Sunday, April 16, 2017

United Airlines' Fiasco and Why We Need Greater Airline Competition

Saying that United Airlines had a bad week last week is an understatement. Last Sunday, United Flight 3411 was ready for takeoff from Chicago O'Hare International Airport. The passengers boarded, but United attempted to accommodate four United employees that they were looking to board last-minute. With the four employees, the flight had more passengers than seats. United tried asking passengers to voluntarily give up their seats. They then asked Dr. David Dao, a 69-year old doctor who was looking to get back to Kentucky to tend to patients the following morning. Dao, who was a paying customer who had already boarded the plane, was then forcibly dragged off the plane, and suffered a concussion, had a broken nose and sinuses, and lost two teeth. It looks like Dao has a strong enough case to sue. This sort of abuse of passengers leaves us understandably upset, even if United ended up changing its policy on displacing customers. And if that debacle weren't enough, a passenger on a United flight was stung by a scorpion that fell out of an overhead bin.

United's stock only dropped four percent since the Dao debacle, which looking at its stock history, is not a huge decline. Even so, it has only been a week, it is too soon to tell how the transpired events will effect United's long-term stance. I could say that our media-saturated world will leave us forgetting this incident in a matter of weeks (if not sooner) because of a quick news-cycle, and United will be back to "business as usual." You could think that people will massively boycott United because of its unacceptable treatment of Dao. As I pointed out three years ago, boycotts work best when they are targeted, massive, and last long enough to do damage. A successful boycott of United gets more complicated when considering the consolidated nature of the airline market. Over the past decade, airline companies have merged and acquired to boost its market share. As the Washington Post points out, there are over 10 major airports where United has 10 percent or more of the airport's market share. For Houston and Newark, United accounts for over half of their airports' travel (see Department of Transportation [DoT] statistics here). The airline industry is an oligopoly, which means that the market is dominated by a small number of sellers. 80 percent of flights are carried out by four major carriers: American, Delta, Southwest, and United (see below, as well as DoT stats). Because there are few alternatives for customers, United does not care nearly as much about customer service or satisfaction as a seller would in a different market.

If a boycott is going to do next to nothing to stop the oligopolistic beast, then what would be more effective? We need to make the airline industry more competitive because there are more efficiency gains, prices go down, and quality goes up (Gil and Kim, 2016Snider and Williams, 2011). One solution that tends to be popular on the Left is "break up the monopolies." As the DoT data show, there are not monopolies or near-monopolies. Sure, there are airports that have high enough market concentration at certain airports, but that doesn't constitute as a monopoly. Obama's Department of Justice went through a lengthy investigation, and found that the airlines weren't colluding, which also helps. The airline industry is more competitive than governments are, but less so than most private-sector markets. The Government Accountability Office (GAO) found that the number of competitors really didn't shift all that much from 2007 to 2012, which is significant considering that is when United acquired Continental (see below).

If we want to think of ways to improve competitiveness in the airline market, here is an alternative to breaking up monopolies. Foreign airlines are presently not able to fly domestic routes. Instead of having this insidious law, how about bringing in competition by letting foreign airlines fly our friendly skies? As the Cato Institute illustrates, privatizing airports can be another route. A couple years ago, I brought up the idea of privatizing air traffic control. Here are a couple more examples of the FAA getting in the way of airline innovations.

While I presented some good and bad alternatives, the practical consideration is whether anything will actually be done to improve airline competitiveness. My answer to that question is "no." The oligopolistic nature of the airline makes boycotting all the more challenging. We currently have a protectionist, populist president who is interested in "America First," which means we probably won't see foreign airlines fly domestic routes anytime soon. The Trump administration also has not indicated that it is looking to improve upon competitiveness in the airline industry. Irrespective of the Trump administration's present stance on the issue (or lack thereof), Trump should focus on airline competitiveness and make flying great again.

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