Open Skies Perspective: One on One with William J. McGee

David Cogswell
by David Cogswell
Last updated: 1:00 PM ET, Tue May 26, 2015

In December 2001, William J. McGee, then-editor of the Consumer Reports Travel Newsletter, wrote that the era when the airlines believed in their mantra "let the marketplace decide" had ended.

"The marketplace argument effectively ended - on Sept. 15, to be exact. That's when the CEOs of major airlines, no longer willing to let market forces rule after the horrific terrorist attacks, began asking for a bailout. Their arguments reinforced what some of us always believed: Airlines are a public convenience and necessity, and they're intrinsic to our nation's economy and defense…."

In the 1980s, McGee took a summer job in the airline industry and ended up working in the industry for seven years, getting a close-up view. Later he covered airlines as a journalist for a number of publications.

As a representative of the Consumers Union McGee testified as a consumer advocate at hearings in both houses of Congress on the merger of United and Continental airlines and again on the merger of American Airlines and U.S. Airways.

In 2012 Harper Collins published McGee's analysis and expose of the airline industry Attention All Passengers.

TravelPulse interviewed McGee about his observations and opinions about the current legal battle in which the three major U.S. airlines have formed an association aimed at limiting the growth of the Middle Eastern carriers.

TravelPulse: Can you comment on the lawsuit filed by the big three U.S. airlines to block the expansion of some Middle Eastern carriers?

William J. McGee: In regard to American, Delta and United criticizing Middle Eastern carriers for getting government subsidies, I think the point needs to be strongly made that all airlines around the world, in some form or measure, receive government subsidies from their own countries. And that certainly applies in the U.S. as well, and it always has.

And it's not just something that was done in the past. It continues to be done. We have the world's largest domestic air market in the U.S., and all of that infrastructure, the airports and air traffic control networks and towers, and all the rest of it are in large measure subsidized by taxpayers. And there are all sorts of expenditures by local, state and federal government to attract and support airline business. There are many different ways in which subsidies are given.

It's important to go back to 2001. It was just days after the terrorist attacks on Sept.11, when the U.S. airline industry contacted Congress and asked for a bailout. And they were given a bailout. The argument at that time was not "let's let the free market determine whether or not they're going to continue to operate." It was "airlines are intrinsic to the national economy, national security, to our well-being as a nation."

And therefore they were given a bailout. And rightly so, in my opinion. But the idea that the free market should be the only determinant in all of this is ridiculous. And the fact that you have these three major carriers claiming that there is unfair competition because the U.S. government doesn't provide subsidies to the airline industry is false. The U.S. government provides financial aid to the airline industry in myriad ways and always has.

Look at the whole history of the industry, not just the infrastructure but how the airlines in the United States have built their reputations with some of the best crew members and pilots over the years who received their training in the U.S. military for decades, for generations.

And when you look at the developments in commercial aviation, many of them were funded on the military side by the U.S. government. It's a fair question to ask, would we even be flying on jet aircraft commercially had the huge expense of research and development not been funded by the Pentagon to develop that technology that then was used for civilian purposes? I'm just bringing up a variety of ways that the U.S. government has always supported airlines.

And in fact I don't think there is anything wrong with that, because I do think it's critical that we have a healthy airline system. But the idea that we're going to point fingers at other countries saying there's an unfair advantage, I think that's ridiculous. And I think it's wrong, because I also believe that each country as a sovereign nation should make its own decisions as to what it thinks is best for its economy and what it needs to support it.

There's a bit of an apples and oranges thing going on here because when you look at American and Delta and United, all three of those airlines through their many mergers and acquisitions through the years have roots that go back nearly a century. Whereas some of the newer carriers in the Middle East and other places need to ramp up to get to the point where the U.S. carriers are.

The U.S. government has always been there for the airlines, and has in many different ways supported them. And it's no different from what is going on around the world.

It is hypocritical for them to be so concerned about protectionism at this point. It was the U.S. airline industry that 20 years ago in the 1990s pioneered the whole concept of open skies agreements and liberalizing commercial aviation so airlines could fly to and within other countries and also the same U.S. airlines pioneered the marketing agreements, the codesharing that allow them to do this.

So the idea that American and Delta and United have for 20 years been benefitting from Open Skies agreements and more liberal access to foreign markets, and now suddenly want to pull up the drawbridge and close off the U.S. to foreign carriers, it's the height of hypocrisy.

I think most people would say one can offer a fair argument, and even if you disagree with it you can respect it. But being intellectually dishonest is a different thing. And I don't see how you can make the case that the same airlines that have benefitted from liberalization of agreements should now want to reverse that and shut down access to foreign carriers.

TP: One of the biggest forms of government assistance has been the lifting of the antitrust protections of the public against anticompetitive mergers.

WM: Absolutely. When you look at antitrust, in theory airline executives are not supposed to be talking to each other about pricing and all sorts of other things, things that over the years we now know have taken place in some cases. When you look at what was done in the 1990s, the one that kicked this all off was it Northwest Airlines and KLM in Holland.

The term that was used at the time was that they were "blessed" with antitrust immunity. They were given this gift from their governments that allowed two airlines, not only two competing airlines, but two airlines from different countries to sit down together and not only work out schedules and all kinds of agreements on sharing lounges and facilities and all of that, but actually set pricing, which is a relaxation of a rule that is designed to protect consumers from anticompetitive practices. They were given immunity from that.

Northwest eventually got absorbed into Delta. And now we see again the irony of the airlines now saying they want to reverse these trends, which raises the question, was it wrong in the 1990s to have allowed this, if it's wrong now?

TP: After 9/11, the airlines couldn't get through a few days without asking for a bailout. But after they're on their feet again, they talk free markets again.

WM: We've seen this before from the airlines. I know some people who are very strong free market proponents. And while I disagree with them, I respect their views because they live what they talk. They truly believe that the marketplace should decide and if a company fails it should close its doors. I don't agree with their views but I respect that they are consistent.

The fact is I think it's very hard intellectually to respect the positions that these U.S. airlines have taken because it's not intellectually honest. When they say, "We don't want government intervention," what they are often saying is, "We don't want government intervention when we don't want it, but we want it when we want it."

We have seen this time and again, in labor negotiations, in bankruptcy reorganizations, in the awarding of slots at airports.

There is one issue that really crystallizes this and makes it very clear that we're not talking about the marketplace [ruling the airline industry] and that is the Wright amendment, which for decades artificially controlled how airline passengers could fly in, out and through Dallas, one of the largest airline markets in the United States.

The Wright Amendment restricted air travel in and out of Love Field, the older, smaller airport, to artificially force passengers to fly out of the newer, larger but further away Dallas-Fort Worth airport.

Not coincidentally, Southwest Airlines had its operation based at Love Field and American had its operation based at Dallas-Fort Worth, as they still do today.

So rather than saying, "Let's let the market decide if people want to fly a low-cost carrier from an airport that's closer to downtown Dallas." Instead the Wright Amendment restricted it and for years only allowed flights into and out of Love Field if the destination and origin were in one of the few states that border Texas.

When people aren't aware of this they laugh and say, "Are you kidding?" If ever there was artificial manipulation of the market, this was it. But you didn't hear a peep from the major carriers. So when you hear the argument, "Let's let the marketplace decide," if that had happened things would be very very different in the history of American Airlines and Southwest Airlines in Dallas-Fort Worth.

TP: You could all that The American Airlines Law.

WM: You see this all the time. You see it at the most congested airports. We have these battles that go on over take off and landing slots. I worked as an airline dispatcher for the Pan Am Shuttle, which operated into three of the most congested airports in the country, and I can tell you landing slots are a finite resource. It's not infinite. There are X amount of runways and taxi ways and gates and facilities, so in the course of an hour you can only have so many take offs and landings and you can't squeeze in more without compromising safety.

In some cases you can say you can make the airports larger, but in many cases that's not possible. So when you see how slots are allocated in these airports you quickly see that again, the free market doesn't always play out in the way free market proponents would like to see.

What you often see is a very protectionist mode on a domestic scale. The major carriers, who are older and date back many years through all their marriages and mergers, have grandfathered rights in many of the most congested airports. And they would love to do everything in their power to keep smaller, newer, low-cost carriers out of those markets.

This is no small issue. The fact is we're not in the realm of opinion, it's documented fact by the Department of Transportation that low-cost carriers bring down the fares in a given market. The DOT has even given it a name, "The Southwest Effect," referring to the largest low-fare carrier. And even if you and I don't fly on a low-cost carrier, if we're flying on a route where there is one, we're going to benefit. There is going to be a lower fare.

It's a documented fact that when the majors quote-unquote compete with each other, that there really isn't competition in the United States, particularly now through all this consolidation.

We are now at this unprecedented point in American history where there are three major network airlines in the United States:, United, Delta and American. That has not happened since the 1920s.

Of course we have Southwest. And those four airlines completely dominate the U.S. market. When you see the majors competing only against the majors, without the low-cost carriers there is no competition. They have clearly decided not to compete on price, and fares stay high. The DOT has documented this.

When a low-cost carrier comes into a market, the fares drop overall. And if that low-cost carrier leaves, guess what? We've seen many low-fare carriers fail. We've seen the majors do whatever they can to drive them out of business, dirty tricks and all kinds of other things going back historically. If a low-cost carrier fails, guess what happens? Those prices go right back up.

When you look at that you have to ask, are consumers really being served by a system in which we are now down to three players, three 800-pound gorillas that clearly have either exclusively or through their actions determined it's best if we don't compete aggressively with each other, that in fact when there are just major carriers, you're not going to see fares being lowered? And it is not only fares, it applies to many other things.

TP: Such as service. If you fly internationally, you get an idea what airline service can be like. In the U.S. they don't really bother to try distinguish their service from the others. It's all no-frills.

WM: There's no question that service has eroded. Load factors are at an all-time high. Seats are tighter, and configured in such a way they are more uncomfortable than they've ever been. Overhead bin space is being fought over because of all these fees for baggage and other things. It's a miserable experience.

If you step back and say, "Why don't they compete on service as they once did?" I think we need to go back to 1978 and look at deregulation. I've studied it very closely, especially when I was working on my book, and I spent a lot of time talking to people who were there, who were advocates of it, and a funny thing has happened that I've noticed time and again.

Deregulation occurred in 1978, and yet time and again I've heard people say, "Oh yes, airline deregulation, that was brought in by President Reagan." That's wrong. In a lot of people's minds, Ronald Reagan deregulated the airline industry. Maybe they are conflating it with the fact that Reagan fired every air traffic controller in the country.

But the fact is deregulation was spurred not from the right, but from the left. In 1978 the White House and both houses of congress were controlled by Democrats. Jimmy Carter advocated it. And the strongest proponent for it in Congress was Senator Ted Kennedy. And when you look at testimony that was given in favor of deregulation, you see that Ralph Nader was one of the strongest proponents of deregulation.

So it's interesting. It's worth asking, "Why is that?" If today we look at deregulated markets as a conservative idea, coming from the right, why is it that in 1978 deregulation was something that was advocated by the left, as I think anyone would characterize Jimmy Carter, Ted Kennedy and Ralph Nader in 1978?

That's why it's important to go back and look at what was said and what was promised. The promise of deregulation is not what we have seen. And in my view, and I stated this in my book quite clearly, it is now safe to say in 2015 that deregulation, which is a mixed bag, has brought some good things, but overall I think has failed. The reason I say that is if you look at the promises of what it was supposed to do, most of those things have not happened.

The idea behind this was that we're going to get the government out of the airline business, that government will not decide what airline will fly from Cleveland to Minneapolis or Denver to Seattle, and the government will not set prices, the free market will.

The idea was that this is going to be great for consumers because airlines are going to compete with each other. They'll have at it and whoever has the best products and the safest products and the lowest cost products is going to win, and therefore consumers will win.

But unfortunately in the last 40 years or so that is not how it's played out. Instead what we've seen is the sort of Balkanization of the market. In some cities, yes, there is competition.

Just as all politics is local, everything to do with the airline business is local too. And if you're a journalist living in New York, you see a very different airline industry than people see in Atlanta, and Minneapolis and Missoula, Montana, and many other places.

Yes, there is robust competition in some ways between New York and Florida because there are all these low-cost carriers in that market. It's not unheard of to get a $100 fare from New York to Ft. Lauderdale.

But if you take the low-cost carriers out of the equation, then it's a much different story. And that's where deregulation has failed. They talked about this. The record is clear. It's documented. Back in the '70s when this was being debated they talked about, "What's going to happen to the small markets? What's going to happen to the rural markets? What's going to happen to competition?"

And the idea was there are going to be more players, more airlines, more competition and that eventually that would drive down costs and fares and consumers would benefit. That is not how it played out. What we've seen through dozens of bankruptcies of low-cost carriers and dozens of mergers that have consolidated now into an oligopoly of three major network players, is that in fact ironically I think it's safe to say there is less competition in the market in 2015 than there was in a government-regulated market in 1978.

TP: Whew, that's sad.

WM: And I feel confident in saying that. I don't think I'm out on a limb.

TP: What do you think would make sense going forward to try to restore some of the competitiveness and the diversity in the marketplace that has been lost?

BM: I think we are at the point now where we need to step back and take a big picture macro look at the industry. That was what was done in 1978. And I think we're at the same stage now. I think quite frankly we have a dysfunctional situation in Washington, where the FAA funding has run out multiple times with all these shutdowns and political maneuvering.

The FAA can't plan more than six months in advance at any given time just in terms of the basics, the safety and infrastructure and air traffic control. We're supposed to be the world's wealthiest and most advanced nation and the fact is we have an air traffic control network that is a sort of patchwork of competing systems and is light years behind what some other nations are developing.

And the worst part is there is this term called next-gen, next generation air traffic control system that they FAA has been talking about since the '90s. And we're still not there. The funding is a constant crisis. We really need to have a big picture, high profile discussion about the state of the U.S. airline industry like we did in 1978.

I think people had very good intentions then. I've looked at the record and I think fair questions were asked. Where are we now? How can we make it better? And I think the intentions were good, but unfortunately the promise has not been fulfilled. And I think we're at the point now where we need to do that.

This is an industry that is vital to our success. Sept. 11 taught us a lot of things, but one of the things it taught a lot of people was in the course of things, shutting down a business for three for four days doesn't seem like such a dramatic thing. But when it happened to the airlines we almost had the airline industry go under. It required government intervention. Or if the free market had been allowed to work, all of the airlines might have gone down. We might have had one or two left. Their cash flow was so dire.

At this point I agree with what the airline executives said in 2001. We are absolutely necessary. The U.S. security is compromised if we don't have a healthy airline network, let alone the economy. I agree. It's true. Just as I agree that the nation's interstate highway system is intrinsic to our well being.

If you look over time, no transportation system has been a money making profit center over the long term. Should they even be designed in that way? Are they utilities that are necessary and should be government funded? What I'm saying is that these are the types of discussions we don't even have.

On the one hand we recognize that airlines are utilities and that we need them. On the other hand we say this is the free market and let them do whatever they want to do. We have a highway system because President Eisenhower said we need a system that connects the entire country, not just the big cites. It provides access to everyone, like the postal system.

People are sick of being cramped into middle seats, having someone's tray table smash into their knees, being treated like cattle. We are at the point where there are stricter rules for transporting animals than humam beings. I think it's safe to say the market has failed and we need to look at it again.

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