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Airline Regulations Should be Grounded

3Qs with Department of Economics Chair Steven Morrison
April 27th, 2011

In August, new air­line reg­u­la­tions from the U.S. gov­ern­ment will go into effect. They include refunding pas­sen­gers checked bag fees if lug­gage is lost, increasing the com­pen­sa­tion bumped pas­sen­gers receive and imposing time limits on how long planes making inter­na­tional flights can wait on the tarmac. Steven Mor­rison, pro­fessor and chair of the Depart­ment of Eco­nomics at North­eastern Uni­ver­sity, who studies the air­line industry, exam­ines these reg­u­la­tions and the state of the air­line industry since the eco­nomic downturn.

What is your take on these new regulations?

My gen­eral reac­tion is that the pri­mary poli­cies that the gov­ern­ment should pursue regarding air­lines is not to specify how they should treat pas­sen­gers in cer­tain instances, but rather to make sure there is suf­fi­cient com­pe­ti­tion, and thus choice for pas­sen­gers. That way, pas­sen­gers can vote with their wal­lets about which air­line poli­cies they prefer and which to pay for.

Air­lines were dereg­u­lated in 1978, ending the government’s authority over spec­i­fying what fares they could charge and which routes they could run. But there is always this notion, in all phases of life, that, “There ought to be a law.” Air­lines are no dif­ferent than any other industry. It’s more impor­tant to ensure there is com­pe­ti­tion and let the market work, and make sure con­sumers have all the infor­ma­tion they need to make deci­sions for themselves.

Are air­lines charging cus­tomers more fees nowa­days than in years past?

There are more fees now because the product has become unbun­dled. You used to be able to book flights that would come with food, checked bags and your choice of any seat in coach. Now you pay more for food or a seat with more legroom. Air­lines call it “a la carte” pricing, and it’s under­stand­able for air­lines to issue these charges in their scramble to gen­erate as much rev­enue as pos­sible in an uncer­tain eco­nomic envi­ron­ment.  But it’s impor­tant that pas­sen­gers know what they’re get­ting charged for.

What is the state of the air­line industry’s finan­cial situation?

They are cer­tainly doing better. The pri­mary long­standing problem the air­line industry has faced is aligning capacity with demand over the busi­ness cycle. What typ­i­cally hap­pens in an eco­nomic down­turn is the air­lines are stuck with too much capacity. So they will offer dis­counts. Then the economy turns around, and air­lines aggres­sively add seats and end up with too much capacity again. But over the last sev­eral years, air­lines have been extremely dis­ci­plined with capacity addi­tions and taking capacity out of ser­vice. So fares are going up sig­nif­i­cantly because the economy is improving and air­lines have been retrained regarding capacity. In addi­tion, fuel prices are now rising.

Summer is the peak plea­sure travel season, and fares are gen­er­ally lower during this time of year. But they will be higher than they have been in past sum­mers for these rea­sons I’ve mentioned.

- by Greg St. Martin


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