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America Subsidizes the Air

Why is it that the deregulation of U.S. air traffic turned out quite differently from the policymakers’ intention?

June 16, 2000

Why is it that the deregulation of U.S. air traffic turned out quite differently from the policymakers' intention?

Now, with the planned merger between U.S. Airways and United Airlines — the latter is already the world’s largest carrier — the policymakers are starting to wonder what went wrong.

In a recent hearing in the U.S. Senate, Senator Patrick Leahy asked the CEO of U.S. Airways why it was possible to fly from Washington, D.C., to London for $419 — while a much shorter hop from Washington to Sen. Leahy’s home state of Vermont cost $735. This is no freak case: it is generally far cheaper to fly to European destinations than to travel within the United States.

In fact, this spring, both U.S. Airways and Delta Airlines were charging almost identical fares for travel between Washington and New York, Los Angeles and Paris.

To fly from Washington to Los Angeles and back, the advance fares were topping $2,000 — just to fly about 4,600 miles roundtrip. For that handsome price, the traveler might expect the airline to send a limousine to the office (a gag Virgin Airlines has actually used) and to throw in a feast of champagne and caviar.

Are we talking about a choice between great catering or great prices? No such luck. The Washington-Los Angeles fare was for a no-frills economy class ticket, booked two weeks ahead. On a per-mile basis, this is equal to 44 cents per mile. Still, that sounds like a bargain compared to our Washington-New York ticket.

Economists reading this article may be fidgeting a little by now. They might argue that the price differentials are perfectly reasonable, given market factors such as fixed costs, price discrimination and the optimal strategy for filling airline seats to maximize profits.

They have a point, but it isn’t convincing. For proof, try booking a flight across America. Assume you want to depart tomorrow. Regardless of destination, the price will be close to or well above $1,000.

Now try booking a transatlantic flight. It seems too good to be true, but the same airlines that would have charged charge you an arm and a leg to fly from Washington, D.C., to Los Angeles now quote fares of $398 for a round-trip ticket to Paris. Based on the per-mile cost of the Washington-New York leg, the transatlantic price should be a gargantuan $7,621.

Why, then, are U.S. airlines making it comparatively inexpensive for Americans to vacation abroad? We offer the following novel explanation for airline pricing.

U.S. airlines obviously wish to share the benefits of the booming U.S. economy with the rest of the world. Thus they are imposing high premiums on their domestic customers, using the proceeds to subsidize international fares. In this way, America can send its vacationers abroad to boost tourism revenues in Europe.

Don’t let anyone say that America — or at least its airlines — has no heart.