Bibliophiles ‘R’ Us

Guest Post: J.R. Hauptman

Posted on: September 11, 2009

J.R. Hauptman

The Effects of Deregulation on the Airline Industry 

My novel, “The Target; Love, Death and Airline Deregulation,” is primarily a human story, a tale of one man’s struggles with himself and a world that for him, has been turned upside down.  However, there is a strong undercurrent to the book that might cause a feeling of unease in the reader; it is a sense of potential revolt and impending disaster.  Given the current disastrous economic situation in our country, it may turn out for this book to be unfortunately prophetic.  

Airline deregulation came about in the late Nineteen-Seventies due to the fact that the Civil Aeronautics Board, which regulated that industry, had become too politicized.  The CAB decided what airlines would fly what routes, at what frequency and what fares they could charge.  Both Presidents Johnson and Nixon, having the powers of appointment, approval and veto, used this vital component of our national transportation infrastructure to reward their political allies and to likewise punish their enemies.  The ideal solution would have been to reform the industry and allow more competition in route awards and fares, but the action chosen was what became the Airline Deregulation Act of 1978. 

The promoters of airline deregulation proudly declared that the Act would result in free market entry by both established and startup companies, more competitive fares and result in better airline service and cheaper tickets for traveling Americans.  An added benefit foreseen but not often publicly touted by economic “conservatives,” would be an anti-inflationary check on airline employee wages in this highly unionized industry.  They privately salivated over the prospect of putting the final screws into the coffins of labor unions.  

Rather than recount the past three decades of instability and chaos in the airline industry, let me point out the results.   First, the concentration of the industry.  Promoters of deregulation were unaware, or simply ignored the fact that the airline business is extremely capital intensive; it takes a lot of money to operate and maintain a modern fleet of jet airplanes in any semblance of flight frequency, safety, and reliability.  Further, free market entry by small upstart airlines was nipped in the bud by a simply Darwinian fact of economic life; the Big Fish eat the Little Ones.  The big carriers, having huge cash reserves, would simply match or undercut the fares of the low cost carriers and run them out of any competitive market.  The result is, that eventually, the industry went from many high quality carriers serving large, medium and small market cities to a very few major carriers, deemed “too big to fail,” skimming the long haul routes, leaving the medium and small markets to be served by contract carriers operating smaller, regional jets.  

Secondly, was the overall degradation of service.   Economic gurus touted the idea that airlines were finally solving the problem of excess capacity, or “too many empty seats.”  The problem was and continues to be that with fewer major carriers dominating “Hub” markets, they are not only able to fill those empty seats, it is established practice to cram more seats into airplanes, making current air travel an exercise in torture. Additional factors, such as fuel prices, weather delays and security issues only exacerbate these problems and make the travel experience even more unpleasant.  

The effects of unbridled deregulation on our national economic system are currently there for us to witness every day.  Airline deregulation was followed by deregulation of the public utilities, energy, and truck transportation industries, to mention a few.  Worst of all were the complete dismantling of critical securities and banking safeguards.  One of my first jobs, after my airline underwent a sham bankruptcy orchestrated by a corporate raider, was as a securities broker.   My mentor there had come from trust department commercial banking and early on, he warned me; “Just watch; the banks want to get in on the securities business because the bankers see huge profits on the commissions we earn and it will mean disaster for both.”  

How right he was!   The Glass-Steagall act of 1932 was passed during the Great Depression and placed a barrier between Commercial and Investment Banking, which is essentially a securities function.  Glass-Steagall was largely ignored during the go-go days of the Nineteen-Eighties, and then repealed to obviate any undue embarrassment of those who were charged with regulating these industries.  

The result has been overall irresponsible and some outright criminal behavior by those who manage and regulate banking and securities.   They have turn these crucial businesses into veritable “Crap Games” by designing a plethora of shady products designed primarily to line their greedy pockets.   The list is lengthy; the junk bonds used for “Greenmail”, the savings and loan and Enron scandals, credit card usury by the banks, the abusive banking, securities and insurance bailouts with abusive compensation schemes, sub-prime lending; on and on, the list seems endless.   

Nothing is more representative of this sickness than the Madoff Scandal.  Those who are currently involved in trying to solve this mess are less guilty than Madoff only by degree.   Nonetheless, they seem to be repeating the same arrogant mistakes of their sordid past.  They ignore the risk at their peril and that of our nation.  That risk is Revolution; populist and potentially bloody.

The Target

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