Don't break up the airlines. Bring more in.
Airlines may have a competition problem — but they aren't actually monopolies
Viral video of a United Airlines passenger being dragged from a plane would seem to be prima facie evidence that the U.S. airline industry — and maybe corporate America more broadly — has a competition problem.
Let's say, for instance, you're so outraged by the incident that you vow to never fly United again. It would be a difficult promise to keep. As The Washington Post notes, United has roughly 50 percent market share in Houston and Newark, and around 30-40 percent in other major hubs like Dulles Washington, D.C., San Francisco, Denver, and Chicago O'Hare.
See, domestic U.S. flyers just don't have a lot of options, at least not as many as they used to. Mergers over the past decade have turned the biggest nine airlines into just four even-bigger airlines: American, United, Delta, and Southwest. Those four carriers now control more than 80 percent of the U.S. market. Or to slice the numbers another way: Today, one or two airlines control a majority of the seats at 93 of the 100 largest airports, according to a 2015 Associated Press analysis. A decade ago, that number was only 78. And if you restrict the study further, you find that a single airline controls a majority of seats in 40 of the top 100 markets vs. 34 a decade earlier.
Which seemingly leads to a simple explanation for why United didn't make a better effort to avoid an ugly confrontation: They didn't have to, so they didn't bother. So bring on the extreme re-accomodation! Or as a Fusion headline put it, "Airlines can treat you like garbage because they are an oligopoly."
Well, if the problem is too few airlines competing for passenger business, then one obvious solution is to bust them up. Indeed, some critics — mostly on the left — were advocating a breakup even before the disturbing video surfaced. They saw, for example, last summer's big computer malfunction at Delta as another example of airline oligopoly leading to poor service. With little competitive threat these days, there's no need to spend big bucks on updating IT systems. As David Dayen wrote at The Fiscal Times: "We actually have a choice here, rooted in antitrust laws a century old designed to preserve competition and break up monopolies."
But, of course, this isn't a monopoly situation. To flip the numbers around, most large cities aren't dominated by a single carrier. So there is some competition. (And a recent Justice Department investigation failed to find evidence of collusion among the carriers.)
Still, more might well be better, although as aviation blogger Gary Leff has noted, a situation where the "50th largest aviation market [is] bloodying itself" with three or four weak players, rather than two or three strong and profitable ones, might or might not be better for consumers. Recall that Washington allowed these mergers because the industry was in a shambles due to high fuel prices and the Great Recession. Now it's going to totally reverse course just a few year later?
Moreover, economists generally care more about market power than market concentration. Is the airline oligopoly really hurting consumers in systemic way? That may be tough to prove. Prices could be lower, yet ticket prices have fallen over the past three years. And U.S. carriers remain among the safest in the world, particularly oligopolists United and American.
Still, if the goal is more competition there is another option to breaking up airlines: bringing more airlines in. Let foreign airlines fly domestic routes and lift restrictions on how much foreigners can own of a domestic carrier, boosting potential competitors. And while policymakers are thinking about injecting more market forces into our air transportation system, they might want to consider privatizing our airports. It's common among advanced economies, and studies suggest doing so leads to better performance.
But even then, passengers shouldn't expect flights with lots of legroom and yummy meals. Not enough of us want that, at least not enough to pay a premium for it. Airlines will continue to compete on price because that's what millions of purchasing decisions show we prefer. And it won't matter if you are flying from Atlanta to Denver on Delta, United, or Emirates.