Airline Regulation

Does it Help Consumers?

My Background �  Eleven years as CEO of Spirit Airlines

�  Six Years at US Airways

�  Three Years at TACA

�  Three Years at Continental

�  Early Years at American, Northwest, and UPS

�  Syracuse University ’84 and Princeton ’86

�  Grew up in Rome, NY

I Thought the Industry Was Deregulated?

1903 – Flying Begins!

From the Wright Brothers until 1978, airline travel in the US was regulated. The Civil Aeronautics Board had to approve routes flown and prices charged.

The Civil Aeronautics Board �  Began in 1938

�  Regulated Many Aspects of Commercial Air Travel

�  Want to fly from Washington to Boston? :

- The CAB would say yes or no (years later maybe)

- The CAB would regulate your prices

- The CAB mandated specific service parameters

In the Mid 1970s….

Southwest Airlines was a little airline in Texas that flew only within the state

Pacific Southwest Airlines (unrelated) was a little airline in California that flew only within the state

1978 Airline Deregulation Act

•  Cornell Economist Alfred Kahn Made the Academic Case

•  Southwest and PSA used as “models”

•  Democrats Crafted the Legislation

•  President Jimmy Carter Signed into Law

•  Transformed the Industry in Many Ways

1978 Airline Deregulation Act

•  Cornell Economist Alfred Kahn Made the Academic Case

•  Southwest and PSA used as “models”

•  Democrats Crafted the Legislation

•  President Jimmy Carter Signed into Law

•  Transformed the Industry in Many Ways

•  The law also closed the CAB! How many other government agencies have been closed?!

While the CAB Went Away, Three Large Agencies Still Regulate Many Aspects of Air Travel

FAA

From Wheels up to Wheels Down

While the CAB Went Away, Three Large Agencies Still Regulate Many Aspects of Air Travel

FAA DOT

From Wheels up to Wheels Down

Slots, International, Consumer Rights

While the CAB Went Away, Three Large Agencies Still Regulate Many Aspects of Air Travel

FAA

Homeland Security

DOT

From Wheels up to Wheels Down

Airports

Slots, International, Consumer Rights

While the CAB Went Away, Three Large Agencies Still Regulate Many Aspects of Daily Air Travel

FAA

DOJ Homeland Security

DOT

From Wheels up to Wheels Down

Anti-trust and Mergers Airports

Slots, International, Consumer Rights

Exercise: Why “On-Time” is not “Reliable”

Option Fist: Every flight is exactly 15 minutes late

Option Five: 10% of flights are late, but are late by four (4) hours each

Which Airline Would You Likely Choose to Fly?

Why “On-Time” is not “Reliable”

Option 1: Every flight is exactly 15 minutes late

DOT says this airline is 0% On-Time! Option 2: 10% of flights are late, but are late by four (4) hours each

DOT says this airline is 90% On-Time! Which Airline Would You Likely Choose to Fly?

Case One:

The “Full Fare Rule”

Full Fare Rule (DOT, 2008)

�  Created Because of Frustration by the Growth of Fees for Baggage, Seat Assignments, and More

�  DOT Wanted to Make Prices Seem “More Realistic”

�  1978 Act Removed all Pricing Authority, However

�  Using “Unfair and Deceptive” Standard, Mandated that Advertised Airline Prices Include all Government Imposed Taxes �  Just like Gasoline, but almost nothing else

Full Fare Rule Effect

�  Airlines Claimed That Increase in Advertised Prices Would Drive Away Demand

�  DOT Agreed But Stated That Consumer Benefits Outweighed This Cost

�  Drexel University Study in 2012 Showed That Airline Demand Dropped Over 5% As a Result

�  Regulation Never Addressed Initial Frustration, as Ancillary Fees Continue to Grow and Are Still Excluded

Another Way to Think of the “Full Fare Rule”

According to the DOT:

$100 is More Transparent Than

$80 Ticket + $20 Tax

Case Two:

The “Tarmac Delay Rule”

Tarmac Delay Rule (DOT, 2010)

�  On Valentine’s Day 2007, a JetBlue Flight Stayed on the Ramp Waiting to Take Off for Over Eight Hours

�  Passengers Complained of No Food, Communication, and Bathroom Issues

�  DOT Reacted With the Tarmac Delay Rule in 2010: �  Airlines must return to the gate

within three hours �  If not, Airlines are charged

$27,500 per passenger!

Tarmac Delay Rule Effect

�  Airlines Created Procedures to “Pre Cancel” Flights That Could Be in a Long Delay Situation �  This had another positive effect in that flights cancelled

before departure time don’t count in the DOT reliability statistics

�  Study by Dartmouth in 2015 Showed That For Every Minute of Ramp Delay Customers Saved by This Rule, It Cost Them Three Minutes in Other Delays

Tarmac Delay Rule Modification

�  In 2016, the Rule Was Amended Based on Recommendations from the Dartmouth Study: �  Captain must now have initiated procedures within three

hours rather than be back at the gate

�  Airline Cancellations are Still at Historical Highs Because of the Punitive Penalty

Case Three:

“Pilot Time and Duty Limitations” Rule (Also Known as “FAR 117”)

and

“1500 Hour Rule”

FAA Regulation Background

�  On Feb 12, 2009, a Colgan Air Flight Crashed Just Outside of Buffalo, NY �  All 49 people onboard died and the plane struck a

residence, killing one person inside

�  Families of Those Killed Organized Themselves and Called Themselves the “Colgan Families” �  Appear (to this day) at every Congressional hearing on

aviation and appropriations �  Very effective and influential lobbyists with a strong

emotional conviction

FAR 117 (FAA, 2010) Detail

�  Bowing to Pressure, FAA Implemented “FAR 117” �  Changed times pilots could fly and rest needed �  Required airlines to hire roughly 10% more pilots to fly

their same schedule

�  Pilot Unions Strongly Supported �  Increased pilot jobs and union dues

1500 Hour Rule (FAA, 2010) Detail �  Regional Airlines Used to Hire Pilots with 250 Hours of “Pilot

in Command” Time �  Normally not made captain until 3,000 hours or more

�  1500 Hour Rule Made 1500 Hours the Minimum Time Needed Before Legal to Fly Right Seat for Regional Airlines

�  Two Laws Created “Double Whammy” For Regional Industry

�  As FAR 117 created pilot shortage, regional airlines found it much harder to find pilots with 1500 Hour rule

�  Some filed for bankruptcy protection

1500 Hour Rule Is Less Safe

•  Before Rule: •  Pilots hired with as little as 250 hours •  Hours 251- 1500 earned flying next to an experienced captain •  Hours 251-1500 earned flying in commercial aircraft and into major

airports in the US •  Hours 251-1500 all very relevant experience for the job they would

someday take over (captain)

•  After Rule: •  Hours 251-1500 must be earned doing something else •  Typically this is towing banners, carrying skydivers, or training 16-

year olds to fly very small airplanes •  When they now get hired by the Regional airline, they are no

further ahead than they were at 250 hours and likely have learned some bad habits

•  Significantly further in debt, too

Sad Truth About This Regulation

�  The National Transportation Safety Board (NTSB) Determined the Cause of the Colgan Crash to Be Fatigued Pilots �  But not fatigued because they had been flying many hours �  Fatigued because they lived on the West Coast, flew overnight,

and slept a few hours on a pool table

�  FAR 117 and 1500 Hour Rule Addressed NONE of the Reasons for the Colgan Crash per the NTSB �  Captain had 3,000 hours, First Officer had 2,000 hours �  This was their first scheduled flight of their trip and it was 45

minutes long

What is the Value of a Life?

One More Questionable Outcome

�  FAA Determined the Value of a Life to be $9.6M

�  FAR 117 Was Applied to Passenger Airlines but NOT to Freight Airlines like FedEx and UPS �  In doing their “cost/benefit” analysis, they couldn’t justify

the rule change for Freight because they couldn’t kill enough people

Case Four:

The “Small UAS Rule” (FAR Part 107)

Unmanned Aerial Systems (UAS)

�  A Small UAS is Defined As: �  Weighing under 55 pounds �  Flying under 400 feet above ground

�  Commercial Applications are Numerous �  Scanning crops �  Delivering pizzas and more �  Real Estate visuals �  Mapping and surveying �  Inspecting off-shore and remote locations �  Many more likely

Small UAS Rule (FAA, 2016)

�  Faced With High Demand, the FAA Passed the Small UAS Rule in 2016

�  Having Little Understanding of the Technology and No Agreement From Stakeholders, Defaulted to The Only Known Method for “See and Avoid”: �  “Visual line-of-sight (VLOS) only; the unmanned aircraft

must remain within VLOS of the remote pilot in command and the person manipulating the flight controls of the small UAS”

Small UAS Rule Effect

�  This Incredibly Limiting Rule Has Ground to a Halt Most Innovation and Growth in This Exciting Space �  The VLOS limitation fails to recognize that cameras and

sensing technology is significantly more accurate than human eyes

�  Thankfully, the FAA Has Been Generous in Offering Waivers to Those Who Present Plans to Safely Run “Beyond Visual Line of Sight” Operations

Summary: Regulation Realities

�  Aviation Regulation Is Almost Always Reactive �  An event happens, years go by, regulation is passed

Summary: Regulation Realities

�  Aviation Regulation Is Almost Always Reactive �  An event happens, years go by, regulation is passed

�  Regulation is a Blunt Instrument �  Often tries to address broad issues �  Often results in many unintended consequences

Summary: Regulation Realities

�  Aviation Regulation Is Almost Always Reactive �  An event happens, years go by, regulation is passed

�  Regulation is a Blunt Instrument �  Often tries to address broad issues �  Often results in many unintended consequences

�  Regulations Cannot be Calibrated Quickly �  Changes typically take many years or never happen

Summary: Regulation Realities

�  Aviation Regulation Is Almost Always Reactive �  An event happens, years go by, regulation is passed

�  Regulation is a Blunt Instrument �  Often tries to address broad issues �  Often results in many unintended consequences

�  Regulations Cannot be Calibrated Quickly �  Changes typically take many years or never happen

�  Regulations Often Justified With Arcane Economic Principles That Do Not Align With Common Sense

Questions?