Those calling for re-regulation must be crazy, which is a loose translation of the message delivered last week by New York University Law School Distinguished Research Scholar and Senior Lecturer Michael Levine, who brought the issue into sharp relief when he asked if they really want to turn the fortunes of the industry over to a bunch of guys that have failed so miserably in executing the authority and the responsibilities they have now.
While Levine pointed to the decades-long Federal Aviation Administration failure to execute the modernization of the air traffic control system, there is also the failure of Congress to pass reauthorization and the failure of the Department of Transportation to guarantee that airlines can actually survive while doing Essential Air Service, a promise of deregulation. Oh, and lets not forget all the machinations imposed this year in the DOT/FAA effort to forestall a repeat of last summer’s delay problems. At last report, the La Guardia and O’Hare were actually worse this summer.
Instead he proposed an eight-point plan that included developing a meaningful essential air service program and reforming the user fee system along the lines suggested by the Air Transport Association, something opposed by the regional industry.

Regulation Redux
Calls for re-regulation started last winter with Senator Jay Rockefeller indicating he has not ruled out re-regulation as the answer to airline consumer issues. Related Story It gained momentum with the advent of the Delta/Northwest merger and again, when the august Robert Crandall, former AMR CEO, who never favored deregulation in the first place, called for an aviation summit, decrying the level to which the industry had fallen in quality. Related Story Even so, there was little the government could do for most items on his litany of complaints. It is only slightly ironic that such pronouncements came on the eve of the 30th anniversary of deregulation which gave passengers unprecedented access to air transportation mobility.
But Levine doesn’t think the government can help and he is right. “Reregulation wouldn’t affect the price of oil or the fragility of the economy,” he told the International Aviation Club last week, noting regulation, couldn’t prevent oil shocks in the 1970s, either, nor could it prevent overcapacity given the 50 percent and less load factors of the era.
In fact, said Levine, re-regulation is just what the industry does not need. “To adapt to [the new economic realities], the industry will need just the kind of innovation and flexibility that regulation is designed to impede,” he pointed out. “Certainly, no government effort to find and implement a planned answer can be conducted free of intense interest-group politics and crippling complexity. Nor can it be conducted quickly. There would be no magic in outsourcing this decision to a private monopoly, either. Any single management will be limited by its own history, talent, circumstances, prejudices and incentives. In short, neither an all-seeing government nor any single private management can be relied on to predict the shape of the industry as we move through what may well be a terrible and rapidly-changing period.”

Depression, 9/11 and Now
Levine drew a dismal picture of the days ahead, explaining how this crisis is different from those experienced in the past, including the depression and 9/11. He also likened the industry’s predicament to the fortunes of the railroads when that industry experienced “nearly 100 years of agony as a result of government-imposed obstacles to adaptation to the effects of 19th century overbuilding and of 20th century technological changes like the rise of trucks and pipelines.”
After 9/11 and the depression, the industry resumed its growth. “Maybe we are witnessing a long-cycle wave of a kind we have seen before, with oil prices going high enough for long enough to call forth the investments in production, conservation and substitute technology that will begin to bring the price down,” he said. That is unlikely given last week’s news about ExxonMobil nearly $12 billion in profits since most of its money is spent in dividends and stock buybacks for investors.
“We will then be looking at a domestic industry situation worse than that following 9/11 or even the depression era that [prompted] regulation in the first place,” said Levine. “The industry will face challenges greater than that posed by deregulation 30 years ago. Rising demand, reduced costs and system expansion broadened the availability and convenience of the air transport product. Fuel costs going from around 10 percent of network expenses to more than 40 percent, has forced prices up in an effort to cover costs. As prices go up, price-sensitive travelers leave the system. Flights are consolidated into larger aircraft to get CASM down to where RASM has a prayer of covering it. As aircraft size rises and total passenger volume falls, the system shrinks. As the system shrinks, it becomes less attractive to convenience-oriented travelers and they resist paying more for less, hitting the road or taking fewer trips, causing the system to shrink some more. We have started down that road.”
His questions also revealed possible solutions with his questions, even as he painted a new frontier for airlines. “If fuel prices stay high, the system is likely to look very different simply because there won’t be enough business to sustain the old system,” he said. “And we know that the transition to whatever is the new structure will cause a lot of pain to customers, airlines, labor, financiers and civic parties. Will technological innovation or process improvements lower the components of CASM other than fuel? Will leisure transportation continue to be produced jointly with business transportation? Will airlines become more specialized and, if so, how much cost can be saved or convenience increased by specialization? How rapidly and pervasively will households and businesses find substitutes for air travel?”
As for airline execs, most indicated that they were watching events, but only Continental’s Larry Kellner has indicated he favored a revisit to re-regulation. Related Story  Recently, he clarified his position saying he favored anything that would return stability to the airline marketplace, something with which few would disagree, but he add that included re-regulation. Related Story
But it must be up to the airlines to find their own way since re-regulation is so clearly counterproductive. Turning to government may have worked in the unique post-911 days when tons of money was thrown at the industry in a giant bailout, which, did not, in the end, forestall wholesale bankruptcies and labor disruption. That sort of action will not fly at a time when we are spending $10 billion dollars a day in Iraq; when federal deficits are at record levels and when government is, frankly, impotent or, at the very least, doesn’t possess the will to get things done.
Sure, Congress could have passed legislation reforming the commodity markets, as suggested by the Air Transport Association’s StopOilSpeculatonNow coalition. It could also force more off-shore drilling as well as drilling in environmentally sensitive areas and it can also invest in renewable fuels. But this is an election year when Congress only has to be seen trying to do something, while not actually accomplishing much of anything, at least not for aviation.
It was Alaska Chair Bill Ayer who provided a cautionary note to calls for government help. Noting all the economic benefits deregulation has provided, Ayer said finding a role for the federal government in the current crisis should be done very carefully. Like Levine, he, too, favored limiting government action to a more robust air traffic control system as well as a providing a workable essential air service program. Ayer also said that government should ensure a level playing field to make competition work. However, he cautioned that whatever is proposed should be achievable.

The Prescription
Levine outlined an eight-point plan to help the flagging industry. “What we need is the combined product of many firms with a great deal at stake striving to survive and prosper in the environment that is emerging,” he said. “Second, the FAA should build an ATC system that reduces costs by using airspace efficiently, reducing or eliminating holds and circuity. It should also promote its efficient use by letting users face the costs of serving them and letting them decide how much they value it. That might best be done by removing the system from appropriations and labor politics, but I don’t kid myself about the political difficulty of doing that. Even without that step, something has to be done to overhaul the present process or we will never get the system back into phase with the demands the real world places on it.”
He favors revising bankruptcy laws, regardless of what happens to oil prices. “I am not suggesting forced liquidation here and certainly not suggesting that we restrict the right of firms in reorganization to make the most efficient economic use of the assets they have by competing where advantageous,” he said. “What I am suggesting is that managements that have failed to adapt to a changing environment be subject to being pushed aside for a competing plan of reorganization, with liquidation a real alternative if no reorganization plan seems likely to succeed. This will promote innovation and adaptation and minimize distortions to competition while preserving intangible value where it exists.”
He also called for EAS reform. “This means stepping up to what preserving air service to ease political pain really costs,” he said. “If we want an Essential Air Service Program to perpetuate air service to smaller and medium-size communities, we need to recognize that it will become a lot more expensive at $4.00 per gallon than at $1.00, even if service cuts expand the number of protected points.” He questioned whether there is political will to subsidize more airports at higher rates, especially for those which are a relatively short drive from other airports with scheduled service, saying the test will come as the number of airports rise. “Whatever the level of service we really want, we should step up to paying for it directly and not hold the industry hostage or provide special regulatory carve-outs to provide it,” he concluded.
Levine proposed assisting industrial development alternatives for communities trying to find alternative uses for abandoned facilities like airline hubs and maintenance centers as well as being freer with unemployment insurance in industries especially hard hit by changing economic conditions. However, he would tie it to job retraining for younger workers and carefully design it so that it doesn’t destroy incentives to adapt. “We should ease the transition to other forms of specialized job knowledge, but make sure not to create more rooms full of idle auto workers with no incentive to find other employment,” he cautioned.
Levine put a priority on protecting pensions and reforming health care. “Pensions must be protected from underfunding and ultimate abandonment in bankruptcy,” he said, suggesting strengthening the PBGC system still further so that airline failures don’t leave individuals who have earned pensions stranded at retirement. “It also means moving to some sort of health care system not tied to employment, so that loss of an airline job (or an auto company job) doesn’t mean loss of health insurance and potential financial catastrophe to workers and so that shrinking airlines are not burdened by legacy health costs.”

Let the Economy Adjust
Levine advocated allowing the economy to adapt to the comprehensive set of new energy prices and policies, saying that was becoming increasingly important, although he acknowledge the likelihood for mistakes.
“I’d rather see mistakes made in measures designed to lubricate change and anesthetize those who experience pain from change than mistakes made by efforts to keep change from occurring,” he said. “We don’t know what’s going to happen to the price of oil. If it stays above $100, the industry will change a lot and if it stays above, say, $125, the industry will change radically. I know it is very unlikely to be an 80 percent scale model of what exists today and we shouldn’t try to build one. We will see less total service at higher prices, and both business and leisure travelers will find other ways to spend their money to achieve their goals. The leisure and business ends of the market may separate, perhaps becoming something more like what exists in Europe and is emerging in Asia. In that world, we may see fewer hubs and more turboprops connecting to them but more jet service twice a week from Appleton, Wisconsin to Orlando, tied to a hotel package and tickets to see the Mouse.
“No one really knows how the public will react to a dramatic shift in the relative price of air transportation and other uses for their money,” he continued. “Let’s not try to outguess demand with a planning process designed to enforce a new order, but rather let’s allow as many players as possible to make their own guesses about where we should go, putting their money where their mouths are. Let’s not break the concentration of airline managements by saving them from grisly contemplation. Let’s focus instead on minimizing the damage to those who depend on the potential victims.”