Introduction:

Prior to September 11, 2001 the airline industry faced many problems, including air traffic control, airport congestion, quality complaints, and antitrust concerns. In the aftermath of September 11th the focus shifted to the airlines' dire financial condition. Congress acted quickly to pass the Air Transportation Safety and System Stabilization Act, the so-called "bailout" which offered federally funded grants and loans to the struggling airlines. But was this the right thing to do? And what does the future hold for America's airlines?

The Joint Center and the Cato Institute convened a panel of experts to discuss the state of airlines in the aftermath of September 11th. David Swierenga presented data on some of the problems pre-September 11th and on the significant slowdown that started in the final months of 2000. Clifford Winston emphasizes the importance of deregulation, both in stabilizing the industry in the short term, and shaping an efficient industry in the long run. James Gattuso voiced concerns that the bailout could represent a de facto return to regulation, and is probably unnecessary. John Nannes would like the government to promote competition through deregulation and an active antitrust policy.

David Swierenga, Air Transport Association of America:

Mr. Swierenga explained that the airline industry was already significantly weakened prior to September 11th. The airline business is cyclical and the downward trend started in the fourth quarter of 2000. The demand for air travel, especially among business travelers, has been declining through all of 2001. And while the percentage of seats occupied has remained high, wages have increased--the overall result has been rapidly declining profits. Before September 11th, the airline industry was projected to lose money, but now the losses are expected to reach 7 to 10 billion dollars for the year.

The attacks have not only decreased passenger demand, but also decreased demand for transporting mail. The result has been a cut of almost 14% of the labor force and major declines in tourism and orders for new airplanes. Consumer and business confidence have both dropped in the wake of the attacks and it is unlikely the industry can return to profitability before 2003. Even then, the industry will face problems of congestion that will need to be addressed, probably with more government investment.

Clifford Winston, Joint Center and the Brookings Institution:

Mr. Winston stated that deregulation is the key to long-run health for the airline industry. According to Winston, deregulation has already proven to be beneficial in this crisis--since deregulation allows flexibility, airlines were able to immediately lower prices and keep demand at reasonable levels. If the industry had still been regulated, cost-based pricing schemes would have led to increases in prices as fixed costs were spread among fewer passengers.

The next several months will be the most serious challenge to the industry since deregulation; however, they may also present an opportunity for restructuring. Low cost carriers could take advantage of the low prices for labor and capital to enter the market and displace high cost incumbents. Some day, demand will return. And when that occurs, what action will we regret having taken, or not taken, during the intervening time? Propping up high cost incumbents at the expense of low cost carriers or general restructuring would be a mistake, according to Winston. Furthermore, infrastructure is a long-term problem that is overshadowed by the present crisis, but will return. We must continue to search for ways to improve infrastructure.

James Gattuso, Competitive Enterprise Institute:

Mr. Gattuso voiced concern that the bailout will actually reverse the progress made in deregulating the airlines. In addition to market-distorting subsidies, the bailout includes loan guarantees like the ones America West is currently negotiating. These guarantees will likely have conditions based on political, not economic, considerations. Gattuso fears that lawmakers might prop up failing airlines in exchange for service on high cost (or low demand) routes in their district, for example. This would represent a de facto return to regulation.

A wiser course of action would be to allow the market to adjust. The current crisis is not insurmountable for a deregulated industry. In the past, airlines that have had accidents have seen sharp declines in business. This provides a strong incentive for carriers to promote safety and the same mechanism may work for security. Further, demand will rebound when the economy recovers and al Qaeda is dismantled. This will be far more effective at reviving the industry than government subsidies. There may be some bankruptcies if the government does not intervene, but this should not be feared. Low cost carriers, such as Southwest, Alaska and Jet Blue have been doing well, even during the recent months. The government should allow the industry to restructure and adjust for the long run.

John Nannes, Skadden, Arps, Slate, Meagher & Flom and former Deputy Assistant Attorney General:

Mr. Nannes believes competition is vital for the future of the airlines, but is not sure that the industry will achieve this without some government action. The government should loosen regulations on things like foreign ownership, and instead focus on applying an antitrust policy that is consistent with other industries. Prudent use of the Sherman and Clayton Acts would represent the least intrusive form of regulation. The existing antitrust laws are flexible enough to let the industry change, but allow the government to prevent anti-competitive practices. Nannes points out that MetroJet, a low cost service designed by US Airways to compete with Southwest, has been cut since September 11th. Further, anti-competitive practices have been observed in the past. For example, American added excess flights from Texas airports to drive low cost carriers out of the market on multiple occasions. According to Nannes, situations like that are best solved by vigorous antitrust policy.

Conclusion:

All four speakers agreed on three points.

 First, the aftermath of September 11th served to exacerbate existing problems in the airline industry;

 second, the Congressional bailout will do little to solve these long-term problems;

 third, further deregulation or restructuring will probably be needed. Limits on foreign ownership and joint ventures, for example, should be considered for elimination.

Ideas on addressing the problems of the airline industry varied. David Swierenga emphasized the role for government investment, especially from the transportation trust fund. Clifford Winston and James Gattuso both emphasized the role of deregulation. Fear of bankruptcies should not tempt us to block restructuring that will be good for the long term health of the industry. John Nannes thinks deregulation should be combined with a consistent and active antitrust policy. The debate about the future of the airline industry did not begin with the terrorist attacks and it will not end with the Congressional bailout. It will continue for some time.

This conference summary was written by Patrick Dudley, a researcher at the AEI-Brookings Joint Center.