WASHINGTON — The American airline industry is failing shareholders, employees and passengers while regional hubs such as Memphis and Cincinnati are being starved of service and priced out of competition, a panel of experts said today.

Mergers and a focus on loyalty programs for business passengers on high-volume routes have bypassed major cities, including St. Louis, Minneapolis and Pittsburgh, forcing companies to relocate because of deteriorating air service, said Phillip Longman of the New America Foundation, a non-profit Washington think tank. His recent article in Washington Monthly spurred today’s discussion on whether it is time to “re-regulate” the airlines.

Longman noted that railroads were regulated in the 1880s after Wall Street financiers sought to dominate the market rather than provide services in the public interest.

Former House Transportation Committee Chairman James Oberstar, D-Minn., said he introduced Essential Air Service to smaller communities as an amendment to a deregulation bill in 1978, but noted the program is now under attack.

Oberstar reviewed the history of deregulation since then, saying he vigorously opposed airline mergers as airlines won antitrust immunity and the public suffered “the adverse effects of collusion.”

“We’re now in a stall,” Oberstar said, “and the future of air travel is extremely perilous. … Government failed the public by not intervening to prevent the consolidation of economic power in the airline sector in the years after deregulation.”

Tom Jones of Memphis, an urban affairs specialist with Smart City Consulting and a longtime advisor to Memphis leaders, pulled no punches when he talked about how the Delta Air Lines merger with Northwest Airlines affected the Bluff City.

“Economic development officials in Memphis seem to be scared to say anything that would make our primary carrier upset,” he told an audience of aviation industry officials and reporters. “The logic being that the airline’s cutting 25 percent of our flights after telling us it loves us, what could it possibly do if it decided to reject us?”

Jones likened Memphis’ situation to a frog in a pot of hot water, adjusting to worsening conditions until it succumbs. He said “every person in our region has a horror story,” then went down a litany of examples, involving businesses leaving town, residents driving to Little Rock to catch a reasonably priced flight to their destination involving a stop back in Memphis, and $900 flights to Austin, Texas, for a law firm required to make the flight routinely.

“There’s the national music organization that relocated from Memphis because it was too expensive for its members to fly in for the annual conference,” Jones said. “Then we even have our mayor, who drove the eight-hour roundtrip to St. Louis for a 90-minute meeting rather than pay $976 for a 75-minute flight.”

Jones recalled the “special breakfast meeting” at which Delta’s CEO “assured us … that all would remain well in Memphis and we were vital to the strategy of Delta” then made “the exact same speech in Cincinnati,” another regional hub now down on its luck.

Jones noted that the 25 percent cut in flights and the discontinuation of the year-round Memphis-Amsterdam flight came as the federal government was building a $72 million air traffic control tower in Memphis and the Memphis and Shelby County Airport Authority was building an even more expensive parking garage and passenger-transfer facility.

“The greatest irony of all is that, in the city where FedEx invented modern global commerce, our citizens are being priced out of participation in the global, and even the national, market,” he said.

Douglas Steenland, the former president and CEO of Northwest Airlines, had been scheduled to speak at the conference but did not. Instead, Joshua Marks, the CEO of Marks System Inc., questioned whether re-regulation is the way to serve smaller markets. In the current market environment, he said convenience results in high air fares while the cost of lower fares is longer travel times. “The consolidation genie is out of the bottle,” he said.

New duty hours will affect the supply of pilots available in the short run, Marks noted. Other means of travel, including buses connecting small to larger cities, may be a solution to smaller regional market needs, he said.

From Washington Post:

Has airline deregulation failed?

Posted by Brad Plumer at 02:04 PM ET, 04/24/2012

 A thriving airport can make or break a city. Which is why many business leaders in Memphis got nervous when, in March 2011, Delta Air Lines announced that it would cut 25 percent of its service in and out of Memphis International Airport.

Time to re-regulate? (Mark Garfinkel/AP) The airport had once served as a major hub for Northwest Airlines. But a few years after Delta acquired Northwest, the Memphis airport hub was pared back as a cost-saving measure. Tom Jones, a columnist for Memphis magazine, has been chronicling the damage to the city ever since. It can now cost Memphis residents $750 to fly to Cincinnati or $900 to Austin. Businesses are relocating or avoiding Memphis because they can’t afford the flights. The city’s annual Folk Alliance music festival is shifting to Kansas City in 2014 to avoid airport hassles.

“It’s ironic that in a city where FedEx invented the modern-day model for global commerce, our citizens are being priced out of the world economy,” Jones said.

Jones was speaking at a New America Foundation panel discussion titled “Is It Time to Re-Regulate America’s Broken Airline System?” The debate revolved around a recent articlein the Washington Monthly by Philip Longman and Lina Khan, who argued that more and more regions are finding themselves isolated as airlines merge, consolidate, and prune their less-profitable routes. Older industrial cities like Cincinnati, Pittsburgh, Memphis, St. Louis and Minneapolis “are increasingly cut off from each other and from the global economy.” And it’s not clear what can be done about it.

One big question, said Josh Marks of the American Aviation Institute, is whether there’s truly a market failure here. If there really is plenty of demand in Cincinnati and Memphis for more flights, as Jones suggested, and if Delta won’t provide them for idiosyncratic reasons, then why can’t a low-cost carrier like Southwest Airlines swoop in and offer service? “I think what you’ll see is a filling in of the gaps over time,” Marks said. “I’m not convinced there needs to be a government intervention to solve Cincinnati’s problems.”

On the other hand, Marks and his co-panelists later pointed out that the aviation industry isn’t always a truly competitive market. After the 1996 crash in the Everglades of ValuJet Flight 592, government regulators decided to tighten safety rules even further, which made it significantly harder for new airlines to start up and compete with the giants (since the crash, the only new U.S. entrants have been JetBlue and Virgin America).

What’s more, Longman added, there are two unique facets of air travel that have lead to declining service for many cities. First, most of the fuel burned by a plane is used during take-off, which means that short flights are always less profitable than long ones — especially in the current era of pricey oil. Second, thanks to economies of scale, bigger airports cost less to operate per passenger. In order to maintain a truly nationwide network, air carriers have long used profitable routes to subsidize less-lucrative ones. But in recent years, the merging airlines have been increasingly loath to do that.

For those reasons, Longman and Khan are calling for re-regulation of the airline industry in their article. They’d like to go back to something like the arrangement that prevailed between the 1930s and 1970s, when the Civil Aeronautics Board helped determine routes and set fares, with a focus on building an air-travel network for everyone.

At the panel, Longman acknowledged that this arrangement was often quite messy — with lawyers hashing out endlessly trivial questions about tour operators and fees. “But we did it,” he said. “And that was the era that the United States emerged as a great industrial power.” What’s more, he added, it’s not clear that airline deregulation in 1978 under the Carter administration actually ushered in an era of low fares, as promised. He cited a 2007 study in the Journal of the Transportation Research Forum which found that air prices have fallen more slowly after deregulation than before.

Still, even Longman agreed that transportation regulators got “out of control” by the 1970s. “Like all human institutions, they’re prone to corruption and decay.” Indeed, this seems like a considerable problem for any massive re-regulation effort.

So are there alternatives? One possibility is that the government could just subsidize air routes to mid-sized cities that find themselves with suboptimal service, such as Pittsburgh and Memphis. Congress already does this for small, out-of-the-way towns through its Essential Air Service program. But Longman countered that the cost to extend this program to cities like Memphis and Pittsburgh would be exorbitant. Former representative Jim Oberstar, who also sat on the panel, added that a subsidy system of this size would be so complex that it would essentially take us back to the days of the Civil Aeronautics Board.

Another possibility is that air subsidies are a terrible idea and these cities will just need to find other alternatives to flying. Perhaps building a passenger-rail network between cities like Pittsburgh and Cincinnati would be cheaper and easier than propping up air travel.

Or these cities may just have to figure something out on their own. In the case of Cincinnati, said Josh Marks, air traffic to Chicago has actually halved in the past eight years. “What happened to everyone else? They’re going by Megabus, by bus services that offer nonstop connections,” he said. “It’s too simplistic to treat aviation policy in isolation.” Indeed, some economists, like Edward Glaeser, have warned that government subsidies tailored to benefit specific cities can stifle these sorts of alternatives.

So perhaps the market will figure something out. But that’s not a given. And, for now, Longman said, heartland cities such as Memphis, Pittsburgh and Cincinnati are being isolated from global commerce — not because they’re no longer competitive cities, but simply because of choices made by a small handful of massive post-merger airlines. “We have a problem here now,” Longman said, “that can’t be ignored.”