Daniel Drezner’s Post On Airline Deregulation

Lynne Kiesling

Daniel Drezner has an great post from yesterday on airline deregulation. In commenting on the NY Times article that he references, Dan notes that

… the major airlines are facing a serious financial squeeze, to be sure — but the 2001 post-9/11 government bailout worsened rather than aided their situation.

I encourage you to read it, as well as the Matt Welch article in Reason on the effects of start-up (and upstart) discount airlines in Europe.

Tommy at Almost Average, who is himself a commercial airline pilot, made a profound and important observation in the comments to Dan’s post:

The biggest problem right now with airline competition is it isn’t really competition until you are willing to let somebody lose.

Precisely! That’s why I’m so cheesed off about USAirways getting federal hand-holding. Cut ’em loose, man. There’s all sorts of other value propositions out there for those assets, in the hands of entrepreneurs who are likely to make a better go of it than USAirways in the current setup.

Tommy’s point pertains not just to airlines, but to all infrastructure and network industries. We (and by we I mean politicians thinking that they’re channeling our desires, but who are really directed by the “clamorous importunity of partial interests”) have a very strong unwillingness to tolerate the risk of service dislocation if a firm in an infrastructure network exits the industry.

That fear is not necessarily well-founded. Just because a firm exits an industry doesn’t mean that its assets will exit the industry (although in the case of USAirways, it’s probably true that losing some of their excess capacity would create more long-run stability in the network).

In a later comment on Dan’s post, Don Fishback makes a related point:

If the government would let just one of the legacy carriers fail, it would wake up the capital markets and the employees of the other carriers that capitalism allows for competition and that businesses have to adapt to that competition. Supply would stop growing, demand would catch up to supply, and the airlines would return to health.

But that’s not going to happen. That’s because the airline business is a deregulated business where the government intervention prevents the weak from ever failing!