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What went wrong with deregulation?

Published Oct. 9, 2005

The federal government recently convened a commission to search for ways to save U.S. airlines from their red ink. Undoubtedly, commission members and witnesses will hold forth passionately that airline deregulation has been a failure and a mistake. I believe that it has been a failure, but it hasn't been a mistake _ at least, not yet.

The basic idea of deregulation was to make the airline business more competitive by taking decisions about routes and fares away from bureaucrats and giving them to airline managers. The hope was that lots of new airlines would offer all sorts of intriguing services, and no-frills, low-cost lines would make air travel available to lower-income travelers.

Unfortunately, the first 10 years of deregulation mainly gave consumers an overdose of sameness: a handful of big lines selling similar services at similar prices. On most lines, inexpensive tickets have all sorts of onerous restrictions while the cost of unrestricted tickets has soared out of proportion to the quality of service provided.

Airlines haven't prospered, either. The airlines got a dose of bankruptcies, and thousands of workers have lost jobs or had their pay cut.

What went wrong? Here's my summation:

The second-line airlines must bear most of the blame. Rather than offer a real alternative to the fare and service formulas of the dominant big three (American, Delta and United), Braniff, Continental, Eastern, Midway, Northwest, Pan American and TWA imitated the big guys and each other. When times were good, those with the financial strength to innovate lacked the mental strength to do anything.

The federal government is to blame for allowing mergers that defied all antitrust logic. Northwest-Republic, USAir-PSA, and Delta-Western were especially detrimental to competition.

Much of the industry fell under the sway of financial finaglers, operators who weren't concerned about long-term corporate survival as long as they could pull off their short-term deals.

Two of the most promising low-fare lines committed corporate suicide by overextending: People Express in acquiring Frontier, an incompatible partner, and Midway in establishing an expensive Philadelphia hub it didn't really need.

The history of deregulation so far has been a story of opportunities not even understood, let alone missed. The only two bright spots _ the surviving innovators _ are premium-service Midwest Express and low-fare Southwest. Both are in good financial health and are systematically making market gains.

That's why, despite the many failures, deregulation wasn't necessarily a mistake. We finally have a good crop of new lines with realistic goals. With its new Comfort Class, old-timer TWA is finally reversing the long-term decline in the quality of Coach service.