government Has Consolidated The Airline Industry

The federal government signed off on mergers of United Airlines and Continental; Delta Air Lines and Northwest; American Airlines and US Airways; Southwest Airlines and AirTran to name just a few. Yet they recently fought to stop JetBlue from acquiring Spirit Airlines as though that would stifle competition in the industry, and now Spirit finds itself on the brink of bankruptcy.

The government has also signed off on antitrust-immunized joint ventures between U.S. airlines and foreign carriers. For instance,

• American Airlines, British Airways, Iberia, Finnair and Aer Lingus all coordinate schedules, prices and share revenue.
  
• American and Japan Airlines and also American and Qantas have anti-trust immunity to work together.
  
• Delta Air Lines and Korean Air; Delta Air Lines and Aeromexico; and Delta Air Lines and Air France KLM as well as Virgin Atlantic cooperate.
  
• United Airlines, Air Canada, and Lufthansa act as one across the Atlantic, United and ANA have a joint venture across the Pacific and United and Air Canada divvy up the transborder merket.

Yet somehow they’re shocked, shocked (!) to find out there’s gambling going on here. Joint ventures are a substitute for mergers which are generally prohibited between U.S. and foreign carriers. But in an environment where government blocks new market entrants, fostering a winnowing of existing players is highly problematic.

Barriers To Competition Are Largely The Result Of Government Policies

Unlike much of the world, in the United States airports are mostly owned by the government. While it’s not considered a best practice for a regulatory agency to also be a service provide (since that means the agency regulates itself), the TSA both regulates and carries out most airport security and the FAA’s air traffic organization but regulates and performs air traffic control duties.

Airport slots are handed out by the federal government as property rights to incumbent airlines, keeping out competition from new entrants into the market (congestion pricing for takeoff and landing fees would be a better solution than slots, and there’s no reason to gift these valuable assets as a subsidy in any case).

Even where slot controls aren’t an issue, gates at congested airports are. Federal legislation eliminated 12 out of 32 gates at Dallas Love Field, so that Southwest wound up in control of 90% of them. Meanwhile, when airlines want to serve Atlanta in competition with Delta, they have a hard time getting usable gates. JetBlue initially found themselves with use of gates on different concourses for each of its flights when they began service there.

Foreign ownership of U.S. airlines is restricted, and foreign carriers aren’t allowed to carry passengers between any two points in the U.S. (and that includes Guam, even). Ryanair and Singapore Airlines aren’t allowed to compete here.

The Problem Isn’t The Number Of Competitors, It’s Homogenization

The problem in the airline industry isn’t so much price (which has been on a long-term downward trend, inclusive of fees). It’s lack of product choice and product differentiation. And this is only likely to get worse.

The crackdown on part 135 carriers that American Airlines, Southwest Airlines, and pilot union ALPA are pushing for will make small city air service using new technology electric planes impossible, cutting off innovation before it even starts.

The FAA says it plans to move forward with the crackdown on small competitors despite the harm this will do to innovation and competition.

When government protects incumbents, there’s little need to innovate. And when government closely manages the end-to-end experience of air travel, there’s little room to innovate. For instance,

• Earlier this year United had to ground a fleet of planes because of an outdated no smoking sign rule. The FAA requires cabin crew to be able to turn no smoking signs off and on. They no longer need to turn them off, so they’re no longer made to turn off. United forgot to ask for the standard exemption to this rule. But the cabin experience is that micro-managed.

• American had to ask for government permission to put doors on their next generation business class seats – like JetBlue, Delta, and many foreign carriers have. The government initially refused to consider the request because it was made on letterhead that didn’t include the airline’s address or fax number.

• Early in the pandemic when American Airlines wanted to give out hand sanitizer to passengers they needed sign off from two different FAA offices even though passengers themselves were already allowed to bring on board sanitizer and even though FAA had already determined this was not a hazard.

Governments own the airports, perform the security screening function, and provide air traffic control. They sign off on every detail of the passenger cabin. Planes are at the control of government from the time they push back to when they arrive at their next gate. And the entire selling and customer service experience is directly regulated by their own dedicated government agency. And they wonder why the airline business seems… uncompetitive?

Within A Narrow Range, Airlines Are Quite Competitive

There’s economically significant competition between most U.S. cities with air service. American, United, Delta, and Southwest are all significant players, and Alaska, JetBlue, Spirit and Frontier provide augmented service as well. The notion that there aren’t different airlines to buy from is odd. And mergers often did improve this connectivity, for instance the Delta-Northwest merger improved travel between the Southeast and Upper Midwest.

Airfares are certainly lower than they were in the regulated era. More people have access to travel than they did 25 years ago and 50 years ago, by a lot.

Yet Incumbents Are Subsidized And Protected

Well over $100 billion in subsidies for U.S. airlines had been spent long before the pandemic. For instance, the very first big aircraft order American Airlines ever made was underwritten by the Roosevelt administration. American’s CEO had been best man in FDR’s son’s wedding. The federal government has relieved several airlines of their pension obligations – including from US Airways, Delta, and United.

In the past four years the federal government handed $79 billion in direct taxpayer cash to U.S. airlines as well.

But perhaps more importantly, the government protects airlines from lawsuit. The Airline Deregulation Act pre-empts state rules including, generally, common law contract claims like any duty of good faith and fair dealing. Any suit that touches on airline schedules or pricing can only look at whether an airline violates its own contracts, and not common law obligations.

So What Should We Do?

If we care about competition, railing against the airlines isn’t the answer. We need to look at the policies that give us the outcomes that we have.

Just like if we hate bag fees, railing about those is strange without looking at the 7.5% excise tax on domestic airfares that encourages airlines to charge them – because money taken out of the fare and put into fees is a tax arbitrage worth hundreds of millions of dollars per year to the industry.

We should legalize competition. Allow foreign ownership of airlines operating in the U.S. Let both Ryanair and Singapore Airlines operate here! Eliminate slot restrictions and replace those with congestion pricing, to allow airlines that would derive the greatest value for consumers from a flight to operate it. That would have the added environmental benefit of eliminating the need for slot squatting – flights to nowhere just to meet usage requirements.

A pro-competition policy would look to expand air traffic control capacity, modernizing the way that NavCanada has, to support more flights which would have the benefit of cheaper air service as well by making increased supply possible. And it wouldn’t allow big corporate interests to block competitors by raising their costs and banning their business models, as American and Southwest have proposed in cracking down on Part 135 carriers.

We should demand differentiated airline products but first recognize that we have to legalize differentiated products. We need to stop government agencies like airport authorities from blocking competition. We need to unleash the market from control by the big incumbent players who influence government policymaking and entrench the status quo, before we begin to look at whether increased control in the industry makes any sense.