Airline Monopoly Fears Are Bunk

Recently, many pundits, activists, and politicians have coalesced around the same narrative: Consumers, workers, and small businesses have suffered from increasing industry concentration. Monopoly, we are told, is the scourge of the U.S. economy, the cause of all that is going wrong. And only breaking up Big Industry can restore America to its prior greatness.

It’s a compelling narrative, but while it may feel right, it’s actually based largely on half-truths and unverified and inaccurate claims. In other words, it’s mostly wrong. Consider airlines as a case in point. This industry serves as Exhibit A for many who believe the nation’s antitrust regulators have been asleep at the switch. Just 15 years ago there was robust competition, critics argue, with at least eight major carriers slugging it out for competitive advantage, and in the process keeping fares down and quality up.

Today, we have four major carriers, and they have raised prices, cut service, and jacked up profits — or so we are led to believe. In his new book The Curse of Bigness, Tim Wu, the Columbia professor who coined the term “net neutrality” while critiquing big broadband operators, sees big airlines as a prime example of the deleterious effects of growing industrial concentration. He writes that, “because of mergers, [we have] worse service and higher prices.” Berkeley professor and liberal icon Robert Reich echoes that claim. He writes:

Antitrust laws have been relaxed for corporations with significant market power, such as … big airlines. As a result, Americans pay more for … airline tickets, than the citizens of any other advanced nation.

Barry Lynn, head of the newly formed Open Markets Institute, an anti-monopoly group, goes even further when he argues:

Complaints about the decline of airline service have now become a commonplace of American life. … Meanwhile, more and more cities and even whole regions of “fly-over America” are finding they are served by fewer and fewer flights costing more and more. … Adding insult to injury, the industry’s profitability recently hit an all-time high, reaching $20 billion in 2016.

Lynn asks, “What explains the sorry state of airline travel in the United States?” He concludes, “Largely, it is story of government retreating from its historical role in structuring competition in airline markets, combined with a near wholesale abandonment of anti-trust enforcement.”

Ah, if only it were so. On this view, all government would have to do is break up United, Delta, Southwest, and American Airlines and we’d get the plush service of the 1960s, when airlines were regulated by the federal government.

Let’s look at a few longer-term facts, starting with productivity, a measure of how much output an industry produces per unit of input (e.g., workers). Higher productivity is the sine qua non of higher living standards and a growing economy. The fact that U.S. labor productivity over the last decade has grown at the lowest rate since the federal government started measuring it in 1948 is a national crisis. Yet, in part because of consolidation, airline productivity increased almost four times faster than the rest of the economy from 1997 to 2014.

According to the basic laws of economics, when an industry is monopolistic, its firms cut output and investment, and they raise prices. Yet when it comes to prices, airline prices increased only about one third as fast as the rate of inflation from 1995 to 2016. And as far as Robert Reich’s undocumented claim that Americans pay more for air travel than any other nation, maybe he meant we spend more overall because we fly more than any other nation in the world — in part, because we are a big nation and because air travel is so good. In fact, according to the Kiwi airline price index, the United States had the seventh cheapest air travel of 75 countries measured, behind mostly developing nations such as India and Algeria, which have very low labor costs.

When it comes to investment, the U.S. airline industry is in the midst of a capital expenditure boom, having invested $17.5 billion in 2017, up from around $6 billion per year in the early 2000s. Airline companies are replacing older jets with new ones, buying new equipment like check-in kiosks, and investing in terminal modernization throughout the nation.

But surely this monopolistic airline must be raking in the profits? Indeed, that is the main complaint anti-monopolists like Wu, Reich, and Lind have about increasing concentration. They believe it leads to higher profits, which means less money for average Americans. So, even if concentration led to lower prices, higher productivity, and more capital investment, if it also led to higher profits then government should have stepped in. But according to the Department of Transportation’s Bureau of Transportation Statistics, the airline industry profits were 8.8 percent in 2017 compared to roughly 11 percent for the S&P 500.

An industry that cuts prices, boosts productivity, and invests in new equipment while earning lower-than-average profits: I’d say that industry is a success, and it should be emulated, not broken up. So next time you read something from an anti-monopolist about this or that industry that has gotten too “big” and needs to be broken up, don’t believe them unless they provide real evidence.