1. Everyone's buying the same aircraft, the same fuel, the same airport charges, posting airport jobs on the same recruitment sites, etc etc. Whatever margin differences there are have to come from either commercial strategy and back-end efficiencies, or from flight crew scheduling. In a "real world" product, whatever savings there are from firing the second IT director and using only one corporate project management software subscription are miniscule compared to fuel, crew and mechanical salaries, and aircraft lease payments.
2. Overgeneralizing FAA's equivalent of Hours of Service rules, airlines have to schedule rest as soon as the first flight lands in the US. This means buying hotel rooms and (under US contracts) paying a "trip/duty rig" to crews for every hour they are away from home (this is partly a travel per-diem and partly to ensure the airline schedules crews productively). These costs add up. Would an airline rather pay for one night in the US before they work tomorrow's flight back home or would they rather send the crew on a multi-night journey on a different fleet (if they're even qualified on different fleets!) through a half-dozen cities with a hotel stay after every 2-4 flights before they fly home?
3. If there are no material savings for crew scheduling, then the foreign airline would want to base crews in the US. Now they have to follow US labor laws, and are competing for the same pilots and flight attendants as domestic airlines, and have to pay more or less the same to do so. Unless the plan is to backdoor an airline guest worker program to the detriment of America's pilots and flight attendants, there's no savings here!
4. The three airline alliances and widespread codeshare agreements more or less function as "three global airlines" as far as the ordinary traveller cares.
I think generally in an industry there is an optimal number of competitors. Where scale benefits decline and competition benefits become threatened.
I have zero understanding why Matt thinks we’re missing out at the moment. Airline profits are historically high, but not because prices are up, prices are in fact way down. We’ve simply unleashed the market and seen a tremendous benefit in the per seat cost.
Adding foreign competitors doesn’t give us access to more competition for marginal routes. Those routes are marginal because there are few travelers. You can’t fix a demand problem with more supply. Especially given the likely inelastic nature for air travel demand.
But more flights to Bangor would be good for Matt, so hey, I get it.
Tangential: I think that coastal Maine could benefit significantly from a passenger train.
Coastal Maine is a very attractive linear tourist destination. While the natural amenities of the coastal Maine (scenery, ocean, lobsters) are fairly evenly distributed, the southwestern portions are much more heavily utilized than the northeastern "Down East" coast. Past Mount Desert Island coastal Maine feels surprisingly run-down and empty; Washington County has a 19% poverty rate and a population density lower than North Dakota.
This is a consequence of proximity to population centers in the northeastern US and airports in Portland and Boston. Places like Kennebunkport and Boothbay Harbor get plenty of tourists happy to spend money and have many vacation homes that pay property taxes without demanding much in the way of services.
It seems that some kind of train paralleling US Route 1 could help make the downeast Maine coast much more accessible and bring more tourists and perhaps more second home owners or remote workers. Maine isn't that big; a drive from Portland to the Canadian border at Lubec is only ~230 miles. If a train linked to airports at Portland and Bangor, it could be a very viable rental car alternative for many people.
I don't know what construction costs would be like. Outside of MDI coastal Maine doesn't have a lot of up/down, but it does have a lot of ocean inlets.
For context I'm not a Maine native or even an east coaster; I've been to Maine for weddings a couple times in the past year and stayed in Sebago, Ogunquit, Southwest Harbor, Prospect Harbor, and Campobello Island (in New Brunswick adjacent to Lubec, ME).
Essentially, this immigration influx was planned by the town's own leadership to revitalize the town and arrest its shrinking population and economic base.
We and the Canadians have has multiple chances to do this with each other and Canada of course hates it because it would harm Air Canada’s monopoly position. (Adding Air Canada to our domestic market so we had a “big 5” seems like an easy low stakes step.)
Regarding market concentration, I’m not an economist but I play one on comment boards, so here goes:
When an industry is new, the market is looking for innovation, so you see a lot of competitors trying out different ideas. As the industry matures and the product becomes a standardized commodity, the market puts a higher value on economy of scale and favors fewer, larger companies. We don’t need a dozen competitors doing the exact same thing, just a few to keep each other honest.
I don't see the idea foreign airlines being allowed to fly domestic routes ever happening, once the lobbyists from the airlines and airline workers' unions get their say. The way our political system works, it is nearly always better for politicians to prioritize specific companies (and occasionally their employees) over consumers at large.
It's the same situation with tariffs on Chinese cars.
I’m surprised this article didn’t mention the Alaska-Hawaiian proposed merger! The big thing I start imagining is the new combined airline starting to offer flights from its Asian destinations to mainland US with connections in Anchorage as well as with connections in Honolulu.
Yeah that's going to be awesome. HNL TYO flights operated by American crews sounds like the worst business idea ever, so hopefully that gets abandoned ASAP and Alaska gets into the [continental US] -> Asia ring
American's hub map is missing anything to the northwest of LA, Phoenix, and Chicago, so having Alaska turn its Seattle hub into one offering Asia connections would be a nice addition to the Oneworld map.
While I enjoyed this MattY article, as usual, I found the policy logic to be weaker than usual.
The three largest carriers in the US have profit margins of 4-7%. That means your airfare is overwhelmingly going towards pretty fixed costs like the fleet, jet fuel, crew, airport fees, etc. The fuel alone is 30% of the airfare, and aircraft costs (maintenance, depreciation, etc.) are another 20%.
I don't deny that airlines can improve on their IT, marketing, management, etc. to lower costs, but the upside here seems clearly quite limited. Airlines don't produce aircraft, fuel, or crew-- they have to acquire them at market prices, which are passed onto consumers.
I tried to find extensive data on US air travel costs compared to other countries...
This was the best I could find. The US isn't in there, but that would indicate we are not among the top-20. For a rich country with high labor costs, that would seem to indicate we're doing alright.
My recollection from having traveled domestically and abroad is that US domestic airfares are similar to generic airfares covering the same distance. Some searching on Google flights just now shows airfares for NYC<->MIA being very similar to LDN<->BER (about half the distance).
Most people in my world that travel internationally a lot will tell you that the US airlines biggest issue is the unions. The desk and cabin crew have union job security and are therefore incrementally more indifferent to the customers than less unionized Asian and Middle Eastern airlines.
So I'd say the upside to consumers of letting foreign carriers is pretty limited. It's hard to see how airfares could decline by more than a few percentage points.
Matt rightly points out that the unions will hate this. I'll add that a big slice of the population that reflexively supports protectionist policy will also hate this. Matt is usually quite politically pragmatic, but he seems to go all idealistic here. Given the limited upside in this case, why spend the political capital here? Matt is usually a lot better than this.
Matt also comes across as naive as to how international trade tends to work in reality. Sure, we could just open up our skis to foreign carriers. Alternatively, we could *offer* other countries reciprocal market access, providing additional foreign opportunities to our domestic carriers. Although it could still be beneficial to act unilaterally (if we ignore the political costs), it seems far, far preferable to at least try for reciprocity, which Matt does not mention.
It's always good to read an article on something I'm knowledgeable about that doesn't make me want to tear my hair out. I worked in airline pricing for most of my career and find the take to be broadly correct. I think it is hard to argue that the airline business isn't competitive, even if there's really only four main competitors, and it's correct that the benefits of doing this would be real but modest as a result.
Air travel is already highly divided between competitive and noncompetitive markets (as defined by pricing analysts rather than economists, who I'm sure use a more coherent definition), where the latter have much much higher fares. Not even per mile higher fares, it's just straight up more expensive to fly between a minor airport and a major one than between two major airports, typically. Because of this, if foreign airlines could fly domestic routes, you'd probably see even bigger drops in fare on flights between top tier major cities, and little/no benefit for most of the small expensive places. Emirates isn't clamoring to enter Colorado Springs - Chicago but they'd definitely want to be in NYC-LA.
DC-Maine example is right that the threat of competition is definitely a lesser concern than actual existing competition. When I was doing revenue management, my advice would've been to milk the market for as much as it's worth in the short term, then if a competitor enters drop the fares at that point or exit entirely and use the planes elsewhere. I'm not sure American Airlines takes quite as aggressive an approach as we sometimes had to at the small airlines I worked for.
What definitely did restrain our fare ambitions in the noncompetitive markets was the threat of government intervention. There were definitely cases where the threat of a competitive subsidy by a state government got us to voluntarily offer (much) lower fares than we would have otherwise. I am not sure that the result was welfare maximizing - usually the result was sold out flights, meaning if you need to go at the last minute for whatever reason, you can't.
Also in the airline business. I think this is mostly right, unsurprisingly. Foreign entrants just won’t do much and won’t want to compete on low load/high jet fuel burn/ endemically expensive small markets. To the minor extent this would create competitive capacity it would be on cross country flights and some high demand/return city pairs which are already high demand for incumbent us airlines and served as such.
This would have marginal effect nationally and no impact on low return rural flying. If someone wants to fly Bangor maine to DC (a very seasonal and low demand market) it could be one of the incumbent low cost carriers.
Rural air travel is tough with carriers upgaugung aircraft, rj jets being fuel burn machines and consumers willing to drive to airports with greater service options etc. As I’ve said to policymakers crudely: living in a rural/small market comes with costs, and one of them is that it’s hard to maintain equal service
Do you think there's any chance foreign airlines might be more willing to use turboprops for low-demand routes? As opposed to the major US carriers, which all got rid of theirs.
And if so, could that be something that could potentially meaningfully lower fares and/or make some routes more economically viable?
Though I suspect you might still have the "Will a foreign airline really want to bother with investing in experimenting on low-demand routes on another continent?" question, whose answer might be no....
My understanding is that is in a US operating context the economics of turboprops is pretty bad. Silver Airways struggles to make it work even though they've got an on paper ideal market connecting Florida and the Bahamas.
Another way to increase airline competition is to move to a system of slot auctions. Auctioning spectrum rights boosted competition and innovation in telecomms, auctioning new airport capacity would do the same for airlines.
Are the benefits of this significant enough that we would just open up our domestic market unilaterally, or should we require bilateral agreements?
I.e., does Delta need to be able to fly Paris to Rome before Air France can fly DC to Bangor? Presumably for actual security reasons we might not want Chinese airlines flying too many domestic routes, and they also wouldn’t want our carriers doing their domestic routes either…
Delta can already fly Paris to Rome. Intra-EU flights are not considered cabotage as long as the flight crosses between destinations two EU member states.
Aargh, I have lots of work to do today and I'm a Person Experiencing Westerness, so there are already almost 120 comments, but I have so many thoughts on this because I actually wrote a law journal article years ago that has a major discussion of this subject!
A very quick observation is that I did not see any mention of the 1944 Convention on International Civil Aviation (a.k.a., the "Chicago Convention"), which the US is a signatory of, along with basically all other countries with major commercial airline carriers. Article 7 of the Chicago Convention reads:
“Each contracting State shall have the right to refuse permission to the aircraft of other contracting states to take on in its territory passenger, mail and cargo carried for remuneration or hire and destined for another point within its territory. Each contracting State undertakes not to enter into any arrangements which specifically grant any such privilege on an exclusive basis to any other State or an airline from any other State, and not to obtain any such exclusive privilege from any other State."
It has been argued for decades in the aviation law community that the second sentence of Article 7 means that if a country agrees to allow cabotage for air carriers from one country, it must allow cabotage for ALL countries' air carriers. E.g., if you let British Airways and JAL fly domestic US routes, you also have to allow Air China and Rossiya to fly too, if they otherwise can obtain necessary gates and slots at the relevant airports.
I think this is just a sneaky guest worker proposal? Wouldn’t most of our pilots and flight attendants eventually be replaced by foreigners from countries with lower labor costs who are here on a C1/D? That’s one of the uncapped visa categories, so supply can expand as needed as LATAM and Qatar or whoever divvy up the US market between them.
Always love more immigration, so that side is appealing. Of course cheaper flights would mean more global warming and overtourism, which I’m less crazy about.
The example of the EU suggests you're correct that this would likely lead to the replacement of American crews with lower cost foreign workers. Ryanair was infamous in the early 2000s for hiring East European pilots for a fraction of the cost of even Irish pilots, which a lot of people claimed contributed to its safety problems. (Whether such a relationship was ever objectively verified, I don't know offhand.)
A few points:
1. Everyone's buying the same aircraft, the same fuel, the same airport charges, posting airport jobs on the same recruitment sites, etc etc. Whatever margin differences there are have to come from either commercial strategy and back-end efficiencies, or from flight crew scheduling. In a "real world" product, whatever savings there are from firing the second IT director and using only one corporate project management software subscription are miniscule compared to fuel, crew and mechanical salaries, and aircraft lease payments.
2. Overgeneralizing FAA's equivalent of Hours of Service rules, airlines have to schedule rest as soon as the first flight lands in the US. This means buying hotel rooms and (under US contracts) paying a "trip/duty rig" to crews for every hour they are away from home (this is partly a travel per-diem and partly to ensure the airline schedules crews productively). These costs add up. Would an airline rather pay for one night in the US before they work tomorrow's flight back home or would they rather send the crew on a multi-night journey on a different fleet (if they're even qualified on different fleets!) through a half-dozen cities with a hotel stay after every 2-4 flights before they fly home?
3. If there are no material savings for crew scheduling, then the foreign airline would want to base crews in the US. Now they have to follow US labor laws, and are competing for the same pilots and flight attendants as domestic airlines, and have to pay more or less the same to do so. Unless the plan is to backdoor an airline guest worker program to the detriment of America's pilots and flight attendants, there's no savings here!
4. The three airline alliances and widespread codeshare agreements more or less function as "three global airlines" as far as the ordinary traveller cares.
This is fine if you're ok with all these legacy American airlines with very expensive union labor going bankrupt.
The airline business is bad, that's why all the mergers happened.
I think generally in an industry there is an optimal number of competitors. Where scale benefits decline and competition benefits become threatened.
I have zero understanding why Matt thinks we’re missing out at the moment. Airline profits are historically high, but not because prices are up, prices are in fact way down. We’ve simply unleashed the market and seen a tremendous benefit in the per seat cost.
Adding foreign competitors doesn’t give us access to more competition for marginal routes. Those routes are marginal because there are few travelers. You can’t fix a demand problem with more supply. Especially given the likely inelastic nature for air travel demand.
But more flights to Bangor would be good for Matt, so hey, I get it.
Also, please get rid of "Fly American" regulations for government travel.
Tangential: I think that coastal Maine could benefit significantly from a passenger train.
Coastal Maine is a very attractive linear tourist destination. While the natural amenities of the coastal Maine (scenery, ocean, lobsters) are fairly evenly distributed, the southwestern portions are much more heavily utilized than the northeastern "Down East" coast. Past Mount Desert Island coastal Maine feels surprisingly run-down and empty; Washington County has a 19% poverty rate and a population density lower than North Dakota.
This is a consequence of proximity to population centers in the northeastern US and airports in Portland and Boston. Places like Kennebunkport and Boothbay Harbor get plenty of tourists happy to spend money and have many vacation homes that pay property taxes without demanding much in the way of services.
It seems that some kind of train paralleling US Route 1 could help make the downeast Maine coast much more accessible and bring more tourists and perhaps more second home owners or remote workers. Maine isn't that big; a drive from Portland to the Canadian border at Lubec is only ~230 miles. If a train linked to airports at Portland and Bangor, it could be a very viable rental car alternative for many people.
I don't know what construction costs would be like. Outside of MDI coastal Maine doesn't have a lot of up/down, but it does have a lot of ocean inlets.
For context I'm not a Maine native or even an east coaster; I've been to Maine for weddings a couple times in the past year and stayed in Sebago, Ogunquit, Southwest Harbor, Prospect Harbor, and Campobello Island (in New Brunswick adjacent to Lubec, ME).
On Springfield: https://talkingpointsmemo.com/edblog/actual-springfield-ohio-story-is-pretty-different-from-what-youve-heard
Essentially, this immigration influx was planned by the town's own leadership to revitalize the town and arrest its shrinking population and economic base.
We and the Canadians have has multiple chances to do this with each other and Canada of course hates it because it would harm Air Canada’s monopoly position. (Adding Air Canada to our domestic market so we had a “big 5” seems like an easy low stakes step.)
Regarding market concentration, I’m not an economist but I play one on comment boards, so here goes:
When an industry is new, the market is looking for innovation, so you see a lot of competitors trying out different ideas. As the industry matures and the product becomes a standardized commodity, the market puts a higher value on economy of scale and favors fewer, larger companies. We don’t need a dozen competitors doing the exact same thing, just a few to keep each other honest.
I don't see the idea foreign airlines being allowed to fly domestic routes ever happening, once the lobbyists from the airlines and airline workers' unions get their say. The way our political system works, it is nearly always better for politicians to prioritize specific companies (and occasionally their employees) over consumers at large.
It's the same situation with tariffs on Chinese cars.
I’m surprised this article didn’t mention the Alaska-Hawaiian proposed merger! The big thing I start imagining is the new combined airline starting to offer flights from its Asian destinations to mainland US with connections in Anchorage as well as with connections in Honolulu.
Yeah that's going to be awesome. HNL TYO flights operated by American crews sounds like the worst business idea ever, so hopefully that gets abandoned ASAP and Alaska gets into the [continental US] -> Asia ring
American's hub map is missing anything to the northwest of LA, Phoenix, and Chicago, so having Alaska turn its Seattle hub into one offering Asia connections would be a nice addition to the Oneworld map.
While I enjoyed this MattY article, as usual, I found the policy logic to be weaker than usual.
The three largest carriers in the US have profit margins of 4-7%. That means your airfare is overwhelmingly going towards pretty fixed costs like the fleet, jet fuel, crew, airport fees, etc. The fuel alone is 30% of the airfare, and aircraft costs (maintenance, depreciation, etc.) are another 20%.
I don't deny that airlines can improve on their IT, marketing, management, etc. to lower costs, but the upside here seems clearly quite limited. Airlines don't produce aircraft, fuel, or crew-- they have to acquire them at market prices, which are passed onto consumers.
I tried to find extensive data on US air travel costs compared to other countries...
https://www.worldatlas.com/articles/most-expensive-countries-for-airline-travel.html
This was the best I could find. The US isn't in there, but that would indicate we are not among the top-20. For a rich country with high labor costs, that would seem to indicate we're doing alright.
My recollection from having traveled domestically and abroad is that US domestic airfares are similar to generic airfares covering the same distance. Some searching on Google flights just now shows airfares for NYC<->MIA being very similar to LDN<->BER (about half the distance).
Most people in my world that travel internationally a lot will tell you that the US airlines biggest issue is the unions. The desk and cabin crew have union job security and are therefore incrementally more indifferent to the customers than less unionized Asian and Middle Eastern airlines.
So I'd say the upside to consumers of letting foreign carriers is pretty limited. It's hard to see how airfares could decline by more than a few percentage points.
Matt rightly points out that the unions will hate this. I'll add that a big slice of the population that reflexively supports protectionist policy will also hate this. Matt is usually quite politically pragmatic, but he seems to go all idealistic here. Given the limited upside in this case, why spend the political capital here? Matt is usually a lot better than this.
Matt also comes across as naive as to how international trade tends to work in reality. Sure, we could just open up our skis to foreign carriers. Alternatively, we could *offer* other countries reciprocal market access, providing additional foreign opportunities to our domestic carriers. Although it could still be beneficial to act unilaterally (if we ignore the political costs), it seems far, far preferable to at least try for reciprocity, which Matt does not mention.
It's always good to read an article on something I'm knowledgeable about that doesn't make me want to tear my hair out. I worked in airline pricing for most of my career and find the take to be broadly correct. I think it is hard to argue that the airline business isn't competitive, even if there's really only four main competitors, and it's correct that the benefits of doing this would be real but modest as a result.
Air travel is already highly divided between competitive and noncompetitive markets (as defined by pricing analysts rather than economists, who I'm sure use a more coherent definition), where the latter have much much higher fares. Not even per mile higher fares, it's just straight up more expensive to fly between a minor airport and a major one than between two major airports, typically. Because of this, if foreign airlines could fly domestic routes, you'd probably see even bigger drops in fare on flights between top tier major cities, and little/no benefit for most of the small expensive places. Emirates isn't clamoring to enter Colorado Springs - Chicago but they'd definitely want to be in NYC-LA.
DC-Maine example is right that the threat of competition is definitely a lesser concern than actual existing competition. When I was doing revenue management, my advice would've been to milk the market for as much as it's worth in the short term, then if a competitor enters drop the fares at that point or exit entirely and use the planes elsewhere. I'm not sure American Airlines takes quite as aggressive an approach as we sometimes had to at the small airlines I worked for.
What definitely did restrain our fare ambitions in the noncompetitive markets was the threat of government intervention. There were definitely cases where the threat of a competitive subsidy by a state government got us to voluntarily offer (much) lower fares than we would have otherwise. I am not sure that the result was welfare maximizing - usually the result was sold out flights, meaning if you need to go at the last minute for whatever reason, you can't.
Also in the airline business. I think this is mostly right, unsurprisingly. Foreign entrants just won’t do much and won’t want to compete on low load/high jet fuel burn/ endemically expensive small markets. To the minor extent this would create competitive capacity it would be on cross country flights and some high demand/return city pairs which are already high demand for incumbent us airlines and served as such.
This would have marginal effect nationally and no impact on low return rural flying. If someone wants to fly Bangor maine to DC (a very seasonal and low demand market) it could be one of the incumbent low cost carriers.
Rural air travel is tough with carriers upgaugung aircraft, rj jets being fuel burn machines and consumers willing to drive to airports with greater service options etc. As I’ve said to policymakers crudely: living in a rural/small market comes with costs, and one of them is that it’s hard to maintain equal service
Do you think there's any chance foreign airlines might be more willing to use turboprops for low-demand routes? As opposed to the major US carriers, which all got rid of theirs.
And if so, could that be something that could potentially meaningfully lower fares and/or make some routes more economically viable?
Though I suspect you might still have the "Will a foreign airline really want to bother with investing in experimenting on low-demand routes on another continent?" question, whose answer might be no....
My understanding is that is in a US operating context the economics of turboprops is pretty bad. Silver Airways struggles to make it work even though they've got an on paper ideal market connecting Florida and the Bahamas.
Interesting. Do you know why that is?
I have a vague sense that it's somehow labor cost related, but fleet planning isn't my area of expertise so I could be wrong.
Another way to increase airline competition is to move to a system of slot auctions. Auctioning spectrum rights boosted competition and innovation in telecomms, auctioning new airport capacity would do the same for airlines.
See the work of Coase etc.
Are the benefits of this significant enough that we would just open up our domestic market unilaterally, or should we require bilateral agreements?
I.e., does Delta need to be able to fly Paris to Rome before Air France can fly DC to Bangor? Presumably for actual security reasons we might not want Chinese airlines flying too many domestic routes, and they also wouldn’t want our carriers doing their domestic routes either…
Delta can already fly Paris to Rome. Intra-EU flights are not considered cabotage as long as the flight crosses between destinations two EU member states.
Aargh, I have lots of work to do today and I'm a Person Experiencing Westerness, so there are already almost 120 comments, but I have so many thoughts on this because I actually wrote a law journal article years ago that has a major discussion of this subject!
A very quick observation is that I did not see any mention of the 1944 Convention on International Civil Aviation (a.k.a., the "Chicago Convention"), which the US is a signatory of, along with basically all other countries with major commercial airline carriers. Article 7 of the Chicago Convention reads:
“Each contracting State shall have the right to refuse permission to the aircraft of other contracting states to take on in its territory passenger, mail and cargo carried for remuneration or hire and destined for another point within its territory. Each contracting State undertakes not to enter into any arrangements which specifically grant any such privilege on an exclusive basis to any other State or an airline from any other State, and not to obtain any such exclusive privilege from any other State."
It has been argued for decades in the aviation law community that the second sentence of Article 7 means that if a country agrees to allow cabotage for air carriers from one country, it must allow cabotage for ALL countries' air carriers. E.g., if you let British Airways and JAL fly domestic US routes, you also have to allow Air China and Rossiya to fly too, if they otherwise can obtain necessary gates and slots at the relevant airports.
Do you know how EU cabotage works? Or Australia/New Zealand? Presumably they've found some legal path.
Yes, thanks, and generally agreed
Oh that’s an interesting and highly important point!
I think this is just a sneaky guest worker proposal? Wouldn’t most of our pilots and flight attendants eventually be replaced by foreigners from countries with lower labor costs who are here on a C1/D? That’s one of the uncapped visa categories, so supply can expand as needed as LATAM and Qatar or whoever divvy up the US market between them.
Always love more immigration, so that side is appealing. Of course cheaper flights would mean more global warming and overtourism, which I’m less crazy about.
The example of the EU suggests you're correct that this would likely lead to the replacement of American crews with lower cost foreign workers. Ryanair was infamous in the early 2000s for hiring East European pilots for a fraction of the cost of even Irish pilots, which a lot of people claimed contributed to its safety problems. (Whether such a relationship was ever objectively verified, I don't know offhand.)