Mises Wire

While flying recently I decided to look at the price of plane tickets in Europe compared to the United States. For example, a non-stop flight of about 900 miles from Dusseldorf to Madrid costs on Expedia $125 and takes 2 hours and 45 minutes. A similar distance in the US from any airport in Chicago to any airport in New York City (789 miles) has a lowest fare of $160 and takes 2 hours and 11 minutes. I picked two of the busiest US airports, because I expected competition to be greatest there. I compared several other European flights with US flights of similar distances and always found that the European flights were less expensive (for example, Rome to Berlin 736 miles $109 versus San Francisco to Seattle 679 miles $186).

Why do Americans pay more to fly a similar distance? In a recent interview, Nobel Prize winner Joseph Stiglitz blamed deregulation of the airlines. He said that deregulation was supposed to increase competition, but now we only have 3 legacy airlines. However, he fails to mention that the number of people flying in the US increased from 163 million in 1970 to 798 million in 2015, and the price per mile has fallen from a high of $0.32 in 1980 to around $0.15 in 2015. Perhaps deregulation did work to some extent.

The Airline Deregulation act signed by Jimmy Carter in 1978 removed government restrictions on entry, prices, and routes. As a result, the airline industry changed dramatically. Instead of flying direct flights between cities, the industry moved to a hub and spoke system where airlines would fly more passengers to a centrally located airport for one leg of the flight and then back out to their destination on the second leg of their flight. This reduced the cost of flying. These innovations would not have occurred without deregulation. This is the beauty of the marketplace. Innovators come up with better ways to serve the public. Further, Professor Stiglitz fails to acknowledge that there are other competitors on some routes, such as Frontier, Southwest, and Allegiant.

Stiglitz also implies that the airline industry is totally deregulated. This is not the case. The lack of full deregulation is keeping the price of our airline tickets higher and the quality of service lower (think about United Airlines’ recent escapades) than it would be with greater competition. How can it be that the airline industry is not fully deregulated? Cronyism exists in the US airline industry. The industry and unions fight any government deregulation that would increase competition from foreign airlines. Currently foreign airlines are only allowed to fly passengers from other continents to airports in the United States, but they cannot fly point-to-point between airports within the United States. Allowing foreign airlines access to US routes would increase competition, give consumers more choices, bring lower prices, and provide greater differentiation in service. Some airlines will offer the bare minimum of service. Others will differentiate by improving services. Imagine if the airlines treated customers better. Your next flight could be a lot more pleasant.

Some have argued that for this type of deregulation to work, we would need to have the European Union adopt a similar policy for US airlines in Europe. What Europe does makes no difference for people who fly in the US. Such an argument is similar to arguing that US consumers should not be able to buy French wine if the French don’t allow French consumers to buy US wines. Why hurt American consumers just because other countries choose to have bad policies that hurt their consumers?