Long hot summer for advocates of the free market

SUNDAY TIMES (LONDON) September 3, 2000

There is a tide in the affairs of men and right now it is running in favour of re-regulating some key industries.

America's travelers are upset about the performance of the deregulated airline industry, so much so that Rodney Slater, the transportation secretary, has called the carriers, the unions and the Federal Aviation Administration to Washington to urge them to improve performance, presumably to avoid intervention. At the same time soaring electricity prices, primarily in California and, to a lesser extent in New York, have consumers clamoring for government to step in and replace market forces with new regulations.

The flying public has faced a summer of delayed and cancelled flights. All carriers have been affected, but United Airlines is the chief culprit. In June domestic carriers reported 50,000 delayed flights, a 16.5% rise over last year. Almost half United's flights were delayed and 9% were cancelled in May, the month it said it planned to buy US Airways. Angry passengers have been letting their congressmen know what they think of the prospect of United's managers and unions extending their industry grip.

Part of the problem may have been solved when United struck a deal with its pilots, who have been refusing to work overtime. And part will be cured if the weather improves: June had 19 "severe weather" days, against five in 1999. But the big problem – too many flights pressing on too little capacity to handle them – is not susceptible to a quick fix. Since 1990 there has been a 37% rise to 178m in the people boarding planes in America during the summer. And Boeing says that by 2019 the number of aircraft moving people around the world will rise from 13,670 to 31,000. To make matters worse, passengers all seem to want to fly at the same time, creating a rush-hour traffic jam rather like that on the M25.

This private-sector growth has not been matched by growth of the public-sector facilities on which airlines rely. Airports have been prevented from expanding by financial and environmental pressures. At New York's LaGuardia, on a typical Friday afternoon 25 planes are lined up on the runway, waiting as much as two hours to take off, while cramped passengers remain trapped.

When planes do get airborne, the air-traffic-control system often proves inadequate to guide them safely to their destinations in anything like the time shown on the schedules. There is worse: because of the hub-and-spoke system around which the system has developed, many flights feed into airports where passengers change planes to reach their final destinations. Arrive late at a hub, and you miss your connection.

The situation has got so bad that several airlines, notably United, are cutting their schedules rather than antagonise travelers with last-minute cancellations. And some airlines are flying shorter hauls at lower altitudes to clear space for longer-haul flights at higher altitudes, even though low-altitude flying raises consumption of increasingly expensive fuel.

But few are willing to go along with pricing schemes that would move less time-constrained travelers to off-peak flights by charging airlines more for using airports at peak times. And there seems to be little support from either presidential candidate for privatising the air- traffic-control system to increase investment into what is an antiquated system run by a lumbering bureaucracy.

Not everyone suffers from the chaos. Bartenders are thrilled. The Wall Street Journal says that alcohol sales at United's Denver hub rose 21% in June over last year. Some flights are delayed for so long that if William Hague got stranded en route back from his holiday, he would have time to down 14 pints of ale.

Whether the chaos will result in airline re-regulation we cannot know. But we do know soaring electricity prices have called the regulators out of their lairs. In California supplies are so tight and consumer outcries so loud, the state has imposed a price rollback on the recently deregulated industry.

Some analysts blame the almost trebling of prices on California's too-hasty adoption of pricing systems invented in Britain. Others say environmentalists have prevented new power-plant construction. Still others blame existing remnants of the old regulatory regime, including uneconomic pricing of transmission capacity and the insistence that newcomers include a charge to enable incumbent utilities to recover the cost of nuclear plants. And economists are quick to say California's metering system does not permit consumers to know when prices are rising so they can cut usage.

Professor William Hogan, a leading deregulation advocate, concluded from a session with state politicians: "The regulators are in high gear and I hope we make it through the rest of the summer without turning back the clock."

His hopes have already been dashed by the imposition of a price ceiling that will discourage anyone thinking of building new power stations in California. A further return to reliance on regulation may well be in store for California's utilities.

In short, it has not been a good summer for people who think markets should replace regulators. At minimum, deregulation is no longer clearly the wave of the future.