How to Revive Airline Competition

Let foreign-owned airlines fly in the United States.

Emirates and Qantas A380 aircraft sit on the tarmac at Kingsford Smith international airport in Sydney September 6, 2012.
Foreign airlines like Emirates and Qantas should be able to compete with American companies on domestic routes.

Photo by Daniel Muñoz/Reuters

The era of cheap airfares is on the wane. Regulatory changes in the late 1970s and early 1980s opened the industry up to competition that was a boon to passengers but a disaster for the established airlines. In the aggregate, passenger aviation in the United States has racked up about $30 billion in losses over the years, with Southwest the only airline to put up consistent profits. But in recent years the industry has hit upon a plan to stabilize prices and restore profitability—consolidation and reduced competition. Northwest merged with Delta. Southwest acquired Airtran. Continental was absorbed by United. And most recently US Airways and American have made a bid to merge, leaving the country with just four major airlines.

Regulators have mostly acquiesced to this wave of mergers, because you can’t force investors to keep money-losing airlines flying. The Justice Department is trying to turn this around with a surprise legal filing Tuesday to block the American-US Airways tie-up, but there’s something even simpler the government can do to encourage a new wave of competition. And while it has a funny name—“cabotage”—the basic concept is simple: Let foreign airlines fly domestic routes in the United States.

This is one of those ideas that’s so commonsensical, people tend not to realize it isn’t permitted. But if you’re wondering why it is that, say, Emirates will fly you from Los Angeles to Dubai or from Dubai to New York but not from California to the East Coast, that’s the reason. It’s illegal.

On a practical level, this creates obvious problems. Many international travelers are bound for cities that aren’t large enough to host substantial transcontinental operations. Thus, the invention of codesharing. A traveler bound from Copenhagen to Tulsa would fly on SAS to O’Hare, Newark, or Dulles and then switch to a United flight to Oklahoma with booking done on a single website and baggage transferring smoothly thanks to a partnership between the airlines.

Over the years the industry has evolved a mode of deep collaboration among airlines from different countries. Many major global airlines have joined the Star Alliance, the Oneworld Alliance, or the SkyTeam. The different members of an alliance remain separate companies with separate ownership, separate labor unions, and separate flight operations. But across an alliance, you can generally accrue frequent flier miles, access airplane lounges, transfer elite status, and count on smooth handling of multi-airline bookings.    

But while alliances reduce practical problems associated with anti-cabotage rules, they do nothing for competition. In fact, by encouraging collaboration on major international routes, they reduce it.

To bolster competition, you need to let foreign airlines actually operate domestic routes.

In theory this might be accomplished through the ongoing negotiations for a Transatlantic Trade and Investment Partnership. The main promise of TTIP is to open up new frontiers in cross-border trade beyond the traditional transportation of manufactured goods. And while letting EasyJet or Aer Lingus fly from Seattle to San Antonio isn’t “trade” per se, the case for it is essentially the same general case for trade—American consumers will benefit if we are allowed to purchase from a wider range of options.

Conversely, people in the industry don’t like the idea. The Air Line Pilots Association, backed by 160 members of Congress, has urged the Obama administration to keep air cabotage out of TTIP negotiations.

The reasoning, from ALPA President Lee Moak, is none too convincing. He argues that “dozens of U.S.-based airlines participate in CRAF [the Civil Air Reserve Fleet] and are responsible for the airlift of our troops for overseas deployment in critical situations.” The argument, in other words, is that passenger aviation is a strategic industry like submarine manufacturing that we need to shelter from competition for geopolitical reasons. After all, a major war might break out, straining the Air Force’s airlift capacity and requiring the use of civilian planes. And so it might. In practice, despite fighting two wars simultaneously for a decade, CRAF seems to have been activated just once at the very beginning of the Iraq War when the Pentagon activated 47 passenger aircraft and 31 wide-body cargo planes.

On the other hand, as a 2006 Congressional Research Service report on the program observed, “the program is voluntary” and domestic airlines participate in it because it’s financially beneficial to them. In fact, “airline complaints about the program tend to address perceived impediments to increased access to the program.” Which is to say that just as foreign-flagged airlines could be allowed to fly domestic routes, foreign-flagged airlines could also be let into CRAF.

The real issue, of course, is not national security but jobs and salaries. Specifically, more competition would be bad for the established U.S. airlines and their employees. But this was precisely the question raised by the original deregulation of the 1970s: Should aviation policy aim to provide a steady stream of profits and incomes to airlines and their staff, or affordable, convenient air transportation for travelers?  Thirty-five years ago we rightly decided that the interests of the customer should come first. Today the benefits of that pro-competition regulatory switch have largely run their course. Cabotage is the next logical step. Let any company—regardless of where its headquarters are or who owns it—that’s capable of flying planes safely connect any two American cities, if the company thinks it can make it work.