January 18, 2008
Airline Consolidation and What Really Negatively Affects the Industry (and it is not high oil prices)
Posted by Daniel Sokol

Once again, merger talks and consolidation among US carriers have people buzzing about a transformation of the ailing US airline industry.  This week there was news of a possible Delta merger with Northwest (with a possible French twist) or with UAL, parent of United.  Many critics in recent years have decried airline deregulation.  My response is that we have yet to see true airline deregulation in this country.  I would love to see some true liberalization of the airline market since government restraints far outweigh any anti-competitive restraints based on private firm behavior.  I would suggest the following changes:

1. auctioning off landing slots- give the landing slot to those that value it the most.  A simple concept that works.  For example, telecom auctions have worked very well around the world in auctioning off spectrum.

2. congestion charges- if the FAA's infrastructure is stretched to capacity, why not create congestion charges to spread out the flights and encourage larger planes at peak times.  Congestion pricing has worked well for cars in both London and Singapore.

3. no limits on foreign ownership- airlines are no longer strategic assets.  If deep pocket investors from abroad want to invest to buy new planes (US based carriers have on average more older planes than their European or Asian counterparts), improve service or fly new routes, let the market choose the winners.

4. no limits on foreign flights between US cities- I would love to see a Singapore airlines flight between NY and LA.  Their service is spectacular.  More entry should also lower prices because of the increased competition.

5. no political requirements to keep hubs when airlines merge- US based airlines often have trouble merging because Senators and Governors push hard to keep local jobs even though extra hubs create redundancies.

6. no state and local government subsidies for favored airlines that allows for companies to artificially lower their costs.  The Europeans have embraced a state aid code.  Maybe we should think about something similar.

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