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Airline Deregulation

  • In 1978 Congress deregulated the airline industry
  • Deregulation led to more competition, lower fares, business innovation
  • Deregulation also led many airlines to go bankrupt

In late 1984, the Civil Aeronautics Board (CAB) ended its meeting with the playing of "Taps." After 64 years of regulating the country's airlines, this federal agency was closing down for good. The CAB had been created by Congress in 1938 in order to support the emerging airline industry via regulation. Launched primarily in order to carry mail, the airline industry was struggling as a commercial passenger fleet; government regulation was a way to nurture its growth. By overseeing routes, schedules, and fares, the CAB aimed to protect established carriers and their profits while guaranteeing the public safe and reliable air travel.

By the mid 1970s, however, policymakers from across the political spectrum had concluded that this protection was inappropriate. Democrats complained that it artificially inflated airfares beyond the reach of most consumers and Republicans complained that government regulations prohibited the entry of new airlines and discouraged innovation. The result was an uncommon bipartisan support for legislative reform. In 1978, liberal Democrat Ted Kennedy joined conservative Republicans, traditional champions of deregulation, to pass the Airline Deregulation Act that phased out the CAB and deregulated the airlines.

Since that time, the termination of the CAB has become something of a poster child for deregulation—an example of the business benefits of relaxed government intervention. Most dramatically, airfares have fallen significantly, by about 45% in real terms (adjusted for inflation), since 1978. This has saved consumers an estimated $19 billion annually, and triggered what might be called a democratization of air travel.11 Formerly affordable only to the wealthy, air travel has been brought into the financial range of virtually all Americans.

In addition, deregulation enabled literally hundreds of new airlines to enter the market. The "legacy carriers" (American, United, Continental, Northwest, US Air, and Delta), have faced new competition from "LCCs" (low-cost carriers) like Southwest Airlines and JetBlue, leading to even lower rates and more consumer choices.

All of this has been accompanied by innovation within the industry. Perhaps the most significant change among the larger carriers is the introduction of the "hub-and-spoke" model. No longer required by the CAB to maintain direct flights between particular cities, the major airlines have achieved greater efficiency and lower costs by routing more flights through a single hub. For example, Delta routes most of its traffic through Atlanta's Hartsfield-Jackson Airport, and United primarily flies through Chicago's O'Hare Airport.

The benefits of deregulation were most apparent in the 1990s. Although some airlines struggled to compete in the new deregulated market, many succeeded and profits were sustained. As a result, the airlines were offered up as examples of the sorts of consumer benefits and industry innovation that freedom from government regulation would bring.

But since 2000, America's commercial airlines have struggled, leading some to question whether deregulation was such good idea after all. Critics of deregulation point out that more than 150 airlines have filed for bankruptcy since 1978 (a rate ten times higher than the rate within the general business community as a whole). And many of these failed airlines walked away from pension obligations to their retired employees. Moreover, the rate of failure has increased since 2000, when several factors, including a slowing economy, rising fuel costs, and a post-9/11 sag in air travel, combined to drive airline profits into the red. Between 2001 and 2006, the industry lost more than $30 billion dollars and cut more than 100,000 jobs.12

These more sober analysts also point out that passenger rates were falling even before deregulation, and a large part of more recent price decline is due to online ticket purchasing—a service that allows air passengers to bypass the fee-charging travel agent.

The question facing the airline industry today is whether more regulation—or even less of it—would better improve its economic health. Advocates of more regulation argue that the government needs to protect airline employees—their wages and pensions—within this volatile industry, and that service to small cities, dropped by the airlines once they were no longer required to fly there, should be mandated. But supporters of even less regulation argue that the 1978 Airline Deregulation Act was only the first step. They argue that remaining government regulations have prevented the industry from realizing all of the benefits of the 1978 act. For example, both airports and air traffic control are still heavily regulated. Deregulation of these would enable the airlines to expand their infrastructure and introduce more efficient technologies more quickly.

There is a lot riding on the future of the airlines. Americans have become accustomed to air travel; they will no doubt apply pressure on policymakers to ensure that it remains affordable and convenient. For those anxious to deregulate other industries, there will be additional pressures to convince these policymakers that restoring health to the industry lies in furthering the deregulatory process begun 30 years ago.

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