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Airlines Are Terrible. Small Cities Are Still Paying Them Millions of Dollars to Stick Around

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For each of the past five years, Wendy Volk, a real estate agent in Cheyenne, Wyo., has raised money from local businesses, philanthropists, and government officials to pay millions to SkyWest, an airline that made $50 million last quarter. The payments are to ensure that the airline will keep running the only commercial flight out of the Cheyenne airport, which is scheduled and sold by SkyWest’s partner, United.

In March of 2018, after Great Lakes Airlines filed for bankruptcy, Cheyenne became one of dozens of small American cities to lose commercial air service—in its case, for the first time in 90 years. The only way to convince an airline to serve the metro area of about 96,000 people, says Volk, a volunteer with the nonprofit Cheyenne Regional Air Focus Team (CRAFT), was to pledge a few million dollars a year, meant to offset any potential losses if the route itself wasn’t making money—which it wasn’t.

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In 2018, CRAFT came to a $2.1 million agreement with SkyWest, a regional airline that operates flights for the big carriers; the parties renegotiate the deal every year and it reached $2.5 million this year.

As the airline industry continues its decades-long consolidation, more cities like Cheyenne are faced with the choice of either losing air service or coming up with these payments, called “minimum revenue guarantees,” so that multibillion-dollar airlines will deign to serve their relatively smaller communities. The trend has grown over the course of the pandemic: in the last year, medium-sized metro areas like Lincoln, Neb.; Pocatello, Utah; and Tulsa, Okla., have used federal COVID-19 relief funds to pay airlines minimum revenue guarantees.

The alternative is bleak; since 2019, 14 airports in the U.S. have lost all scheduled commercial air service, according to the Regional Airline Association, which represents airlines that provide these regional flights. Many other cities have lost connections; the three biggest U.S. airlines—American, Delta, and United—have pulled out of 68 cities combined since April 2020, according to a study from the consulting firm Ailevon Pacific.

Raising money to keep afloat airlines, which don’t have the best reputation these days, may seem irrational on its face, but Volk says the loss is offset by preventing the huge blow to the local economy that would ensue were air service to stop completely. When regions don’t have commercial flights, companies don’t want to locate there, people don’t want to move there, and tourists don’t want to visit, she says. “When we didn’t have reliable air service, people just thought we were the sticks,” she says. “How can you have an airport and not have air service?”

How deregulation destroyed the airline industry

It wasn’t always this way. Until 1978, the airlines were regulated, and a federal agency called the Civil Aeronautics Board dictated where they flew and what they could charge. The U.S. government saw airlines as an essential service, kind of like the post office, and ensured that even small communities were connected to others by air. If airlines lost money on those routes, they’d make it up on more profitable routes between big cities because of the prices set by the government.

But in the late 1970s, neoliberal economists like Cornell’s Alfred Kahn began raising concerns that regulating airlines was stifling competition and increasing prices for consumers. In response, Democrats, led by Sen. Edward Kennedy, pushed for changes in the hope they would bring more affordable air travel to millions of Americans. President Jimmy Carter signed the bill deregulating airlines in 1978, phasing out the Civil Aeronautics Board and allowing airlines to decide where to fly and what to charge. Around the same time, the government also deregulated the trucking industry, intercity buses, and the railroad industry.

Many of the Congresspeople who initially voted for deregulation came to hate the results—West Virginia Senator Robert Byrd said it was one of only two votes he regretted in his career. Some airline experts say that deregulation led to the worst of both worlds: a consolidated industry with few airlines and little regulation. Airlines took a no-holds barred approach to competition, trying to drive each other out of business. There were massive waves of airline bankruptcies in the 1980s, and the industry went through a wave of consolidations and mergers in the 1990s, and then again between 2007 and 2012.

Read More: Business Travel’s Demise Could Have Far-Reaching Consequences

Today, four airlines—American, Delta, United, and Southwest—control 80% of the market and the airline industry is smaller and more concentrated than at any time since 1914, says William McGee, a longtime Consumer Reports editor who is now a senior fellow for aviation and travel at the American Economics Liberties Project. The promise that deregulation would allow new airlines to enter the marketplace and compete has fallen flat too; until 2021, when Breeze Airways started operations, the market had gone 14 years without a new entrant, he says.

“There was a promise that was made with deregulation—that the advent of wide-body, further-range aircraft was making the world smaller and all Americans had a right to it,” he says. “Well, you don’t, right now.”

Just about everyone has felt the effects of deregulation in recent years. Before deregulation, airlines were required to honor each other’s tickets, so people whose flights were canceled on one airline could easily move to another, says McGee. Ticket prices were more predictable, as were air routes, so you could buy a ticket for a few months out and be reasonably sure the airline wasn’t going to change the ticket or go out of business.

Anyone who has had to fly to an out-of-the-way hub to get somewhere else, or on a small prop plane to get to a mid-sized market, can thank deregulation. Airlines developed hub-and-spoke models once they weren’t mandated to fly to and from certain cities. Deregulation also dramatically increased the responsibilities of the Federal Aviation Administration, which has been underfunded and understaffed in recent years, says McGee, as was evidenced by the agency’s recent meltdown leading to thousands of flight cancellations and even more delays.

‘Red states’ have suffered the most

Still, deregulation’s impact on American travelers has not been felt evenly. After deregulation, airlines dropped cities that had once served as hubs and pulled out of routes that were unprofitable. Their actions caused a ripple effect—when airlines left, business moved too, since their workers and executives couldn’t get around the country as easily.

“The states that have been most harmed by deregulation, and the states that have seen the biggest private fare increases on average and the biggest reductions in service, they’re overwhelmingly red states,” McGee says.

You could argue that airlines are no different from any other business, and that they shouldn’t be required to fly to markets where they lose money. But for decades, the U.S. government treated air service like a public good. When it dropped that commitment, it left the fate of small communities to the whims of a free market, says Morgan Ricks, a professor at Vanderbilt Law School. “We decided to let the private sector decide, [and] what the private sector decides is [to] only do the profitable stuff, which is largely on the seaboards.”

Ricks and colleagues recently published a paper arguing that regions of the country were becoming more economically equal between 1930 and 1980, but that the wave of deregulation in transportation—airlines, railroads, interstate trucking—reversed that trend. “Where the rural states start to really fall behind coincides with this moment in the 70s and 80s that we abandoned a set of principles about broad-based access to infrastructure resources,” he says.

Indeed, even before the pandemic, the U.S. was diverging economically; there were big, “superstar” cities like Austin and San Francisco that attracted big companies and high-income workers, and there were small cities and rural areas that were losing residents and businesses. The economic fate of some of the struggling cities can be tied to a decline in airline service.

Memphis, Tenn., for instance, has one of the slowest-growing economies of the top 100 biggest metropolitan areas in the U.S.; its home values are less than half those of its neighbor Nashville and it is losing big companies like ServiceMaster to cities like Atlanta. Perhaps not coincidentally, the Memphis airport has also lost thousands of flights in the last two decades; in 2019, it had 18,342 flights, 73% fewer than in 2003. Delta was a hub for Northwest Airlines, which merged with Delta in 2008, and eventually removed Memphis as a hub.

The connection between jobs and airline service may seem hazy in an era where so many people work remotely and business travel is on the wane. But even if most of their workers don’t travel frequently, companies want to be able to ensure that their employees and products can get to other places easily. Caterpillar moved its headquarters from Peoria, Ill., to Chicago in 2018, for example, saying it wanted to be closer to a “global transportation hub.” Chiquita Brands International moved from Cincinnati to Charlotte because of inadequate air service. The chemicals giant Albemarle moved its headquarters to Charlotte from Baton Rouge for the same reason.

“Air service is one of the most critical economic development tools in the tool chest—without it, companies aren’t going to be able to recruit the work-from-home crowd,” says Jeffrey Hartz, managing director at Mead & Hunt, an air service consulting firm. “Zoom and conference calls are great, but you still need that face-to-face meeting, you still need to get to your factories, and air service is critical.”

As more communities recognize the value of air service, more have started to offer minimum revenue guarantees, like Cheyenne did. Often, Hartz says, the payments are just for a few years, until the city can prove that the route will be profitable for the airline. But other times, the deals may go on in perpetuity.

Of course, he says, even communities that offer airlines money to serve them don’t always get airline service. Because of a pilot shortage (arguably self-inflicted when airlines encouraged pilots to take early retirement and buyouts during the pandemic), sometimes airlines that are offered minimum revenue guarantees don’t take them. That means communities like Cheyenne are going to have to offer up even more money just to be considered.

Can air travel be saved?

“Going forward, all industry forecasts call for further consolidation and continually rising fares and fees, accompanied by declining service on all but the most heavily trafficked routes,” Lina Khan, the current head of the Federal Trade Commission (FTC), wrote a decade ago in a Washington Monthly essay arguing that deregulation was killing the airline system. Khan’s prediction proved right—in the last year alone, airfare prices were up 25%, the biggest jump since the Federal Reserve began tracking the index in 1989. Meanwhile, the amount of money the airlines are making per passenger mile has risen 84% since 2002.

But even now, in a position of power, there’s not much she can do about it. Past calls to re-regulate the airline industry—even when coming from the former CEO of American Airlines—have led nowhere, in part because Congress has become more skeptical of the role of government in the free market in the decades since deregulation.

There are other small fixes that advocates are pursuing: The FTC is now challenging a planned merger of Spirit Airlines and JetBlue under antitrust grounds. McGee, of the Economic Liberties Project, is advocating for new legislation that would eliminate a federal preemption clause in the 1978 Airline Deregulation Act that prevents states from taking action against airlines. Hartz, the consultant, says another solution could be to expand federal funding to help communities woo airlines back.

In the meanwhile, communities like Cheyenne are left pining for the good old days of 50 years ago when they didn’t have to worry that airlines would leave them behind. Cheyenne had 28,467 enplanements in 1990; by 2019, it had roughly half as many.

“We had air service for 90 years, and we took it for granted,” says Volk, a fifth-generation Wyoming business owner. “I didn’t realize how much it is a part of the equation, but you really need it to stay on the map.”

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