April 24, 2019 Columns

Editor’s Column

By William R. Drexel

In this transportation-focused issue, we feature a 100-year anniversary article on the railroad industry and an article comparing the deregulation of the airline and telecommunications industries.

Tim Strafford serves as our conductor for the 100-year journey of railroad regulation. The journey starts with the Populist movement of the late nineteenth century that lead to the Interstate Commerce Act, providing the foundation for much of the regulation of the industries covered by our Section. The initial regulatory focus on safety shifted to labor regulation due to labor unrest affecting the rail industry in the aftermath of World War I. The Interstate Commerce Commission regulatory model provided the template for much of the regulatory administrative state created in the New Deal years.

During the middle of the twentieth century, railroad economic regulation focused principally on maintaining the viability of rail carriers. Rail carriers’ economic challenges that arose despite the booming post-World War II economy eventually lead to deregulation of the rails and replacement of the ICC with the Surface Transportation Board. Deregulation encouraged significant investment in rail infrastructure, thereby increasing productivity and driving reductions in rail prices. Throughout the entire 100-year rail journey, however, safety remained a prominent regulatory concern. Safety issues, such as those involving the deployment of positive train control technology designed to prevent train collisions, likely will continue to provide a key source of railroad regulatory debate in the coming years.

In the other article in this issue, Debra Aron summarizes her extensive analysis of the deregulation of the airline and telecommunications industries. Both industries historically were subjected to extensive economic regulation. Regulation of airlines, however, was principally driven by a perceived need to keep prices high enough to avoid destructive competition. In contrast, telecom was regulated as a perceived natural monopoly to keep prices low to encourage universal connectivity. In the airline industry, constraints on prices led to more service-amenity competition. In telecom, low basic connectivity prices were supported by cross-subsidies from optional, discretionary services.

Airlines were subject to flash-cut deregulation, while telecom has been subject to a gradual and ongoing deregulation. Both forms of deregulation led to results that, in some respects, were predictable yet, in other ways, surprising. Deregulation led to entry by firms in both sectors. New airline competitors predictably shifted service competition to price competition. In telecom, arbitrage opportunities encouraged entry in high-margin services that eroded subsidies for other services. In both sectors, innovative technology was a wild card, injecting new forms of business-model competition into the industries in unpredictable ways.

Dr. Aron concludes the comparison by observing that the flash-cut deregulation of airlines was followed by volatile periods of profits and losses that might have been tempered by more gradual deregulation. However, the gradual deregulation in telecom encouraged greater arbitrage and inefficient capital flows that could have been avoided by a quicker deregulatory approach.

We hope you enjoy this issue. If you have suggested topics for future issues or would like to submit an article for consideration, please contact me at billdrex@yahoo.com. inf

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By William R. Drexel