September 2000 Fraser Forum: The "Fatal Conceit" of the Threatened Air Canada Pilots’ Strike
The idea that regulators can protect the interests of consumers was considered dead in the 1980s. Unfortunately for Canadians, like some dormant virus, it has returned alive in 2000, when the federal government decided to use bureaucrats to make sure that Air Canada did not exploit the public.
Friedrich von Hayek called "the fatal conceit" the belief that socialist planners can replace market forces and improve the performance of economies. In a similar fatal conceit, the Competition Bureau believes it can protect the public from the power of a government-created and protected monopoly. Where have Canadian policymakers been during the last 20 years?
First, there is significant evidence that it is virtually impossible to know when a monopoly airline exploits consumers. There is no such thing as the price for flights, which can be watched. Instead, we have a bewildering structure of prices, all subject to certain conditions and evolving all the time. How does the government react if these conditions are made harder for consumers?
Consider the periodic seat sales. The size of the discounts and the myriad conditions are virtually impossible to translate into average prices. How much of a price increase has taken place if the discounted prices are available only on fewer flights than before, or if the discounted sale tickets amount to only 5 percent of all available seats whereas before they covered 20 percent? Or if the use of frequent flyer points is restricted to two rather than 10 seats per flight, and the mix of business and economy class is changed? What is the value of reduced flight frequencies, more stops on long distance travels, less legroom, narrower isles, and older planes?
What is the effect on the price index watched by bureaucrats if the quality of the food service drops, travel agents no longer give advice because Air Canada denies them a commission, the line-up at check-in counters is lengthened, or there are more overbookings and lost luggage?
The airline can introduce each of these negative changes slowly. Like the proverbial frog being killed by a gradually rising water temperature because it will not leap out to save itself, passengers will not notice gradually declining service, and will not complain to the government.
During the heyday of airline regulation it was recognized that consumer interests could not be protected just by monitoring these many dimensions of the cost of flying. Because of this, regulation shifted to a focus on the bottom line. The idea was to give the monopolist great freedom on price, quality, and quantity of services, but insist that they earn only normal profits. Higher fares were allowed only if costs rose. This procedure is wonderfully simple and was believed to ensure the protection of consumers. Or so the argument used to go until it was discovered how regulation raised costs. During the 1970s, flights between Los Angeles and San Francisco were unregulated because they escaped the jurisdiction of the US federal regulators. Flights of equal length between Boston and Washington, DC were regulated and cost twice as much as those in California.
How could this happen when bureaucrats carefully monitored the costs of the interstate flights and airline profits were normal? Research revealed that the regulation encouraged pilots and flight attendants to threaten strikes for higher wages and better working conditions. Those were the days when US pilots were paid $200,000 a year while working only a few days a month. There was virtually no limit to their demands. After all, they had so much stress and responsibility!
Whenever employees demanded improved pay and working conditions, employers went through a song and dance about their inability to meet them. But rather than accept a strike, they eventually settled. And why not? The higher costs led to higher ticket prices sanctioned by the regulators, and airline profits were unaffected.
Costs were also inflated by providing excessive levels of service. In the United States there was competition among regulated airlines. But the competition did not take the form of lower costs. Instead it involved ever fancier and costlier services, like gourmet meals, free drinks, and luxurious waiting lounges. This form of competition raised costs, but those costs were passed on through higher ticket prices. The prices at the time were so high that there were few tourists, and most passengers had their costs paid by their employers. These expense- account flyers welcomed all of the free perks; when deregulation was contemplated, they were among the most vociferous defenders of the status quo.
At one time, attempts to regulate the competition through limits on the lavishness of meals required airlines to serve only sandwiches on certain flights. It is amazing how big a sandwich can be made and how much expensive food can be piled onto one!
One important regulation required airlines to serve small markets, which it was believed would otherwise be without flights. The airlines met this requirement by using planes when they were not needed on profitable runs. That is why small markets had so few daily flights, and the flights left at inconvenient hours.
With high costs and excessive service levels, airline flights were a luxury accessible only to a few rich, or business-expense travellers, and smaller cities were underserved. Deregulation changed all that. The rich can still sit in bigger seats and get fancier meals than those in the back of the plane. But the back of the plane is filled with people who pay low prices and who come from small towns in planes designed to suit their needs. Airline travel has become an item of mass consumption.
Oh, the wonders of competition. And we in Canada are about to lose them all. Pilots for Air Canada have announced that they will strike soon unless they get a better contract. Would the probability of a strike and the size of the demand have been the same if Canadian Airlines were there to transport Air Canada passengers? Not likely. Instead, it is likely that the demand by the pilots is just the first volley in a game which will see other costs rise and be passed on to consumers with the permission of the regulators and the blessing of David Collenette.
Can someone please explain why the Minister of Transport and the Liberal cabinet, so preoccupied with fairness, do not understand these things? It is possible, of course, that there is not a lack of understanding but a lot of cynicism. Nationalists and airline employees will reward the Liberals at the ballot box for creating a monopoly carrier sporting the maple leaf. But consumers will be like the frog in hot water. They will suffer, but not enough to punish their tormentors. That is the kind of political strategy which brings election victories.
Postscript: Just before this issue of Fraser Forum went to press, Air Canada pilots accepted a mediator’s report, so the strike appears to have been avoided. The final settlement almost certainly will bring pilots higher settlements than those enjoyed by any other group of employees in Canada. It is not difficult to figure out who will pay for these higher airline costs. We will all have to brace ourselves for the forthcoming higher airfares and lower service levels.
Herb Grubel (herbg@fraserinstitute.ca) is the David Somerville Chair in Taxation and Finance at The Fraser Institute and Professor Emeritus of Economics at Simon Fraser University. He is also a former Reform Party Finance Critic.
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