“Airline Consolidation Hits Smaller Cities Hardest” is a Wall Street Journal article about the recent wave of airline mergers has resulted in cuts to service and increases in fares in smaller American cities. “Rising house prices may be chiefly responsible for rising inequality” is an Economist story about research by Matthew Rognlie who found that owning desirable real estate was the principal driver of the wealth inequality statistics that are motivating our current politics of envy (and who among is not envious of those who bought Brooklyn brownstones 30 years ago?).
Everything that airlines do is a result of government regulation, starting from the fact that there is a U.S. airline industry at all (foreign competitors, e.g., Ryanair, who are more efficient, are excluded from the U.S. domestic market). Now it seems that airline regulation is exacerbating the disparity in real estate values. In a globalized world, being stuck three airline legs away from London or Shanghai makes a house or an office building worth a lot less. Letting a handful of U.S. airlines enjoy an oligopoly also exacerbates wealth inequality due to the fact that airline shareholders, executives, and many employees earn more the median.
Presumably this won’t change. The U.S. government is not going to disappoint its cronies by allowing Ryanair to fly from Boston to Detroit for $40 (see this page for just how little Europeans may pay). But at the same time we shouldn’t express surprise that the long-term trend for Detroit real estate is downward.
As a point of reference: driving 200km in a small, fuel-efficient car in Europe currently costs about 16 euros in gasoline alone. The fact that RyanAir can advertise a trip from London to Oslo (almost six times that distance) for the same amount of money should be an indication that they receive at least some kind of favorable treatment compared to other forms of transport.
@philg “Letting a handful of U.S. airlines enjoy an oligopoly […] The U.S. government is not going to disappoint its cronies by allowing Ryanair to fly from Boston to Detroit for $40.”
I have only a superficial understanding of the US airline industry but I have some questions:
1) Until a few years ago, before the consolidation wave (United + Continental, Delta + Northwest, American + US Airways), the major six airlines had been losing very large amounts of money, for years, and many of them had to file for bankruptcy. Could it be that the market was simply not allowing all six to function profitably?
2) If there’s indeed an oligopoly and government cronyism to the extent that the competition is extremely limited, how was it possible for companies such as JetBlue and Southwest to expand as much as they did, in the past 10-15 years? How was it possible for Spirit Airlines to expand? How was it possible for Virgin America to launch, if the market access is so restricted?
3) Finally, note that the oligopolies are not simply defined as a small number of competitors in a market. If you want another European example, I traveled recently to Eastern Europe and I was amazed to see how in a market where there are just three cell phone companies you get incredibly cheap service so there’s no oligopoly there …
Laura: Airlines will always lose money in the U.S., due to the intersection of labor laws and FAA regulations. See http://philip.greenspun.com/flying/unions-and-airlines for why you should never invest in a U.S. airline.
How was Virgin America allowed to start? See https://en.wikipedia.org/wiki/Virgin_America for how the pilot union (of which I was a proud member!) managed to throw legal wrenches into the works for about two years over the issue of whether the airline was controlled by foreigners.
Michiel: Why is it cheaper to fly 189 people on a B737 per mile than for one person to drive alone in a car? It turns out that airplanes are more efficient than cars, per passenger-mile. If you want to look at a ground-based transportation option that is cost- or energy-competitive with a stuffed B737 you would look at a 50-passenger diesel bus (but it would probably still lose if you counted the cost of building the road).
Michiel: “favorable treatment” might well be the reason, but I suspect it’s “favorable” in the sense of “less thoroughly discouraged”. A 200km trip (in my tiny car, on UK roads) would cost me 15GBP in petrol, or rather 4.5GBP in petrol and 10.5GBP in duty and tax. IIRC turbine fuel for aviation is untaxed. A 70% difference in fuel cost would make the airlines seem good even if they burned twice as many litres to do the same journey.
Is the fuel the dominant expense anyway? I estimate my car’s running costs (e.g. parts, maintenance, insurance, etc.) by doubling what I spend on fuel, so fuel is 50% of the running cost. For airliners I think it’s nearer 20% (philg: you worked there, what is it really?) so variation in the price of fuel will have a quite different effect on the price of each.
philg: The road costs money. So do the airports. Does the airports’ large cost at each end of the trip exceed the roads’ small cost all along the route?
I’d love to have a per-mile figure (or at least formula) for each form of transport, but the few times I’ve seriously tried I’ve gotten mired in complexity (e.g. of regulations) and uncertainty (e.g. how to measure the costs of airport “security”). Maybe the world’s economists have an answer?
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