GNS Special Report

Published on

Gannett News Service

WASHINGTON — Until recently, the concept of “deregulation” commanded great respect in many corners of the nation. But severe woes in the air travel and electric power industries have brought it under vigorous attack.

Public satisfaction with the first, airline performance, has been evaporating for some time.

“The major problems of unreliability have occurred in the last three years,” said Paul Hudson, executive director of the Aviation Consumer Action Project. “We have a very fragile system now — very vulnerable to any sort of disruption. That’s why we have a crisis.”

Until momentum peaked a quarter-century ago for deregulating airlines — the first major industrial sector to shuck tight government operational strictures and economic mandates — commercial aviation for 40 years had been controlled completely by the federal Civil Aeronautics Board.

The CAB could limit competition by determining which airlines could enter a market or shut down routes. The CAB approved and disapproved fares. The CAB controlled mergers, acquisitions and joint ventures. It micromanaged routes and decided which cities airlines could serve and which they could not, and determined what type of cargo could be carried. The CAB approved or disapproved airline employment policies — and even established a rate of allowable profit for each airline.

Sometimes it took the board up to eight years to approve a new route. Retired Cornell professor and former CAB Chairman Alfred Kahn — often referred to as the “father of deregulation” — was fond of complaining to Congress that there were “thousands and thousands of restrictions on where you must land and where you may not land and how many stops you can make before you land and what percentage of your trips can be off-route and who has the right to do what and with which and to whom.”

By the mid-1970s, about 200 million Americans a year were flying, and more wanted to. Cities of all sizes were clamoring for new routes and service, but airlines were having trouble filling existing flights on the old routes and making any kind of profit. And fares were rising. Clearly, the system was wacky.

Kahn took an unheard-of step for a bureaucrat. He asked Congress to phase out the CAB. The Airline Deregulation Act of 1978 resulted, and President Carter signed it the same week.
The system now handles more than 650 million passengers a year — albeit in shaky fashion — and safety has improved. The average six fatal accidents per year before deregulation has been halved.

Until recently, however, the biggest boast by the industry was in fare reduction. Several studies showed that the increased competition had cut average fares — adjusted for inflation — from 29 percent to 45 percent. A George Mason University study four years ago claimed that air travelers were saving more than $ 19 billion a year with deregulation.

Most of that hype is history. Some critics claim that the studies were heavily weighted toward discount fares and unfairly tilted the two-tiered system airlines now use for much cheaper plan-ahead leisure travel and the out-of-sight “unrestricted” fares that hit business customers who must fly on short notice.

“When I look at those numbers,” says research director Mark Cooper of the Consumer Federation of America, “I sometimes feel like saying ‘They made this stuff up.’ The people in the air industry are supposed to gather some sort of sample of what people actually paid for their tickets. In practice, you don’t get that. When people gin up these numbers that are assuming big discounts, they are not precisely reflecting what people actually pay.”

Indeed, one can find startling examples — although not adjusted for inflation — of then-and-now major carrier fares when flying on short notice. In November 1976, American Airlines would fly you from Newark to Los Angeles, round-trip coach, for $ 324. Last week, the Internet fare posted for next-day unrestricted coach was $ 2,437. In November 1976, Delta would fly you coach, round-trip from New York’s LaGuardia to Miami for $ 210 ($ 168 if you left at night). That trip today — next day, unrestricted coach class — will cost you $ 1,361 according to Delta’s Web site.

Even Kahn concludes that while average fares have gone down 39 percent since deregulation, unrestricted fares are up 73 percent. When Congress asked the General Accounting Office to study the question five years ago, it concluded that while average fares had fallen overall, fares at 33 of the 112 airports reviewed — particularly those serving Appalachia and the Southeast — “have experienced substantial increases in fares since deregulation.”

According to Hudson, “There are no ‘average fares’ anymore. Everything changed from 1995 forward. The airlines went from record losses to record profits. The unrestricted fares are 50 percent to 100 percent higher than ever. The so-called leisure fares have lots of restrictions. The price of oil went down, so their costs went down. And they decided to fly at 80 to 100 percent capacity. “You’re seeing enormous concentration at a few large airports and it’s breaking the system down, making it far less reliable.

It’s not only inconvenient to the consumer — it threatens our economy.”

Statistics back up Hudson’s claim. The tightly scheduled hub-and-spoke system preferred by major carriers means just 20 large airports are carrying more than 50 percent of America’s daily commercial traffic; the remaining 440 carry the rest.

“If a hub airport is disrupted for any reason, like an ice storm,” said Hudson, “a large portion of the whole system will shut down.”

Calif. crisis shocks nation

While air travel was the first deregulated, electricity is the most recent — and California’s horrendous record has the nation watching in trepidation. In retrospect, the 1996 California power deregulation plan hardly could have contained more economic quicksand.

Private utilities were allowed to auction their generating plants, which they did at huge profits, many to energy companies in Texas.

At the same time, about $ 20 billion in hard-to-sell investments and bad debts incurred by those utilities were assessed to their customers in return for freezing rates until 2002. Meanwhile, utilities — including the two biggest in the state, Pacific Gas & Electric and Southern California Edison — were not permitted to buy power from wholesale generators under long-term fixed-rate contracts. They had to purchase it on the volatile “spot” auction reflecting daily market prices.

Some critics liken it to running a lemonade stand you cannot shut down, selling your orchard, agreeing to purchase the lemons for whatever price the national economy dictates, and locking in your sales price per glass at a nickel — no matter what.

Keep in mind, you can’t store electricity produced at a cheaper price. When natural gas production flagged, wholesale power prices shot up and PG&E and Edison had to pay them — even though, by law, they couldn’t recoup them. They started losing money in a hurry.

Now, PG&E, awash in $ 9 billion worth of red ink, has filed for bankruptcy protection — although its parent company has about $ 30 billion in assets. Edison awaits legislative approval of a deal worked out with Gov. Gray Davis, who wants to purchase the utility’s power transmission lines for $ 2.8 billion (twice their stated value) to ease that company’s $ 5 billion debt.

Meanwhile, to keep the lights on, the state spends $ 54 million a day ($ 5.7 billion so far) to buy wholesale electricity from out-of-state firms because the beleaguered state power companies can’t get any more loans on their ruined credit. Aides to Davis estimate that California will blow $ 15 billion this way this year.

It would be paid for through bond issues the ratepayers would finance through monthly electricity bills. Davis, who for months promised no rate increases, has now proposed a 26 percent increase.

California advocacy groups such as the Foundation for Taxpayer and Consumer Rights are calling for re-regulation. Director Harvey Rosenfield predicts that the state this year will end up spending more than four times what Davis had predicted in power purchases from “the energy cartel that bought all those plants,” and that California’s economy will “crash in a Sarajevo-like collapse.” Many lawmakers are pressing for a state-owned power authority.

In March, Davis signed a $ 500 million incentive package: If Californians cut electricity consumption 20 percent this summer compared with the peak months June through September last year, they could get an additional 20 percent rebate for that period on their bills.

Those are the months in which power experts predict 34 days of rolling blackouts if Californians use their normal amount of air conditioning.

The scant good news? Power consumption by frightened Californians dropped 6 percent in January, 8 percent in February, and 9 percent in March.

Consumer Watchdog
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