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“If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” - Warren Buffett

The Summer of 2022

When I chose to go on a trip this summer, I knew air travel would be bad. In June of 2020, I wrote a piece for this newsletter titled “The Post-Pandemic Plan to Make Flying Miserable,” detailing then-Secretary of Transportation Elaine Chao’s policy to enable more consumer harm. Specifically, she narrowed the definition of certain terms to make it much harder for regulators to stop unfair or deceptive practices.

Not a lot of people noticed what Chao was doing at the time, because Covid was raging and most assumed that people wouldn’t fly again for years. But now, cancelations and delays are routine. In June, the government reported that consumer complaints about the airlines are up 300%, and those were April numbers. It’s much worse for this summer.

The airlines are explaining the problems as a result of weather and staff shortages. And that’s not entirely wrong, but there are always problems with weather and staffing. Why is it so much worse this year? In 2020, when airlines got a $54 billion subsidy from the Federal government, they promised to maintain staff. And then at the depth of the pandemic, airlines encouraged their employees to take early retirement.

These staff cuts were not some dastardly plot by the airlines. Reducing capacity was an entirely rational choice, and it happened worldwide. I heard from airline pilots saying how creepy it was in 2020 to fly empty planes and debark in eerily quiet terminals. Warren Buffett was so convinced we’d never return to flying the way we did prior to Covid he sold all his airline stocks. It’s easy to look back now and act like these were self-serving decisions, but I don’t think they were.

Still, the desire for air travel came back much more quickly than anyone expected, and airlines were thus understaffed for the resurgent demand. And that’s where the bad behavior came in. When airlines saw increased demand for their services, they started planning more flights than they could reasonably deliver. This took the form of eliminating any potential slack in the system. When planning for flights, airlines stopped taking into account things like bad weather, pilots being sick, delays, mechanical problems. They pressed to ensure that flights are 90-100% full.

This choice created a situation in which there would certainly be last-minute flight cancelations, en masse. When every seat is booked and every pilot is flying, eliminating slack can generate a large amount of extra revenue, as long as everything goes perfectly. But if anything goes wrong, then things go really wrong. A jam in one part of an air transportation network makes every other part of the system slower. If, say, a pilot doesn’t show up to fly a plane from Boston to Cleveland, then that plane is not in Cleveland to pick up passengers for its next scheduled leg. All of a sudden, hundreds of passengers have to be rebooked into a system where every other flight is 95% full. In other words, one missing pilot in a system without slack can cause lots of havoc. That’s where we are now.

Good Delta, Bad Delta

So on my trip, I decided to not to hope for the best, but to adopt the attitude that a lot of things simply would go wrong. And indeed, they did. This weekend, my wife and I experienced delays and cancelations, as well as misrepresentations from Delta Airlines. But also the airline, unexpectedly, treated us quite well at one point. And why Delta behaved the way it did reveals in microcosm that the problems in our air travel system are directly related to regulatory policy.

So here’s what happened, without going into too much detail. We had a connecting flight through JFK airport in New York to DC. Like a lot of flights this summer, Delta canceled it. The airline then texted and emailed saying we could either try and book a new flight, or get a credit for future flights on Delta. Now, legally speaking, an airline must give a cash refund for canceled flights, but that’s not what Delta offered. Had the airline given me a refund, we would have bought train tickets, but we were tired and didn’t feel like fighting with airline reps who likely couldn’t help anyway.

The next day, we got another flight, and sat on the ground for about three hours. After we landed, I got an email from Delta giving us an automatic credit of $50 as an apology for the tarmac delay. That seemed odd. Canceling the flight and not offering a refund seemed worthy of an apology. But sitting around for a few hours, and then finally getting to our destination seemed minor. Why was Delta so badly behaved in one area, and so nicely behaved in another?

The answer is regulation. Why did Delta steer us to a credit for a ticket, instead of offering a cash refund as they were legally obligated to do? Well because, since Covid, there have been no fines against domestic airlines for refusing to offer cash refunds for flight cancelations. Delta isn’t afraid they will be held accountable for mistreating us on that score. But on tarmac delays? Well, in 2011, the Department of Transportation issued a tarmac delay rule. Airlines can’t keep passengers on the tarmac for more than three hours, or they face penalties. Delta was in fact fined for violating this rule in 2019. And so three years later, Delta sent us an apology, unprompted, just for getting close to the legal line.

As it turns out, where there are rules and enforcement, airlines are on their best behavior. Where there is no enforcement, airlines are willing to deceive people and do it in writing, without any fear that their main regulator, Transportation Secretary Pete Buttigieg, will do anything about it. Thus, one core reason for the awful travel summer is weak regulation. But it’s not as if weak enforcement is new; the decline in enforcement of regulations is longstanding, and isn’t just about one particular regulator. Here’s a chart of aviation enforcement orders, and you can see the collapse in the late Obama period.

It’s gotten worse since this chart was created. Trump’s Secretary of Transportation Elaine Chao, in 2020, her final year, issued just 6 aviation enforcement orders, a record low. How many did Buttigieg issue in 2021? Only 4. This year? So far he's issued... 3. He’s just not regulating the industry, and it shows.

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The failure of the Department of Transportation to regulate is compounded by the unique legal structure of the industry. Because of the way airline deregulation was written in 1978, consumers and states are barred from suing the airlines over consumer or safety issues. This liability shield is effectively a subsidy to the industry. One policy solution is to take power out of the hands of regulators like Chao and Buttigieg, and let airline customers and state officials themselves sue the airlines over consumer protection rules. And that would help consumers.

The other alternative is competition. Normally, customers could discipline airlines by choosing to fly someone else when they have a bad experience. But these days, customers can’t do that, because there has been significant consolidation in the industry.

Here too regulators are causing problems - the Federal Aviation Administration is allowing large airlines to hold onto valuable slots at the nation’s busiest airports, even when they don’t use them, and despite the White House’s executive order on competition mandating otherwise.

Consolidation and Public Utility Rules

You might think that I would call for more antitrust and break-ups at this point, and there’s some value to that. But unlike many areas of the economy, the airline industry is not a story where concentration is the problem, so much as a symptom of an industry that should be regulated like a public utility, but is not. Consolidation is being driven not just by the search for higher profits, but by financial desperation.

In the 2000s, US Airways, United Airlines, Delta Air Lines, Northwest Airlines, American Airlines and Comair all went bankrupt, and it was these bankruptcies that spurred rounds of mergers. And this financial fragility hasn’t gone away, because it’s an industry with very high capital costs but variable amounts of revenue, which makes it susceptible to severe busts. Had the government not stepped in during Covid, we wouldn’t have an airline industry. Even now, in a boom, Delta’s profit margins were lower this quarter than they were in 2019. It’s an unstable industry, despite the high prices and bad service.

To understand the roots of this instability, we have to go back to legal changes in the 1970s. At the time, a government agency called the Civil Aeronautics Board set routes and prices. Airlines were a regulated public utility service, with essentially a guaranteed reasonable return on their capital. They didn’t have to harm their customers to earn money, and they weren’t subjected to the same boom and bust cycle regularly buffeting the industry. Despite the more intrusive public rules, there was a lot more competition, with new airlines entering on a regular basis. And air service was evenly distributed around the country, you didn’t have mid-size cities cut off from the air grid when an airline decided to close a hub, as happens today.

The reason for the success and necessity of this particular regulatory framework has to do with the economics of flight. It is costliest to take off and land, so airlines like flying long routes over short ones. And it is cheaper to serve a busy airport than an empty one, because you can use the same equipment on more flights. So everyone in the industry naturally wants to serve long flights between big cities, not short flights or small cities.

The result is that, absent any regulation, airlines will all cut flights to smaller cities, and pile into the popular routes. If a bunch of airlines are all trying to compete on the New York to LA route, they will be willing to cut prices to nearly nothing simply to capture an additional customer, since the plane is already budgeted to fly the route. The net effect, if everyone is doing this, is that the industry becomes structurally unprofitable, airlines go bankrupt, and then there’s consolidation. As with ocean shipping and rail, air travel is a high capital cost industry, and without public rule-setting ‘ruinous competition’ takes over and bankrupts everyone.

When we deregulated airlines in 1978 and let airlines charge whatever they wanted and fly wherever they wanted, that’s what happened. Service to small cities ended, and the busiest routes went way down in price to consumers. The Department of Transportation saw promoting the financial health of airlines as its charter, so it didn’t really protect consumers for fear of harming the airlines financially. Then came waves of bankruptcies and consolidation, leading to price regulation, only this time privately through monopoly.

So when Elaine Chao or Pete Buttigieg chooses not to protect consumers, they are doing so as a tacit subsidy to airlines who are often in desperate financial straights. The goal of the Department of Transportation is to find ways of moving as many hidden subsidies to the airlines as possible, because it’s such an unstable industry.

But the nightmare travel summer of 2022 is showing that this model is untenable. For forty years, we’ve been in an era of deregulation. But that time is ending. Earlier this year, Congress re-regulated the ocean shipping sector, an industry with very similar characteristics as airlines. I think there’s more to come. And the airline industry should be next.

What I’m Reading

FTC to Consider Noncompete Rule in September, The Capitol Forum. This story is paywalled, but it’s important. The Federal Trade Commission will be considering a rule to ban contracts that prevent employees from leaving their jobs and going to a competitor. This is a big deal. It’s something BIG readers have weighed in with comments at the FTC over the past few years, and now the commission is acting. Yay!

D.C. Attorney General Karl Racine is Filing an Appeal of his Lawsuit against Amazon, D.C. Attorney General’s Office. This is excellent.

Also, some good news on the merger front.

Eamon Javers @EamonJavers

DOJ says China International Marine Containers Group confirmed today it has abandoned its acquisition of Maersk Container Industry and Maersk Container Industry Qingdao after the Justice Department’s Antitrust Division’s investigation.

Here’s some good policy using procurement to block the abuse of market power by academic journals.

ScienceInsider @ScienceInsider

BREAKING: White House issues new policy that will require, by 2026, all federally-funded research results to be freely available to public without delay, ending longstanding ability of journals to paywall results for up to 1 year. Coverage coming on @ScienceInsider.

The private equity firms, like Blackstone and KKR, behind 8 of the biggest names in autism therapy, STAT Oh dear.

Moderna Among Firms Quietly Granted Powers to Seize Patent Rights During Early Days of Covid Pandemic, The Intercept. This is an important story on how loosening patent thickets during the pandemic on behalf of U.S. pharmaceutical companies allowed them to innovate to create Covid vaccines. Patent rights for me, but not for thee.

USPS is chasing freight brokers as the agency scrambles to slash costs, Freightwaves The post office is beginning to destroy its workforce and destabilize postal routes.

Hidden Cost of Free Trading? $34 Billion a Year, Study Says, Bloomberg

Top crypto company defies U.S. sanctions on service that hid stolen assets, Washington Post

A Dad Took Photos of His Naked Toddler for the Doctor. Google Flagged Him as a Criminal, NYT

After setting up a Gmail account in the mid-aughts, Mark, who is in his 40s, came to rely heavily on Google. He synced appointments with his wife on Google Calendar. His Android smartphone camera backed up his photos and videos to the Google cloud. He even had a phone plan with Google Fi. Two days after taking the photos of his son, Mark’s phone made a blooping notification noise: His account had been disabled because of “harmful content” that was “a severe violation of Google’s policies and might be illegal.” A “learn more” link led to a list of possible reasons, including “child sexual abuse & exploitation.”…
He filled out a form requesting a review of Google’s decision, explaining his son’s infection. At the same time, he discovered the domino effect of Google’s rejection. Not only did he lose emails, contact information for friends and former colleagues, and documentation of his son’s first years of life, his Google Fi account shut down, meaning he had to get a new phone number with another carrier. Without access to his old phone number and email address, he couldn’t get the security codes he needed to sign in to other internet accounts, locking him out of much of his digital life.

Google, Machine Learning, and CSAM; Takeaways and Tradeoffs; Apple’s CSAM Controversy, Stratechery This piece is paywalled, but it’s a useful observation by Ben Thompson - who is normally supportive of consumer welfare models of antitrust - about the profound diseconomies of scale involved in having Google or Apple manage your your email.

This, by extension, makes this a story not just about Child Sexual Abuse Material, but also antitrust and the problems with privileging your own platform in moves up the stack. I’ve defended this sort of integration as having real consumer benefits; this case raises very significant consumer costs.

Thanks for reading. Send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt

P.S. One of my favorite publications - The Capitol Forum - is looking for a reporter to focus on mergers and acquisitions. It’s hard to overstate how much I respect TCF. The job description is below, and you can apply here.

The Capitol Forum - an independent media company that delivers investigative news and legal analysis of industry-defining competition policy issues to a subscriber base including investors, lawyers, and policymakers - seeks a senior correspondent to cover mergers and acquisitions. By producing timely investigative journalism and exclusive analysis, we have become one of the most differentiated and influential media companies in the United States. The position will require the reporter to write clear, in-depth, accurate stories, and is an exciting opportunity to help shape our coverage.

BIG by Matt Stoller

What Will Come of the Nightmare Travel Summer…