Consequences of Corporate Consolidation

Monopoly

In 2018 Wendover Productions made a video on YouTube where he discussed the issue facing airlines where they are not being able to get enough pilots, so they are cancelling routes.

There are a few reasons for this. The cost of training is absurdly high, the starting wages are very low, and the good routes are usually dominated by the pilots who are near the end of their career.

Since it can cost hundreds of thousands of dollars of training and then you will likely make only about $30,000 a year at the beginning of your career as a pilot, airlines are having difficulty to get enough pilots to fly for them, so they are closing profitable routes.

At first this sounds crazy, but in reality it is exactly what economics predicts. The United States has seen a massive consolidation of airlines as is known by many. In 2019 American Airlines (the largest in the country) had more passengers than the total on Alaska Airlines, JetBlue Airways, Spirit Airlines, Frontier Airlines, Allegiant Air, Hawaiian Airlines, and Sun Country Airlines. The entire industry in the United States is dominated by American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines. This consolidation of airlines into a small number means that they can charge more for each flight they serve, and do not offer as many options as there would be if there were more major airlines in the country. If we take a major airport like Seattle,  you can fly to Chicago on 6 different airlines, you can fly to New York on 3 different airlines, but if you want to fly directly to Miami, you can only fly on American Airlines. This gives immense power to American Airlines who does charge monopoly prices for this Seattle-Miami route, just like any monopoly in the world. This means there are fewer flights, and if another airline were to try to take advantage of this monopoly pricing, American would be able to significantly reduce their prices and force the other airline out of business. This is why getting out of our current situation with monopoly pricing is going to be so difficult.

Part of this is also because the United States has laws about how foreign airlines are not allowed to fly domestic flights in the United States. But even more than this, even the route to London has only 3 year round flights, despite being a major hub, and Frankfurt has only two flights on either Condor or Lufthansa.

This problem is obviously bigger than just the United States. There are three Airlines Alliances which exist in the world, Star Alliance, SkyTeam, and OneWorld. These airlines codeshare on international routes so if you were to fly from Seattle to Amsterdam you would fly on a codeshare between Delta and KLM. Most small countries will only have one major airline as well, which will belong to one of these major alliances. The United States, Spain, Russia, and China are the only exceptions to this rule. This lack of competition reduces the number of flights available and makes travel more expensive. The airlines naturally will pocket this cash, and before this epidemic were generally profitable.

All of this leads to fewer flights available overall, which while this is better for the environment, leads to fewer flights available for people in smaller cities. Here in Bellingham, Washington, only Alaska Airlines flies to Seattle, and only Allegiant flies anywhere else outside of Washington State. In Medford, Oregon (near where my great grandparents lived) only Seattle and Los Angeles have any competition. In larger cities like Kansas City, there are only two airlines operating between there and Seattle, Minneapolis, or New York. This makes flying less accessible to people with limited means, reduces the amount of options.

This is by any definition a very clear market failure.

So, what are solutions?

For myself, when I look at flying being more expensive, I have two battles pulling in me, it makes it more expensive to fly so we have fewer people flying overall, but we also see a benefit to the environment with fewer plans flying. My personal desire is to see accessibility for people to travel in ways which are efficient, preferably better for the environment, provide a high quality of service, provide a lot of service, and are at a good price for consumers.

In economics, we find that we first have to determine the nature of the market. For this we see that on the supply side we have a limited number of runways in each city, limited airspace between any two city pairs, and ideally those runways will be allocated in a way which maximizes the number of people who are able to use those services so we don’t run empty planes.

One of the first things any student of economics will study is information theory, which is fundamental to all economics. The information which needs to be determined in order to find the price and quantity of people who will consider flying at any given price is the goal of many economists who are employed by transportation companies who build models to determine the ticket price. The goal of the average consumer is obviously to spend as little as possible to safely get to their destination in as little time as possible. The goal of the company is obviously to maximize their profit. With fewer airlines in the marketplace, the total amount of information the market is going to respond to will be smaller, which hurts America’s GDP by reducing the amount of people who are traveling.

With routes which go between major cities which have several airlines competing for customers there will be lower prices. The reason for this is because those airlines are trying to maximize their profit, but if one raised their price too far, their plane would run empty and they would end up making less money than they would with a higher price.

If I look for a flight from Seattle to Chicago, there are a lot of different airlines which are competing to get me there, so the price for a four day trip starting on December 17th will currently run for $177. I am about as far away from Monterrey, Mexico as I am from Chicago, and Monterrey is also a city of considerable size with a good sized airport. There are fewer airlines offering flights to Monterrey from the United States, and even including transfers the least expensive flight right now is for $518 for the same 4 day trip. The reason is simple, Alaska, Spirit, United, American, Delta, and Southwest all compete for the flight to Chicago, whereas only United and American are competing for flights to Monterrey. This is one example where we can clearly see competition lowering prices. These prices stay pretty stable regardless of which season you look for prices according to Google Flights.

If there were more airlines in the market, there would be more airlines looking to edge out another, but with only a handful of major airlines, airlines have no incentive to do this. It is also far  too easy for one company to respect another companies turf, and extremely difficult for regulators to prove collusion if collusion exists.

The answer then is to have more entrants to the market. Most flights in the United States are fairly short (under 600 km last I checked) which means that a flight from Seattle to Medford is about the average length of a flight in the United States. Most flights then are competitive with high speed rail, and if America were to build a high speed rail network, which airlines could not compete with in terms of the waiting time in airports, then that will force airlines to serve more long haul routes and save oil for the majority of routes in the United States.

This also hints at another consequence of corporate consolidation. America’s interurban railroads are (with the exception of the Northeast Corridor) all privately owned. The consequence of this is that the private railroad is not acting on behalf of the country but instead for the interests of their own pocket books and stock holders. They also do not upgrade their lines as much as other countries, meaning anyone who has traveled in the United States knows that we have far more single tracked railroads than any other developed country. This makes it so the United States does not provide the same level of rail service as most other developed countries, limiting the ability for mobility within the United States. Given that railroads are a natural monopoly, and the only reasonable competitor to large airlines, there are very few solutions to solve the corporate consolidation in America’s transportation sector.

One option would be for the government to break up the existing airlines companies under anti-trust lawsuits. Having 10 or 20 airlines would make it far easier for at least one airline to cheat if some try to form a cartel, making a cartel far less powerful. The other option is (assuming there will never be a large number of railroads between two cities) is to nationalize the railroads and treat them like our highways. Then having AMTRAK increase service will provide a reasonably fast, efficient, inexpensive way to travel on trips of up to 500 km which would provide direct competition to a large number of existing flights. We could allow private railroad companies to compete with AMTRAK as well which would both increase the amount of people being able to travel in the United States and provide further downward pressure on price.

This solution will also solve the original problem I proposed in this post. With more airlines competing in the United States they would be forced to increase the salaries of pilots, or another airline will hire the pilots instead. This will end the shortage of pilots in a very short amount of time.

This is how we can end the pilot shortage, increase the availability of travel in America, reduce prices for traveling, and make a more prosperous economy.

References:

https://www.propublica.org/article/airline-consolidation-democratic-lobbying-antitrust

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