EverydAY economics roundup competition

Back to the Future… of Air Travel

by Elaine Schwartz    •    Aug 13, 2014    •    2632 Views

Fondly, I remember the Eastern Shuttle.

With the airline industry subject to extensive federal regulatory control before 1978, it was okay for Eastern Airlines to have a government sanctioned monopoly on flights between LaGuardia and Washington D.C. As a consumer, the nice part of Eastern’s monopoly power was a guaranteed seat on every flight. You could arrive at the airport with minutes to spare and know that Eastern would roll out a new plane if the scheduled flight was full. Because government made sure that fares were high enough to cover costs, Eastern made money.

Where are we going with this? To the impact of a new airline industry market structure because, in 1978, everything changed.

With the onset of airline deregulation, government no longer mandated interstate routes, competition surfaced and all airlines, including Eastern, had to change their behavior. Suddenly, someone else (New York Air) was charging (and advertising) a lower fare for flights between NY and Washington D.C. Competition meant a lower fare and consumer choice. You could board the more expensive alternative or take a “no frills” airline.

Another one of those new “no-frills” was PEOPLExpress.

I can remember flying between Newark Airport and Chicago on PEOPLExpress. Located in a rundown terminal that was separate from where the larger airlines arrived and departed, the PEOPLExpress waiting area didn’t even have enough seats — so we sat on the floor. But the flight was inexpensive and safe.

Several years later, unwisely, PEOPLExpress decided to become a “normal” airline. They moved to a nice terminal and tried to attract business travelers. It did not work and their finances unraveled. Unable to survive, they were acquired by Continental (which became United Airlines after the 2 carriers merged in 2010) and destined, I thought, never to be heard of again.

Until now.

PEOPLExpress is back. Its management says they got the name for free when its previous owners let their rights expire. Just like the old PEOPLExpress from the 1980s, the tickets are cheap–as low as $56 a seat between Pittsburgh, PA  and Newport News, VA. Also like its namesake, PEOPLExpress charges a fee for almost everything. It will cost you $25 to use the overhead bin for your baggage and $1 for a cup of coffee.

Among a new group of small startups hoping to move into territory that larger airlines do not occupy, the names PEOPLExpress and Eastern have resurfaced. Again though, their quest to survive will be formidable. Since deregulation began in 1978, out of the 400 government approved air carriers, 264 shut down, 62 never operated and only 68 remain.

Our bottom line: With 4 airlines controlling 82% of the industry, we would expect an oligopoly in which firms have price making power, and where entry and exit is expensive and difficult. But here is the interesting part: The seemingly unprofitable routes that the big carriers cut from their networks have attracted smaller carriers. For those routes, entry is easier and firms have less price making power. As a result, characterizing the airline industry as a traditional oligopoly can be misleading.

And finally, this 2008 excerpt from the Onion has some fun with the price making power and fee proliferation of an airline oligopoly.

“[The president of American Airlines] said that non-passengers of American Airlines should expect to pay a small fee when making Greyhound bus reservations, choosing to drive to their final destination, or simply being a citizen of the United States with a valid Social Security number.

“[American’s president] went on to note that some additional charges would also apply, including a $15 fee for every piece of luggage customers have inside their bedroom closet, and a one-time payment of $40 for any American whose name is Greg.

‘We are confident that these new measures will not discourage customers from flying with American Airlines,’ vice president Margaret Wilkinson said. ‘However, we’d like to remind our customers that there is a ‘discouraged-from-flying-with-American-Airlines’ charge if they do in fact choose not to fly with us.'”

Sources and more...Tough to access, the best article on the new startup airlines was from WSJ.com (paywall) but a Boston business journal did have some good detail on PEOPLExpress. For my airline deregulation history and PEOPLExpress information, I took some excerpts from a past econlife entry and used my textbook, Economics Our American Economy. For some smiles, I recommend the entire Onion article. A satire from 2008, it is still entirely relevant.  

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