The Plan to Make Post-Pandemic Flying Miserable

How the Department of Transportation Is Beginning to Make Post-Pandemic Flying Miserable.

Hi,

Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to write about how Secretary of Transportation Elaine Chao is starting to restructure air travel with a little noticed change to consumer protection rules. Here are a few of the other nuggets in this issue:

• The five dollar footlong rebellion among Subway franchises reveals market power in the franchise economy.

• A whistleblower from the antitrust division and political interference by Trump

• Corruption at the United States Trade Representative’s Office

• The relationship between corporate research levels and antitrust

• The policy attack on targeted ads

• Tesla, Nikola, or how the stock market is unreal

• Concentration in the market for body cameras and policing equipment

First, some housekeeping. I wrote an essay for the American Compass on how to bring back generic pharmaceutical supply chains. The gist of the argument is that our markets are screwed up by monopoly power. We distribute and sell medicine through an opaque system of kickbacks among various large buying groups. If we just got rid of kickbacks, we’d get real prices again, and then we could structure supply chains more safely.

And now…

Planning for the Unfriendly Skies

Perhaps the hardest hit industry during the pandemic is that of commercial airlines. Though the evidence isn’t clear, being confined in a small metal tube with other passengers for hours at a time seems like the best possible way to spread a disease like the Coronavirus, and travel itself using any medium is much riskier these days. Entire countries like New Zealand and Taiwan, and even states, like Maine, are under self-imposed quarantine, which suggests that without a vaccine, the post-pandemic “normal” for airlines will look very different than what we are used to.

Congress recognized this dynamic in March, when it passed the CARES Act to provide specific financial support to the industry. So far, we don’t really know what the end state will be. Some airlines are getting more aggressive on masking policy. On a financial level, both American Airlines and United are putting up their frequent flyer programs as collateral for more loans, while Alaska Airlines is planning large job cuts. Delta reduced hours and pay, which is likely a violation of CARES Act conditions. Most airlines are also making it much harder to get refunds by changing their ticketing practices to prevent class action lawsuits. Airlines seem to be transitioning to a new post-pandemic normal in ways that prioritize cursory health measures and preserve cash by exploiting customers and workers.

Policymaking is also in flux. The existing consumer protection framework is in chaos, with consumers filing 25,000 complaints in March and April, versus 1,500 in a normal month. There are questions about how to restore flying while the virus is on the loose, as well as what to do with people who had planned to fly but could not. It’s an opportune time for forward-looking policymakers to rethink an industry that is both vital and deeply problematic in terms of its competitive dynamics. In Germany, for instance, policymakers are using aid to restructure the industry. Lufthansa, after a fairly bitter negotiating stance, got government aid conditioned on giving up a few takeoff and landing slots at Munich and Frankfurt airport, which may increase competition.

Clearly, the airline industry is at a big inflection point; the next election will likely have a big impact on what the industry comes to look like. The last major pivot point was deregulation of the airlines in 1978, which was a shift from seeing the airline grid as a public utility to one in which airlines simply operated in a normal market for tradable services. Consumer advocate Ralph Nader was the single most aggressive advocate for eliminating the Civil Aeronautics Board, in favor of deregulation, plus a robust consumer protection and antitrust regime. Since that time, consumer protection and antitrust authority has been held mostly by the Department of Transportation.

Deregulation did not work out as Nader (plus other deregulatory champions like Ted Kennedy, Alfred Kahn, and Stephen Breyer) thought it would. In terms of antitrust and mergers, the story is pretty bleak. There’s a story that prices came down because of deregulation, but this wasn’t really true in aggregate; prices had been coming down since commercial airlines began, because technology keeps getting better. Throughout the 1980s, and continuing through the George W. Bush and Obama administrations, the DOT allowed a continued consolidation of airlines. Today there are just four big ones and a few smaller more regionally focused ones. A significant number of routes are monopolized, and smaller airports have seen fewer flights over time. Under Trump, the DOT has been giving antitrust immunity to foreign airlines engaged in joint ventures to fly into and out of the U.S. There were a bunch of bad mergers and there’s plenty of price gouging, but the root problem was deregulation; the economics of airlines simply don’t lend themselves to robust competition without extensive regulatory intervention.

Unlike antitrust, which was weak under both parties, there is a bit of a partisan split for consumer protection, a legacy of the Nader influence among Democrats. Democratic administrations tend to be slightly more aggressive on things like baggage fees, tarmac delays, ticket price transparency, wheelchair accessibility, and so forth., But it’s important not to overstate the difference. In 2015, the DOT issued just 15 consent orders against airlines, with a little over $2M in fines, this despite 19,000 complaints. The National Consumer’s League’s John Breyault noted the total amount of fines since 2009 amounts to $38.7 million, versus $1.4 billion collected via baggage fees just in the fourth quarter of 2019. Here’s a chart of the fairly sad story.

Despite the generally weak consumer protection record of the DOT, in 2017, Transportation Secretary Elaine Chao decried the overregulation of various industries under her purview. Chao requested a full-scale review of all of the department’s regulations. In response, the main lobbying group for the airlines, Airlines for America, asked the Department of Transportation for a host of rollbacks of existing rules. (I asked both the DOT and Airlines for America for an example of overregulation, they both declined to offer one, though in its original commentary Airlines for America did praise the friendlier regulatory approach the FAA had towards Boeing.)

In 2017, the airline lobby sought to overturn a bunch of consumer protection regulations, which would give airlines the ability to:

• Hide the full price of a ticket at the point of purchase

• Raise the price of a ticket after a consumer has already paid

• Not divulge how often flights are delayed or canceled when selling tickets

• Charge multiple baggage fees for an itinerary

• End the practice of letting consumers cancel within 24 hours of booking a flight

• No longer promptly provide wheelchair assistance to passengers

• Have much longer tarmac delays

• Not have air conditioning or heating during tarmac delays

• Deny giving paper-based explanations of denied boarding compensation

• Pay denied boarding compensation in flight credit instead of money

The airline industry hasn’t gutted these rules as far as I can tell, at least not yet, but it has already achieved several significant victories. In 2016, the Obama administration finally started investigating how airlines block price comparison websites from functioning. After consolidating, airlines around 2011 began refusing to allow online travel agencies like Expedia or Hipmunk to get untrammeled access to ticketing data, in order to prevent consumers from being able to price shop. If you’ve noticed online travel sites get less functional in the last few years, that’s why. Anyway, the Trump DOT shut down this investigation.

The second victory is the DOT has simply refused to put out rules for two regulations Congress mandated, one requiring compensation for late baggage deliveries and another requiring refunds for services customers pay for but airlines don’t deliver.

The third was this significant weakening of the DOT’s ability to regulate air travel in general. One of the key asks of Airlines for America was a request that the DOT stop itself from using its own authority to prohibit unfair and deceptive practices. In the response to Chao’s request for information in 2017, there were thousands of comments, from consumer groups, ordinary people, affected industries, and other stakeholders. Airlines for America was the only entity asking for this change. Nevertheless, for the sole reason that airlines asked for it, the Department of Transportation complied, and in late February, as the pandemic picked up steam, issued a proposed regulation to do that.

Consumer advocates were furious. Kurt Ebenhoch of Travel Fairness Now told me, “Their news release praising them came out within minutes, if not seconds, of DOT’s news release, and DOT cites A4A in their news release and proposal. They have never met an airline ask they didn’t like.” Four Senators, Ed Markey, Maria Cantwell, Richard Blumenthal, and Tammy Baldwin have criticized DOT over the proposal.

So what exactly is DOT trying to do? It seems boring and technical, but that is so often how critical changes happen. DOT is not changing the wording of law, but changing language itself. Specifically, they are shifting what the term “unfair” means in rule-making. According to a court decision in the 1970s, FTC v. Sperry & Hutchinson, unfair as a legal term basically meant what we all think it means, specifically “immoral, unethical, oppressive, or unscrupulous,” or being treated badly in the context of an exploitative power dynamic.

Over the course of several decades, policymakers in various agencies have redefined fairness to mean what economists calculate in a cost/benefit analysis. For example, at the Federal Trade Commission, to claim an action or practice is unfair, you must show that it is substantially harmful, that it’s not avoidable, and that there’s no countervailing benefit elsewhere. In short, unfair means ‘well let’s put that to industry-paid economists.’ But so far, DOT has not adopted that standard for unfairness, and issued a bunch of rules on baggage fees, overbooking, tarmac delays, and so forth, based on the old standard. Chao wants to get rid of the DOT’s ability to issue such consumer protection rules.

Hundreds of people and groups filed comments opposing the DOT’s change, including both Democratic FTC Commissioners. We have experience with what happens when this kind of change happens. This shift happened at the Federal Trade Commission in 1980, and it undermined the FTC’s ability to stop unfair practices. Commissioner Chopra noted that because of this shift of the meaning of the term “unfairness,” the FTC didn’t do much to stop subprime mortgage abuse before the financial crisis. While preferences differ on the overall virtue of such regulatory changes, there is consensus on their consequence. According to law and economics scholar Josh Wright, who support this new definition of unfairness, such a change would likely eliminate two thirds of consumer protection regulations going forward.

I’ve asked what the effect of this new regulation would be on existing consumer protection rules, and no one has given me a straight answer. The DOT didn’t respond, and lobbyists for the airlines politely referred me to DOT. I’ve also tried to find out why they are doing this. What is the specific regulatory overreach here? Again, no answer.

It’s hard to figure out what the point of all this is, except to just give something to airline lobbyists that they are asking for. As I noted earlier, the key officials in charge of overseeing the industry is Secretary of Transportation Elaine Chao, one of the savviest members of the Trump administration. But it’s her general counsel, Stephen Bradbury, is doing most of the work. Bradbury is an impressive corporate lawyer with expertise in both antitrust and national security, and he seems to have a knack for corporate crises. His clients in private practice included American Airlines, Turing Pharmaceuticals (of Martin Shkreli fame), Raytheon, Time Warner and the U.S. Chamber of Commerce. To give you a sense of Bradbury’s ideology and role in private practice, in the 2017 Spring meeting for the powerhouse law firm Dechert, he presented the topic “How to Shut It Down: Creative Strategies that Ended Government Antitrust Investigations.” (Bradbury was on track to get a much higher profile position, but he ran the Office of Legal Counsel during the George W. Bush administration, and there were questions about whether he might be sanctioned legally for memos authorizing torture.) Chao and Bradbury understand the levers of power, and they use those levers to structure industries.

I don’t know where DOT goes from here, whether they’ll kill tarmac delay rules, or just knee-cap the enforcement, or just lie to customers about their rights. Yet one more baggage fee or a lack of wheelchair service may not sound like much. But I sort of feel like as a society, we’re getting more and more frayed and frustrated with the nickel and diming, the endless legal cheating and looting. That said, this proposed rule, even if it goes into force, can be reversed, and maybe it’s useful to highlight the amount of power and authority held by the Department of Transportation. The restructuring of the airline industry will take time, and every election brings forth a new opportunity for different actors to govern. Maybe this pivot point leads to much more misery among airline passengers. Or maybe it’s the moment that policymakers decide to rethink the system from the ground-up, as we really should do.

Subway’s Five Dollar Footlong Rebellion: There are roughly a million franchisees in America, an entire economy that operates under a special set of franchise laws. And the pandemic is bringing forth some real tensions. This week, a controversy arose when Subway put out a new promotion for the five dollar footlong, cutting prices for large sandwiches from $8.95 for a 12-inch sub to $10 for two 12-inch subs. Subway franchisees are very very unhappy, because this arrangement will cause them to lose money as restaurant owners while the parent franchise company profits.

Subway is the largest franchisor in the world, and it makes its money with an 8% royalty, so the more its franchisees sell, the better. There is, however, a twist. The franchisor who owns the brand gets its royalties on revenue, but the franchisee who bears the capital costs survives on profit. A sandwich that sells below cost can actually be good for the overall franchisor if it is a hot seller, but catastrophic for the franchisee that has to eat the losses.

Franchising is one of the hidden areas of American business where market power is abused regularly, mostly by franchisors who own the brand against franchisees who own and operate the restaurants. And this is a great example. Five dollar footlong is effectively a transfer of wealth from independent business people who own the franchises to the corporate guys at headquarters. To put it another way, franchisors run businesses based on other people’s money, aka the capital of the franchise owners themselves. Franchise law is its own special area, and it’s enforced by the Federal Trade Commission. More soon.

More Blows for Trump Antitrust Chief Makan Delrahim? According to this story in Politico, antitrust division staffer John Elias will be testifying on political interference by the White House before the House Judiciary Committee next week. Elias is the chief of staff to Makan Delrahim, Trump’s antitrust chief. There are so many possible areas of corruption and collusion to look into. Wheee!

Meanwhile, Delrahim is trying to broker a sale of assets from T-Mobile to Dish Network after Dish Network chair Charlie Ergen balked at the price. Remember, Delrahim pushed the Sprint-T-Mobile merger through under the premise Ergen would buy these assets and start a fourth competitor. The antitrust enforcers trying to block the merger pointed out that (a) Ergen was a liar and (b) that it made no sense to take four competitors, combine them into three, and then have one of them spin off assets to create a fourth competitor again. The Democratic appointed judge let the merger through anyway, in a “jump the shark” moment for antitrust. Now it turns out that Ergen… lied. And Delrahim is furiously trying to get the deal to happen anyway.

Aren’t you glad we’re paying our chief antitrust enforcer to broker deals among merging parties?

Leaning into Corruption at the US Trade Office: Bloomberg reported this remarkable story about United States Trade Representative Office attorneys negotiating trade agreements on auto rules, while running a side hustle as corporate consultants on trade. I did a bit of digging, this isn’t a Trump scandal. These were civil servants, not political appointees, and the rumor I heard is they apparently had this side business going on for awhile.

Whither Research Labs: A few people have sent me this blog post on the decline of big research labs. It’s a fascinating explanation of why corporate research departments like GE research and Bell Labs were created from the 1900s to the 1920s, and why they have basically fallen apart. There were two causal factors in them collapsing. The first was the end of antitrust. Corporate labs emerged because big corporations were barred from buying competitors by antitrust laws, so they had to invent new stuff to compete. When antitrust law eroded in the 1980s, so did the need for the big labs. In addition, excessively strong intellectual property protections reduced the incentive to invent new things. After all, why spend money building something new when you can get a better return by hiring a patent attorney to sue you competition?

Ending Targeted Ads? Recently I published a paper on ending clickbait culture by reforming Section 230 of the Communications Decency Act, which piggybacks on Dave Dayen’s notion of banning targeted ads. That’s where Josh Hawley is going with his proposal, which will end legal protections for libel claims for anyone who makes money on targeted ads. The bottom line is, if you want to change the behavior of Google, Facebook, or any other corporation, don’t ask them to be nicer, just change how they make money. (If you’re interested in watching an event with me and Congresswoman Jan Schakowsky on internet regulation, the full hour is here.)

An Unreal Stock Market: One of the crazier stock stories is Tesla and Nikola Corporation. Last week, Nikola, an electric truck maker with no revenue, achieved a $30 billion market cap. Elon Musk then mentioned he might focus on trucks, and his stock went up by $16B, as Nikola reversed itself. It’s sort of like Amazon mentioning it might enter a space, hurting competitors without doing anything, except that in this case neither Tesla nor Nikola have a clear strong business line.

Body Camera and Tear Gas Concentration: With new scrutiny of police budgets, it might be useful for municipal officials to take a look at all the concentration in police equipment. Axon has bought up small competitor in body cameras and is aggressive on IP, and the FTC recently sued them for colluding with a competitor Safariland, which also makes tear gas. Meanwhile, Motorola Solutions recently acquired Watchguard, which was the other major player, and it also makes radios and communications equipment. Maybe the police themselves could learn more about white collar crime and save themselves some money.

Thanks for reading. If you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to a book to learn more about the anti-monopoly roots of American society, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. I often hear from people abused by Amazon or Google, but rarely both. Here’s a reader of BIG relaying a fun set of experiences.

Two quick stories about big tech from my personal experience:

I started a business on the side selling goods on Amazon's platform. We worked to grow our business until we were on pace to have gross revenues of a million dollars in a year. That's when something was wrong. We paid Amazon to fulfill for us, but we started getting poor reviews because people were receiving the wrong products. Soon, our ranking plummeted and we struggled to figure out what was happening as we were leading into the heavy season. It took us months to figure out what happened: Amazon had relabeled our products without our knowledge and they had mislabeled half of it randomly. They destroyed our business and refused to do anything about it. Well, that's not completely true: they offered us a refund of six months of the online sellers fee of $30 / month. 

Google: At the business I work at now, we were doing paid search analysis and found that we were getting a lot of "clicks" from our paid search that came to our home page and then "bounced." As we dug further, we found that all of those clicks were coming from just a handful of URLs. As we tallied it up, we had paid Google over $700,000 over the prior 12 months on clicks that were clearly fraudulent. We brought it to their attention and all they said was "trust the algorithm." Our legal team never even considered suing because of the death sentence of being banished from Google as an online business.