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Tuesday, September 25, 2012

Can't get there from here

A few years ago I worked for ITA Software, a very successful privately-held company whose customers were airlines. Along with about a hundred other people there, I was on a big project to build a new airline reservation system from the ground up, something that pretty much hadn’t been done since the 1970s.

It may surprise you to know that most airlines still rely on reservation software originally written before 1976, though these systems have seen their code base updated and wrapped with more modern trappings since then.

Still, no one had really re-engineered a system with all the things we’ve learned about databases in the last 40 years. So ITA was trying. But then Air Canada, the customer, went bankrupt, prompting someone to ask the CEO, at a company meeting, what he thought the prospects were.
He said, “Well, Air Canada has entered bankruptcy. Something that we in the industry refer to as a natural part of the life cycle of an airline.”  It got a big laugh, though perhaps this was gallows humor, since lots of the audience got their walking papers within a couple of weeks.
One question is what exactly happened in the 1970s that halted innovation in airline data processing?  Could the data processing problem just be too complicated?  Though this is a serious line of inquiry for anyone who has ever tried to make sense of airline schedule data, it seems pretty unlikely compared to some more recent data achievements, like cell phones or Google. Another question is what does it mean when airlines seem so financially fragile.
Hmmm. Think think think. What happened in the 1970s?
Oh, yes: transportation deregulation happened. Planted as a wholly bipartisan enterprise in think tanks and in academia in the 1960s, the deregulation movement flowered during in Jimmy Carter’s administration, and reached astonishing heights under Ronald Reagan’s. Reformers were going to free the engines of capitalism from the yoke of unnecessary regulation. The result: win-win situations everywhere, with lower prices for consumers and better-paid CEOs. What could be better?
Lots of things, it turns out. Flights are slower and more expensive than they once were, and airlines are more fragile, preventing them from innovating in any ways besides figuring out how to pay their employees less and charge their customers more.
They don’t even make more money.  You can see that with numbers from Airlines For America, the big trade group for big US airlines. Quoting from the estimable Doug Henwood:

“Between 1948 and 1978, the industry made $5.5 billion in total (or $28.7 billion in 2011 dollars). Between 1979 and 2011, it lost $37.7 billion (or $41.6 billion in 2011 dollars). Of course, I’m not here to defend corporate profits, but it’s hard to see how an industry can survive under capitalism in a chronic state of loss.”
So what got better?  Price?  Since 1982, the consumer price index overall has risen by a factor of 2.8% per year, while the airfare component has gone up 3.9% per year, just slightly slower than the gas index. Part of the increase in the index is is that the quality has declined — there are many fewer non-stop flights than there once were and service, well…
Service?  Planes are more crowded, make more stops, exact more fees, and have seen a virtual end to every single perk passengers once enjoyed as a matter of course. It’s hard even to see the need to document the decline in service, but it’s there. 
If you ignore the drop in quality, prices have risen somewhat slower than inflation since 1995, according to the Bureau of Transportation Statistics. This seems fair, but less so when you realize that it’s not just that you’re getting poor service, you’re being charged for the quality you’re no longer getting with your ticket, and in many cases unavoidably.
Wages?  Like everywhere, the CEOs have it pretty good. American Airline’s Gerard Arpey earned $5.9 million in 2010 and that airline was bankrupt before 2011 was over. AA has been looking for wage and benefit concessions from their unions ever since. 

Between deregulation and 1995, wages in all industries rose 83%, according to the BLS. Airplane mechanics saw an increase of 68%, pilots of 56%, and sales agents 28%. Airline employees have not kept pace with the rest of the private sector.

Could labor unions be part of the problem?  Possibly, but consider that Southwest is about the only consistently profitable airline around, and it is also about the most heavily unionized airline in the US.
Southwest could stand as a counter-example to this whole tale of woe, but here’s the question of perspective. When I want to book a flight from here to Utah, it is a question of no interest to me whether some airline somewhere can make money on the routes it serves. 
Instead the only questions on my mind are about the airlines who do go to Salt Lake City. As it turns out, Southwest has made a business decision not to serve that city, and that’s fine for them, but what about me and all the other people who want to go there?
In short, deregulation has been a 30-year disaster, playing out in motion so slow it’s easy to ignore. But here we are, 30 years later, paying higher prices for a worse product to an industry that pays worse wages. Yay free market.
Obviously it’s true that regulators are prone to capture by the industry they regulate. But it’s equally obvious to those who look that deregulation is no picnic either. (It’s not as if financial deregulation has been less of a horror show than it has been for airlines.)  All this was obvious to those who looked decades ago.
Doug Henwood, who I quoted above, points out in an earlier article (23 years earlier!) that regulation was originally the idea of big business, to prevent ruinous competition. Deregulators, then, could claim to be acting against business, on behalf of consumers. But consumers are also workers, as so many of us seem to forget. When deregulation created the conditions for pay cuts, service cuts, and mergers — and when it deep sixes the possibility of investing in innovation — was it really consumers who benefited?  Was it our nation?

Tom Sgouros is a freelance engineer, policy analyst, and writer. Reach him Buy his book, "Ten Things You Don't Know About Rhode Island" at