Private transportation: no operations subsidy, but at what cost?

Northwest Airlines, now owned by Delta, from Cliff1066.

On this blog I've tried to draw attention to the expectations and perceptions we have of different forms of transportation, and in particular the lack of scrutiny that airline subsidies get relative to that of train services. They each receive billions of local and federal dollars for infrastructure and for operations (TSA and air traffic control for air, basically all rail employees); airlines are privately owned though, and passenger rail is not, so it gets more negative press when it loses money. But while we may spend less on per-mile subsidies for air travel, we're finding more and more that private transportation has its own costs: steadily decreasing quality in the form of higher fares and more fees, less comfort, and fewer options.

A recent Brookings report highlights Delta Airlines' recent elimination of hub services in Memphis as emblematic of the trend toward consolidation of both airport hub designations and airlines themselves: customers are being left with fewer departure options, their airline choices are increasingly limited, and the flights they do manage to get are nearer full-capacity. Shortly thereafter, another article, by David King and David Levinson at Streets.MN, thoroughly explored the benefits and drawbacks of private networks, like broadband services, and public ones, like the US interstate system.

I include a summary of both because this quote from the latter article unwittingly explains the problems discussed in the Brookings report (emphasis mine):

Generally speaking, the public will over-invest in network size relative to the social optimum and the private sector will under-invest relative to optimum, though it gets very complicated.

Much like the US highway system, we can think of the various connections between airports and hubs as a network, and it's clear that the private airline sector, as it retrenches, is under-investing relative to the social optimum. The purpose of private businesses is not to strive for the social optimum, of course. Its purpose is to make a profit. This is why you see more and more fees, fewer flights with center seats unoccupied, and more concentrated hub services. The airline industry needs to make a profit to continue to exist, and its had a pretty rough time of it over the years:

 Red line is airline profits before tax, blue line is profits after tax

Red line is airline profits before tax, blue line is profits after tax

In virtually every way--cost, convenience, comfort--air travel has gotten worse over the past decade, even without consideration for the burdensome security regulations imposed upon them in the wake of the September 11th terrorist attacks. But without those changes, without the baggage fees, the full planes, the discontinued routes, airlines simply couldn't afford to operate. It couldn't be any other way than this. Airlines had over-invested in their network, and now we're seeing them pull back. We as taxpayers haven't had to absorb the financial losses of the past decade, but we've paid in poorer quality of service by nearly every metric.

Whether that's a fair price to pay is up for debate. For my part, I feel no particular urge to change it, and it would probably be an insurmountable task even if it were desirable. This is the new normal. Next time you're unhappy with the quality of your flight, it might help to remember that back when flights were more enjoyable the airline was probably losing money on it.

As I've stated in previous posts, I'm not interested in bashing on airlines. I think they're fine, for what they're here to do. What I'm mostly interested in is a recognition of the fantasy-land of aviation we've been living in, where for the past 30 years the industry's average profit margins have been just 1%. We've been flying around at basically zero markup--private businesses don't like that. As the profit margins of North American airlines increase over the next few years (they're around 4% now), we're likely to get a more realistic view of what real private transportation networks look like, and then we can look at things like propositions for privatization of Amtrak's Northeast Corridor from a much more informed, realistic perspective.