The Federal Role in Aviation

The Federal Role in Aviation

June 25, 2014  | ENO CENTER FOR TRANSPORTATION

Congress continues to do very little as we head toward the midterm election, but one issue that continues to come up is that of “transparency” in airfares. House Transportation and Infrastructure Committee Chair Bill Shuster (R-Penn.) has proposed the “Transparency Airfares Act” while Senator Robert Menendez (D-NJ) has introduced the “Real Transparency in Airfares Act”. These two pieces of legislation represent opposing arguments over how airlines are required to display taxes and fees to potential customers.

The airlines ask why they alone are being selected for such scrutiny. They have a point: how many other industries do Congress and USDOT follow so closely and play such an outsized role in? On the other hand, one could argue that passenger airlines are the nation’s economic lifeblood, and that Congress should step in when issues of interstate commerce are at stake.

While this fare display issue may seem small, especially compared to some of the real problems we actually should be dealing with in aviation (NextGen, airport investment, funding, etc.), it is emblematic of the larger problem. More than 35 years after airline deregulation, the federal role in the economics of aviation continues to be controversial and unsettled.

From 1925 to 1978, Congress and the Civil Aeronautics Board regulated fares and routes. After the federal government discarded that direct responsibility, the extent to which Congress should intervene in the airline industry has been a matter of debate. Unfortunately, that debate often gets mired in relatively minor issues such as fare transparency.

It is useful to consider what the continued federal and Congressional role should be with respect to the economic components of aviation. There is relatively little disagreement about the federal role in safety regulation and infrastructure provision, but the economic components continue to be an issue. The following are some ideas for effective federal involvement in the economics of aviation:

Develop a strategic plan. Airline industry consolidation has continued at a rapid rate over the last decade, to the point were we now have only four major carriers. While much of the industry seems to believe that this era is drawing to a close and no more mergers are imminent, we cannot know for sure. What we do know is that the industry has been through numerous iterations and disruptions since deregulation but has now settled into a relatively stable – and even profit-making – rhythm.

USDOT should take advantage of this stability by working with industry to develop a strategic plan for the nation’s aviation system. This could at a minimum set some economic goals with respect to the national system, and serve as a guide for future policy decisions. Federal responses to mergers are often reactionary rather than thoughtful, and when Congress legislates on aviation issues it is typically in a haphazard manner without an eye towards long-term growth. USDOT does not have to settle the answer of the appropriate amount of federal intervention – that would likely be impossible – but they can work with the industry to set objectives and performance measures upon which future policy decisions can be based.

Create a national airline passenger council. Congress often sees a role for itself in protecting consumers from the airlines. After a series of incidents in which passengers were stranded for hours without basic necessities, Congress passed regulations to prevent future incidents including potential fines on carriers. Now Congress is getting involved in the issue of how airfares are displayed. It is not that these issues are unimportant – they matter to passengers and for the economic health of the country – but Congress should not be micromanaging at this level.

There is a better way, one that we can borrow from public agencies. Transit authorities often have a “riders council” that helps bring rider concerns to management. This entity can be governmental or a non-profit but the key is that it needs to have the authority to engage the providers. In the case of the airlines, this means that Congress must require airlines to meet with this “passenger council” and hear their concerns. If the council does not feel that their concerns have been responded to adequately, they can take their case back to Congress to press for further action. Members of the council could include frequent flyers from each of the major airlines, as well as representatives for the pilots and flight attendants. Such a structure would give passengers a voice and keep Congress in the loop without micromanaging.

Reduce barriers to entry. No matter what Congress does, the future of the airline industry is one that appears to be more consolidated. The traveling public is already feeling some of the effects of this consolidation: many smaller and medium-sized communities have lost air service, many larger hubs are increasingly dominated by one carrier, and airlines are careful to control capacity in order to maintain high load factors. It would be a mistake to try deal with these potential problems through regulation, which is a blunt instrument that can create negative side effects and an economic drag on an industry that is still not very profitable.

A better strategy would be to work to reduce barriers to entry. Deregulation was supposed to lead to numerous new airline entrants, and for a while it did. Between 1979 and 2003 there were 129 new market entrants, but there have been less than five in the last decade. New entrants help to ensure competition and can keep fares down at larger hubs, and they often can provide service to previously underserved communities. Barriers to entry in the airline industry have grown as carriers have consolidated and investors have become wary of startup airlines. Substantial analysis and research is needed to determine how some of these barriers could be reduced, either through federal action or other means. Congress should direct USDOT to work on this issue in order to prevent these impacts from becoming more severe.

Conclusions

To some extent, Congressional meddling in the airline industry may be inevitable. Not only are all members of Congress consumers of airlines, but also the issue of air travel typically receives extensive media coverage and can be a useful stage from which to gain publicity. There is only so much we can to reduce this type of micromanagement, but these issues must be delegated because Congress has serious issues to confront in aviation. There is growing consensus that we need to reform our air traffic control governance and financing structure—a project being undertaken by Eno’s NextGen Working Group. We have an airport investment problem where airports and airlines fight regularly about raising the Passenger Facility Charge and never resolve the unproductive nature of the Airport Improvement Program. Finally we have the continued issue of safety, which though it has not been an issue lately, must remain the top priority of the federal government with respect to aviation.

We may not be able to effectively confront these issues if fights over fare displays and the like distract Congress and the industry. Mergers, passenger rights, and the future of competition in the industry are serious issues that demand thoughtful, rather than reactionary, responses. Moving these larger issues out of Congress, while still providing them with an oversight role, could help ensure that they are dealt with effectively.

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