US Airlines: Who’s Afraid of the Big Bad Foreign Competition?

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The 1978 airline deregulation was one of the greatest free market reforms in more than a generation. Few people today can even fathom the degree of control the federal Civil Aeronautics Board had over the airline industry: routes were set in stone; fares were mandated; and competition did not exist.

Justice Stephen Breyer had this to say about the deregulation of the airlines:

What does the industry’s history tell us? Was this effort worthwhile?… No one foresaw the industry’s spectacular growth, with the number of air passengers increasing from 207.5 million in 1974 to 721.1 million last year.… [And] fares have come down.… In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: $1,442. Today one can fly that same route for $268. That is why the number of travelers has gone way up.

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But we knew all of that already. What is seldom acknowledged is that the initial deregulation, while major, was incomplete. There are clear places where airline regulation remains, to the detriment of fliers nationwide.

One of these is the prohibition on foreign-owned airlines flying between domestic airports, or “cabotage” as it is known. Kenneth Button looks at this in a new study published in Regulation. Allowing cabotage would open the door for low-cost airlines — such as Ireland’s Ryanair, the United Kingdom’s easyJet, and others — to enter the domestic market and compete with lower fares.

Source: Ryanair
Source: Ryanair.

This rule is the airline equivalent of the more famous Jones Act of 1920, which, among other things, banned cabotage among US ports for non-US ships. In both cases, as Button notes, the rationale is defense — the ability for the military to commandeer civilian vehicles in the event of a war.

On its face this argument seems absurd. Can you imagine any realistic scenario where the largest military in the world has to not only seize civilian planes, and where foreign ownership of the planes makes any difference?

The fact is that when foreign airlines are banned from domestic routes, it is consumers who lose out. The barrier to foreign, low-cost airlines not only keeps prices artificially high, it decreases the overall capacity of the system. Given that the United States is full of airports that primarily operate government-subsidized flights, foreign carriers could take advantage of the vast amounts of unused capacity for their own commercial operations.

All of this comes at effectively no cost to taxpayers or the flying public. Ending cabotage restrictions makes almost too much sense.

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