Regulating Airline Prices Would Be a Big Mistake
If you care about keeping airline prices low, buckle up. Legislation introduced in the U.S. Senate would impose strict government price controls on airlines, disrupting the industry and endangering billions of dollars in consumer welfare.
The U.S. Senate’s version of the bill to reauthorize the Federal Aviation Administration (FAA) contains a provision by Sens. Ed Markey (D-MA) and Richard Blumenthal (D-CT) called the FAIR Fees Act. It establishes “standards for assessing whether baggage, seat selection, same day change, and other fees are reasonable and proportional to the costs of the services provided.”
At first blush, this proposal might appear to be pro-consumer. After all, what’s wrong with mandating “reasonable fees” and protecting flyers?
But despite the innocuous-sounding language, FAIR Fees would interfere with the successful business model that has slashed airfares and boosted consumer welfare. There is no shred of evidence to justify onerous rate regulation in a sector as competitive as the U.S. airline industry. As history has shown again and again, government bureaucrats are incapable of setting prices better than the market.
Ironically, the U.S. airline industry is one of the best-known historical examples of the federal government’s harmful attempts to manipulate market prices. From before World War II to the late 1970s, federal agencies tightly regulated America’s airlines, setting fares, routes, and schedules. The results were disastrous — artificially inflating prices, stifling competition, and mis-allocating resources.
In 1978, Congress passed the Airline Deregulation Act, which did away with many of the price controls that had hampered the industry for decades. Studies estimate that airline price deregulation resulted in nearly $20 billion in consumer welfare benefits and 33 percent lower fares since these reforms took effect.
The FAIR Fees Act amounts to a re-regulation of the airline industry and a return to the central-planning approach that once made the skies accessible only to the wealthy.
The crux of the FAIR Fees Act is to put federal regulators in charge of deciding whether airlines fees are “reasonable.” This micromanagement would undermine price and service competition as well as many of the benefits consumers derive from air travel.
Today, flyers enjoy unprecedented flexibility in making their travel arrangements. Travelers can opt for a more expensive ticket with the option to make last-minute cancellations and changes, or they can select a cheaper ticket that requires an extra fee to make itinerary changes. Likewise, flyers with lots of baggage pay an additional fee, while those traveling light don’t. This flexible system allows travelers to avoid paying for services they don’t use, benefiting everyone.
By contrast, the FAIR Fees Act would encourage airlines to bake these fees into everyone’s fare, effectively requiring consumers to pay more for less.
The FAIR Fees Act would dramatically alter the current airline fee structure, stripping choices away from consumers and allowing federal regulators to impose a one-size-fits-all approach that ignores the enormous variety of preferences that different travelers have. In response to such limits on change fees, airlines would likely either offer non-refundable tickets that do not allow travelers to make changes to their reservation (depriving consumers of flexibility) to keep costs low or include the cost of changes into all ticket prices. This would make travel more expensive for everyone. No matter how airlines respond, consumers would be worse off.
Baking change fees into the cost of a ticket would also lead to frequent last-minute changes, since travelers would face no penalty for switching itineraries. The result? More empty seats on flights and greater business uncertainty for airlines. In response, airlines would seek new opportunities to maximize revenues elsewhere, which could mean ending service to many small and medium-sized airports across the nation.
Simply put, the FAIR Fees Act would limit consumer choice and make air travel less affordable for the average American. Don’t be fooled by the consumer-friendly name.
Steve Pociask is president of the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.