Archived Speeches
“Whistling Up a Storm”
Remarks of Robert L. Crandall, Retired Chairman and CEO, American Airlines to the Aero Club, October 27, 1998
It’s very nice to be here this afternoon and to see, once again, lots of old friends who have shared my interest in the aviation industry over the years.
And I thank you for this nice award, because, as you know, a pat on the back is always welcome. And that’s particularly true for old retired folks like myself, who operate in a less expansive universe than those of you still active in business and government.
As many of you know, I’ve been spending a good deal of my time recently on a sailboat. What you may not know is how Jan and I have divided up the duties and responsibilities aboard ship. Jan is captain - which lets her tell me what to do. But I’m the navigator, which lets me tell her where to go!
Since that may suggest that life aboard is contentious, let me hasten to dispel that view. Our sail across the Atlantic was a wonderful adventure and was a great way to shift my long-standing focus on American airlines to another interest which both Jan and I have always found great fun.
A lot of folks have asked me about retirement, and most particularly about whether I miss the airline business. The answer is that I’ll probably always miss the excitement, glamour, stimulation and challenge of working with lots of smart, motivated people in a very interesting industry. But by the same token, I love being retired and both Jan and I are finding that the next chapter in our lives is off to a great start.
That’s true for lots of reasons, one of which was captured by e. B. White who wrote in a book entitled the sea and the wind that blows:
“If a man must be obsessed by something, I suppose a boat is as good as anything, perhaps a bit better than most. A small sailing craft is not only beautiful, it is seductive and full of strange promises and a hint of trouble.”
As much as I’m enjoying my new life, I continue to be a very interested observer of the ever fascinating airline industry. From my observer’s post, I have been struck by the enormous amount of governmental involvement in a business which was deregulated twenty years ago.
In some respects, the controversy which continues to swirl around the business reminds me of a bad storm at sea. In such conditions, visibility is poor, there’s water everywhere, there’s lots of crashing, creaking and groaning - and everybody onboard is hanging on for dear life.
Storms are bad - and every sailor I know makes every possible effort to avoid them. The aversion is so strong that on sailboats, no one is permitted to whistle - since old salts believe that doing so “whistles up the wind,” thus encouraging the gods to send unwelcome storms towards the whistler.
Since almost everyone in Washington says they think deregulation has been a success, I was astounded by the comments of transportation secretary Slater, members of his DOT team, and congressman Jim Oberstar at the airline deregulation 20th anniversary symposium held on
September 23rd. Their comments, which were both critical and extraordinarily regulatory, amounted to whistling up what amounts to another dose of centralized planning for the airline industry, a development I think would be a catastrophe for the industry, its customers and the u.s. economy.
Secretary Slater led off with remarks which included these very welcome words: “the traditional regulatory mindset is on the way out - and it isn’t coming back.” Unhappily, subsequent presentations belied the secretary’s words. Jim Oberstar’s remarks were focused on what he chose to characterize as the predatory practices of major airlines -- on a denunciation of domestic airlines alliances -- and on a list of other areas in which he thinks congressional supervision of the marketplace would be helpful, including such matters as travel agent commissions and CRS practices.
Later in the program Pat Murphy, deputy assistant secretary for aviation and international affairs, laid out the department’s regulatory agenda. Pat didn’t waste a lot of time celebrating the successes of deregulation, but proceeded directly to an enumeration of the department’s four principal concerns about deregulation. Those are:
First, the level of industry concentration.
Second, the evolution of single-carrier dominated hubs.
Third, the current relationship between airlines and airports.
And finally, the fact that large airlines have marketing advantages over smaller ones!
Never one to let a concern go unrectified, pat then listed a half dozen suggestions for government action including a more vigorous review of mergers and alliances, intensive studies of the CRS rules, airport practices and travel agent commissions, and - last, but far from least -- finalization of what the department calls its “statement of enforcement policy regarding unfair exclusionary conduct,” commonly known as the “proposed guidelines.”
Believe it or not, pat’s speech even celebrated the monopsonist behavior of the u.s. government which has - in each of the last several years - managed to coerce the airlines into carrying government traffic at fares that are at least $2 billion below their fully allocated costs!
These folks all seem to have forgotten that back in 1993, shortly after his first inauguration, President Clinton convened a group called the “commission to ensure a healthy and competitive airline industry.” At the time, America’s airlines were losing billions of dollars annually, and there was grave concern about their continued ability to either provide safe and convenient air transportation in the united states or to compete successfully on the world stage.
In the years since, the industry has worked hard at solving its problems. It is controlling its capacity; it is introducing new and more efficient airplanes including regional jets; it is constructing new and more cost effective methods of product distribution; it has developed and is using sophisticated pricing mechanisms; it is reducing costs; and it is using automation to improve its productivity and enhance its competitiveness.
Nonetheless, in 1997 the network carriers earned a net margin of only 6.04 percent, a half percent less than the average net profit margin of all u.s. manufacturing industries in the first nine months of the same year. Moreover, despite all the progress, the network carriers as a group were still in the red for the decade as a whole through the end of last year.
Fortunately, 1998 has turned out to be a satisfactory year, and by year end, the network carriers -- as a group -- should be solidly in the black for the 1990s. Nonetheless, it strikes me as inordinately shortsighted for senior policy makers in the u.s. government to have forgotten, so soon after the debacle of the early 1990s, just how cyclical - and how important - the airline industry is.
But of course, economics and politics are very different things. When times are good, regulation - particularly if undertaken in the name of lower fares - is good politics. It is also -- for folks who are regulators at heart - good fun.
Would any group truly devoted to free markets seriously propose creating peanut-free zones on u.s. airlines?
And would a market-oriented department really be concerned with whether airlines are dealing fairly with internet service providers who think the government should tell carriers how much they ought to pay to distribute tickets on the net? I think not!
The department’s lust to regulate is intellectually inconsistent with its acknowledgment that deregulation has produced -- for consumers as a group and for the industry as a whole -- excellent results on many fronts. As compared to the years of regulation, more carriers are offering more flights to more destinations by more alternative routings -- at lower average fares -- than ever before.
Since 1978, on an inflation adjusted basis, average fares are down by 36 percent. Meanwhile, traffic has more than doubled, the number of airlines operating in the u.s. has risen from 43 to 90, and the number of departures offered has increased by 50 percent.
Are there inconsistencies? Sure! Are there some consumers that have to pay higher prices to fly nonstop than do others? Sure! But the same inconsistencies are present in every other competitive industry. You can buy cameras, watches, underwear, and most other things cheaper in big cities than in small ones - and anywhere there’s lots of demand for a particular product, it will be more widely available -- and sold for lower prices -- than in places where there is less demand.
Washington’s intellectual unwillingness to accept the fact that free markets cannot be expected to deliver exactly the same benefits to all consumers is well matched by its refusal to acknowledge that many of the things the department considers problems are a function of governmental decisions. Let me offer several examples:
First, god did not create airline slots; the FAA and the Department Of Transportation did. Slots came into existence because politicians were unwilling to let the marketplace solve the congestion problem! Absent the imposition of slots, travel delays and financial losses would ultimately have driven the carriers serving congested airports to reduce the number of flights offered to whatever number the air traffic control system could accommodate. Moreover, the existence of high prices and long delays would have created vastly greater pressures for an improved air traffic control system and the construction of additional runways. Thus, to the extent that slots limit competition, we can thank governmental intervention for the favor.
Another of the department’s concerns involves industry concentration, and the interdependence of carriers which results from codesharing. I want to remind everyone that when codesharing was first proposed -- and for many years thereafter -- American and many other carriers opposed it vociferously. It was the department of transportation who decided that it was okay to sell a Chevrolet and call it a ford, and it was the department of transportation which approved - over the vigorous objections of many major carriers - the first of the international alliances which have now become so ubiquitous.
In addition to fostering increased concentration, the department’s willingness to approve alliances has substantially weakened the international presence of the u.s. airline industry. Glen Engel of Goldman Sachs, one of the industry’s premier analysts, recently wrote:
“We believe that alliance benefits have disproportionately accrued to European rather than u.s. carriers, because U.S. hubs access a greater share of connecting traffic than do European hubs. Since the advent of alliances, European airlines have increased market share fifteen percentage points, and now offer 65 percent of transatlantic capacity.”
Had the department of transportation declined to approve international alliances, and rejected codesharing as the deception that it is, two of D.O.T.’s principal concerns would immediately evaporate. Moreover, I should point out - to pat and others who might be interested - that codesharing and international alliances survive at the will of the department. If the department wants to encourage multi-carrier competition, it need only ban codesharing and withdraw its approval of the several existing international alliances. However, it is neither competitively sensible nor appropriately even-handed to approve some but not other combinations.
We also heard, on September 23rd, that the department is concerned about the way in which airlines have used commissions to build distributor loyalty. The department can’t have it both ways! If it wants the airlines to compete by paying different commissions to different distributors - which is what it said it wanted when commissions were deregulated in the late 1970s -- it cannot now characterize differential commission payments as anti-competitive.
Nor is it realistic to complain about the operation of CRS systems. Here again, private enterprise came to the fore in the late 1970s and found a way to distribute the products of more airlines to more people in an economically efficient way. Ever since, the department has been busy imposing ever more detailed CRS rules. After reading pat’s remarks, I’m not sure that anything short of collectivizing the CRS systems for the benefit of consumers will ever satisfy the department’s regulators.
Neal Goldschmidt, at the same “deregulation celebration,” put the issues in context rather well. While observing that deregulation was not intended to provide opportunities to avoid the country’s antitrust laws, he went on to say, “It is a great leap from that obvious truth to the conclusion that the government is well served by having its transportation career employees create a new layer of antitrust law without the justice department telling congress that our current antitrust laws will not suffice.”
“It is an approach born of political frustration,” Mr. Goldschmidt continued. “barraged by noisy complaints, the department is trying to be proactive. But it is an agency” - and here I’d like to add emphasis to Mr. Goldschmidt’s words - “it is an agency that through five presidents and multiple transportation secretaries, myself included, has not been able to master the technological and capital challenges that constrain the aviation sector’s growth, health and safety. It is a huge mistake to divert the transportation department’s attention away from solving the more significant problems inhibiting the promise of deregulation to make a political statement about antitrust policy.”
To Mr. Goldschmidt’s words I would say “hear, hear!” Back in 1978, the government decided that deregulation would produce better results than regulation - and it has. It has not satisfied everyone, and it never will - any more than any other industry is ever likely to satisfy all of its customers and constituencies. Nonetheless, it has met its essential test - it has allowed more carriers to operate more flights to more destinations by way of more alternative routings than would have ever have been conceivable back in the days when theCAB. ran a centralized planning bureau for the industry.
Unfortunately, it appears that the department - and many in congress -- find that insufficient. To this observer, at least, the department’s position seems to be that any kind of competition other than price competition is unfair - and price competition is also unfair, unless you happen to be a new entrant, low-cost carrier. That prescription, if applied, can only mean - in the long-term - another round of huge financial losses for the established carriers, less competition, and higher -- not lower -- fares.
To the extent that deregulation has fallen short of its full promise, it is largely because government hasn’t kept up its part of the bargain.
It is government, not the industry, that has failed to modernize the air traffic control system.
It is government, not the industry, that has approved - indeed encouraged - the creation of alliances and partnerships that have sapped the vigor of the interline system that allowed independent carriers to offer the public multi-faceted competition in the years before codesharing became ubiquitous.
And it is government -- at many levels -- that has failed to create the ground transportation systems needed to complement America’s peerless air travel network.
Air travel can be better than it is. But the road to improvement lies not in regulating the system, but in expanding it! Despite universal agreement that there is far too little air traffic capacity, we are devoting far too few resources to fixing that problem. As we look from today’s 600 million passengers to the billion plus expected to fly ten years hence, we can be absolutely certain that unless we accelerate the creation of an adequate air traffic control infrastructure -- and build the runways and ground transportation systems we need -- air travel will be less convenient and more expensive. Unless government meets its obligations, airlines won’t be able to add the needed capacity. If that happens, prices will inevitably rise and service, particularly service to smaller communities, will diminish.
On the other hand, if government does the job it’s supposed to do, the marketplace will produce whatever amount of capacity can be flown at compensatory rates of return. That’s true in every other industry, and unless the folks I used to compete against have lost their vigor - which I very much doubt - it will be true in the airline business as well.
But if we continue to whistle up new regulation, the consequences will be as unexpected as the consequences of deregulation itself. Many of you will recall that the theorists of deregulation projected very different outcomes twenty years ago from those the marketplace ultimately produced.
The theorists believed, for example, that on a given route, there would be high end service and low end service; the reality is that airline services are so hard to differentiate that no carrier has been successful in persuading consumers that a seat from a to b is worth materially more than any other seat -- hence the intensity of price competition, as consumers make clear than one airline seat is readily substitutable for another.
The probable outcome of more intrusive airline regulation is well summarized in a work cited by the DOT. itself, prepared by professors Ordover and Willig. In reply comments in the docket concerning the proposed guidelines, they said:
“Challenging such conduct as a matter of course would lessen price competition, would artificially place floors under fares by making new entrants protectorates of the DOT rather than benefactors of the flying public, would potentially give the new entrant the ability to control and manipulate the extent of competition on a particular route, and could force consumers to forego the trip or utilize a less preferred carrier because of an artificial scarcity of seats at the lower fares.”
Centralized planning, ladies and gentlemen, would wreak unknown changes and impose unknown costs. Like a storm at sea, it would be both frightening and damaging - and like a storm, it should be avoided at all costs.
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