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| Terminal Sickness
How a thirty-year-old policy of deregulation is slowly killing America’s airline system—and taking down Cincinnati, Memphis, and St. Louis with it.
By Phillip Longman and Lina Khan
“It was certainly one of the hardest choices that I’ve ever made,” explained Fernando Aguirre. He’d raised his family and built his career in Cincinnati, Ohio, rising through the ranks of the city’s business elite, first as an executive at Procter & Gamble’s headquarters and later as CEO and chairman of Chiquita Brands International. Along the way, he became a fanatical fan and part owner of the Cincinnati Reds baseball team, as well as a proud sponsor of the Chiquita Classic golf tournament, the proceeds from which he poured into local philanthropies.
But last fall, Aguirre confirmed Cincinnati’s worst fears by announcing that he and his company were—very reluctantly—skipping town, and for a reason that cast an even deeper shadow over the city’s economic future. Cincinnati has long been (and for now remains) a major business center, the headquarters of six Fortune 500 companies and fifteen Fortune 1000 companies, including not just household-name producers like Procter & Gamble and Chiquita but also retail giants like Macy’s and the Kroger grocery chain. With a population of 2.1 million, it’s the twenty-seventh-largest metro area in the United States. But running a national, much less international, business out of Cincinnati is becoming more and more problematic for a simple reason: inadequate air service.
As recently as 2004, the Cincinnati/North Kentucky Airport (CVG) was a major hub for Delta, and offered nonstop flights to 129 major cities, including Frankfurt, Amsterdam, London, and Paris. Today, the number of flights through CVG has fallen by two-thirds, and an entire concourse stands eerily empty. At the same time, flights out of the airport have the highest fares in the country. This means that if you live or do business in Cincinnati, it’s hard to fly anywhere without paying a fortune and having to cool your heels for hours while waiting to change planes in a city like Atlanta or Charlotte. And if you’re a global business like Chiquita, which operates in seventy countries and needs to be able to attract global talent, the situation is untenable.
So Aguirre is moving Chiquita’s headquarters to the NASCAR Plaza in uptown Charlotte, just a thirteen-minute drive from that city’s busy international airport. The move will be a boon to Charlotte, creating more than 400 jobs with an average wage of over $100,000. But it will be gut-wrenching for existing employees, as well as for Aguirre personally. He recently had to explain to Charlotte’s local press that he is no fan of NASCAR (“I have never gone to a NASCAR race. I’m sure I will end up going to a few from now on”), and that he still pines for his beloved Reds. But at least he and his employees have had time to prepare themselves mentally. “We’ve been dealing with the logistics of our business and the airport for so long now,” says Aguirre, “that everyone knew that the likelihood of moving was very high. It was just a matter of where and when.”
A generation ago, Aguirre and his employees at Chiquita would not have had to face such a difficult choice. Until 1978, the United States viewed airline service as a “public convenience and necessity,” and used a government agency—the Civil Aeronautics Board, or CAB—to assign routes and set fares. This regulation was designed to ensure that citizens in cities like Cincinnati received service roughly equal, in quality and price, to that provided to other comparably sized communities like Charlotte. The government also made sure that smaller cities maintained vital links to the national air network.
In 1978, however, a group including Ralph Nader, Ted Kennedy, Kennedy’s then Senate aide Stephen Breyer, and an economist named Alfred Kahn, whom President Jimmy Carter chose to run the CAB, conjured up a plan to drive down the cost of airline fares by fostering more price competition among airlines. Though they called it “deregulation,” the practical effect of eliminating the CAB, especially after subsequent administrations abandoned antitrust enforcement as well, was to shift control of the airline industry from experts answerable to the public to corporate boardrooms and Wall Street.
Over the years, most Americans have adopted a pretty standard line about the results. On the one hand, complaining about the indignities of flying—overbooked, late, or canceled flights; surly flight attendants; and, more recently, terrible in-flight food service and high fees for checked baggage— has become a staple of American life, much like complaining about Internet providers or health insurance companies. On the other hand, we’ve told ourselves, at least the increased competition has made air travel cheaper. And at least most of us can still get where we need to go by air.
But now we find ourselves at a moment when nearly all the promises of the airline deregulators have clearly proved false. If you’re a member of the creative class who rarely does business in the nation’s industrial heartland or visits relatives there, you might not notice the magnitude of economic disruption being caused by lost airline service and skyrocketing fares. But if you are in the business of making and trading stuff beyond derivatives and concepts, you probably have to go to places like Cincinnati, Pittsburgh, Memphis, St. Louis, or Minneapolis, and you know firsthand how hard it has become to do business these days in such major heartland cities, which are increasingly cut off from each other and from the global economy.
And it’s about to get worse. Despite a wave of mergers that is fast concentrating control in the hands of three giant carriers, the industry remains essentially insolvent. Absent any coherent outcry, the directors of these private corporations remain free to respond to the crisis in the manner of an electrical utility company that, when it runs short of money, simply cuts off power to the neighborhoods of its own choosing.
The loss of airline service to rural and remote areas is an old story; by the 1980s, even some state capitals— such as Olympia, Washington; Dover, Delaware; and Salem, Oregon—became places you could no longer fly to except in a private plane. But over the last five years, service to medium-sized airports fell by 18 percent. This latter trend is much more disruptive to the economy, reflecting lost service to important centers of commerce that until recently had major airports but are now isolated—most often due to the frantic pace of airline mergers and downsizing.
St. Louis, for example, has seen “available seat miles”— an industry measure of capacity—fall to a third of their 2000 level, following the American Airlines takeover of TWA and Lambert International Airport’s subsequent downgrading as a mid-continental hub. Two of Lambert’s five concourses are now virtually empty, and another, which housed the TWA hub, is only partially used. A third runway—the building of which required demolishing hundreds of homes and cost local taxpayers a billion dollars to finish in 2006—is now redundant. “This scenario,” notes Alex Marshall, a senior fellow at the Regional Plan Association, “can be likened to states building highways and then having General Motors, Ford, and other auto companies suddenly telling their drivers to use different roads.”
St. Louis’s loss of service comes despite the fact that the population of the St. Louis metropolitan area, the eighteenth largest in the U.S., grew by more than 4 percent between 2000 and 2010. The city is also the home of eight Fortune 500 companies and is a major center for such international players as Anheuser-Busch InBev, Monsanto, Boeing, Emerson Electric, Express Scripts, and Nestlé Purina. The GDP of the metro area, which is also propelled by such large research institutions as Washington University and a fast-growing medical sciences sector, rivals that of oil-rich Qatar. Yet like most other midsize American cities, St. Louis’s economic development is now hostage to the shifting, closed-door deals and mergers of a mere handful of airline executives and their financiers. The prevailing mood was captured by a St. Louis Post-Dispatch editorial that quoted “The Serenity Prayer” in advocating philosophical acceptance of the distant forces shaping the region.
Memphis International faces an even more urgent reason to pray. When it was designated a hub by Northwest in 1986, the airport undertook record-breaking expansion projects to house the airline and its regional carrier, Northwest Airlink. As in other cities, lack of competition at the airport led to record-high airfares. These high fares are still in place, but they haven’t been enough to preserve service. Delta’s acquisition of Northwest allowed the executives of that Atlanta- based airline to diminish the airport’s hub status. In March of 2011 the post-merger airline announced that it would cut 25 percent of its flights from the city. This loss of connectivity affects Memphis in ways both big and small. The Folk Alliance music conference, held annually in downtown Memphis, recently announced that it would move to Kansas City starting in 2014, due in part to airport hassles. The Church of God in Christ, too, recently decided to move its yearly convention out of Memphis, breaking 100 years of tradition. When Mayor A. C. Wharton visited church leaders to lure their 50,000 convention attendants back to the Bluff City, he learned of the material culprit that had pushed the spiritual gathering away: high airfares.
Pittsburgh is another example of a major city whose culture and economy is increasingly determined not by its underlying fundamentals but by the dictates of an ever more concentrated, yet failing, airline industry. After it lost most of its steel industry in the 1970s, the city did everything the apostles of the so-called new economy said must be done to compete in the emerging global economy. When the city played host to the G-20 Summit in 2009, President Obama hailed Pittsburgh’s transformation “from a city of steel to a center for high-tech innovation—including green technology, education and training, and research and development.” That same year Forbes named Pittsburgh one of America’s best cities for job growth, while the Economist lauded its cosmopolitan cultural amenities, such as the topflight Pittsburgh Symphony Orchestra and the Pittsburgh Opera.
But Pittsburgh’s renewal as a vibrant, creative, international city is now in doubt, due to the downscaling of its international airport, which now stands largely empty. Pittsburgh International was able to offer more than 600 daily nonstop flights after the city went deeply into debt to turn it into a showcase during the 1990s. But when US Airways merged with America West and concentrated its hub operations in Philadelphia and Charlotte, Pittsburgh service tumbled. US Airways’s daily flights have plunged from 542 to sixty-eight, causing the shuttering of half the gates at the airport as well as sections of two concourses.
K&L Gates, one of the country’s largest law firms, used to hold its firm-wide management meeting near its Pittsburgh headquarters, but after flying in and out of the city became too much trouble, the firm began hosting its meetings outside of New York City and Washington, D.C. The University of Pittsburgh Medical Center, the biggest employer in the region, reports that its researchers and physicians are increasingly choosing to drive to professional conferences whenever they can. Flying between Pittsburgh and New York or Washington can now easily take a whole day, since most flights have to route through Philadelphia or Charlotte. A recent check on Travelocity showed just two direct flights from Pittsburgh to D.C., each leaving shortly before six in the morning and costing (one week in advance) $498 each way, or approximately $2.62 per mile.
All these trends in the airline industry are bound to get much worse, and soon. Despite massive consolidation, steep cuts in wages and benefits, sharply rising fares, huge direct and indirect subsidies, and a slowly recovering economy, the industry remains unable to service its debt, and its executives—now serving at the whim of Wall Street— see no way out except to continue to merge and to cut capacity. U.S. airlines lost money in all but three years between 2001 and 2010, according to the industry’s trade group, for a cumulative net loss of $62.9 billion. Even before the recent bankruptcy of American Airlines, the value of all publicly traded U.S. airline stocks amounted to only $32.3 billion, less than that of Starbucks.
That number would be even lower were it not for the major subsidies the industry has extracted from Congress. These include not just the billions spent by state and local governments to construct and maintain airports, and the $15 billion in loan guarantees the industry received in the aftermath of 9/11. They also include tens of billions in unfunded pension liabilities that major airlines have shoved onto taxpayers by declaring bankruptcy, as United and US Airways did in the last decade and American Airlines is trying to do now. If American succeeds in its plan to shed its pension debts onto the federal government’s Pension Benefit Guaranty Corporation, that alone would amount to a bailout of more than $10 billion. Other U.S. airlines continue to benefit from special provisions passed by Congress in 2007 that allow them to underfund their pension plans, so in the future taxpayers are likely to be paying even more of the cost of flying yesterday’s planes.
Yet even though these and other public subsidies dwarf those provided to Amtrak or General Motors, only one U.S. airline, Southwest, still has an investment-grade credit rating. Since 1978, almost all new start-ups have either failed or been absorbed (remember People Express, ValuJet, and Air Florida?) and only one, JetBlue, remains as a national competitor. Meanwhile, all six of the major “legacy” carriers that were still flying in 2011 have gone through bankruptcy. When the final numbers come in for last year, the U.S. industry as a whole will probably show some net income, but as of the third quarter of 2011 the margin was razor thin, and was mostly the result of rising fares and canceled service. Adjusted for growth of the economy, airline capacity is now at its lowest level since 1979, according to the trade group Airlines for America, and the industry has announced plans to cut another 1.5 percent of available seat miles in the first half of this year.
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