Airline Deregulation

views updated Jun 27 2018

AIRLINE DEREGULATION

The first airlines began appearing in the United States following World War I (1914–1918). By the 1930s the federal government had granted exclusive rights to domestic airmail routes to four airlines: American Airlines, United Air Lines, Eastern Air Lines, and TransWorld Airlines (TWA). (Also among the first of U.S. airlines, Pan American was granted rights for international mail routes.) Government regulation of airlines began in 1938 when Congress created the Civil Aeronautics Board (CAB) to set fares, select routes, and license new carriers. Meanwhile airline passenger loads escalated from fewer than 6,000 passengers annually in the 1930s to a total of 200 million by the mid-1970s. But discount fares were nonexistent and flying continued to be a luxury. For four decades no new major airlines were licensed and few newly proposed routes approved as the four airlines managed to hold onto their lucrative contracts and routes. Competition was intentionally muted to ensure stability for both airlines and passengers.

By the 1970s high inflation, low national economic growth, escalating fuel costs, and rising labor costs hit the airline industry hard. Deregulation supporters claimed that it was decades of inefficient regulation by the CAB that was taking its toll. The near monopoly held by the five major airlines originally charted in the U.S., they argued, had to end. In October 1978, Congress passed the Airline Deregulation Act. With the intent of promoting competition in the industry, the act gave airlines virtually unlimited freedom to establish new routes and drop existing routes, to merge and form alliances, and to enter or exit the market without CAB approval. The airlines were also free to raise or lower rates as they chose and service standards were eliminated. Only safety regulations remained. On top of this, the deregulation era also created the opening for hard-nosed management to pursue a much more aggressive—some might say union-busting—policy. Some observers pointed to Eastern Airlines' chief executive officer Frank Lorenzo as an example of this trend.

The effects of deregulation of the airline industry were immediately felt as airfares dropped in some cases to record low levels and passenger loads increased. Newly formed no-frills airlines appeared, such as People Express. But with the formation of the Middle East oil cartel in 1979 the price of jet fuel skyrocketed and airline profits dropped. In 1981, struggling under the demands of significantly more daily flights, air traffic controllers went on strike for higher pay and better working conditions. In response President Ronald Reagan (1981–1989) suddenly fired 11,000 controllers and requested that airlines temporarily reduce their number of flights by a third. Fuel prices and the controllers' firing greatly reduced opportunities for new airlines to break into the larger markets.

When new airlines managed to enter the smaller air traffic market, they entered a hostile business climate. The larger companies lowered prices to artificially low levels and drove out competition. Thus increased competition—the goal that convinced Congress to deregulate—was thwarted by such monopolistic pricing strategies. Charges of unfair business practices escalated. Some airlines went heavily into debt and teetered on the edge of financial disaster. Fears rose concerning air safety being compromised as airlines sought to cut expenses by skimping on maintenance costs and hiring less experienced pilots. In 1990 Eastern Airlines was indicted for poor and dishonest aircraft maintenance practices. The following year the company went out of business.

Deregulation continued to transform the industry: nonstop flights from coast to coast were no longer as profitable. Instead, the major airlines established "hubs," or central points, at certain cities—United in Chicago, American in Dallas-Ft. Worth, Northwest in Minneapolis-St. Paul, and Delta in Atlanta. By 1992 twelve major hubs existed; competition was dampened further because at these localities the dominant carrier greatly influenced flight choices for transferring passengers. Approximately 80 percent of transferring passengers rode the same airline for their entire journey. One strategy of larger airlines was to set ticket prices for flights out of smaller airports at rates as much as 20 percent lower than at hubs. Such fare discounts tended to drive out new start–up carriers; later prices would often rise to hub–level fares once competition was removed.

Deregulation also spurred computerization of reservations and "frequent–flier" programs. Because of anti–trust concerns, the government required each airline to create its own reservation system rather than a single, shared system. This requirement further reduced competition by limiting the access of information to passenger and booking agents. The major airlines also introduced "frequent flier" offers to attract and maintain customers. Such programs gave large, broadly–based airlines the opportunity to offer loyal customers bonus rides for flying a single airline extensively. Sometimes, such practices significantly reduced airline revenues and often eliminated competition (which also drove up fares).

Between 1989 and 1992 industry instability peaked as some large carriers (notably Pan American) ceased operations; a number of mergers took place as well. Airline earnings fluctuated wildly. Some airlines, such as Continental and TWA, reorganized under bankruptcy. Still others, including Northwest, received cash infusions from foreign airlines. In some cases, unions helped companies avoid financial disaster by accepting wage reductions in return for part ownership of the airline. At one carrier, United Airlines, employees gained majority control in return for major pay and benefits cuts. Stability returned in 1993 when new airlines began to appear that did not attempt to compete with the major airlines and their hub systems.

By the end of the twentieth century, debate still raged over the impact of deregulation on airline competition, service, profitability, and safety. Some smaller commuter airlines serving hubs, often in a restrictive alliance with a major airline, proved they could survive in the deregulation era, but mid-level carriers were largely uncompetitive with the big airlines. Smaller communities suffered economically from declining air service and increasing prices due to the anti–competitive strategies of the large carriers who, for their part, often found it unprofitable to compete in these communities. Business fares for all routes significantly increased through the 1990s. Some degree of new regulation for the industry and subsidies for smaller carriers was sought by deregulation critics to stimulate competitive pricing, guarantee safety, and better serve a broader range of communities.

See also: Air Traffic Controllers Strike, Airline Industry

Airline Deregulation Act

views updated May 21 2018

AIRLINE DEREGULATION ACT

AIRLINE DEREGULATION ACT (1978). For forty years, the domestic commercial airline industry was extensively regulated by the Civil Aeronautics Board (CAB). Among other things, the CAB governed which airlines could serve which routes, determined which airlines were certified to enter the market, and restricted mergers among airline companies. In addition, the CAB set the fare structure for the industry: it established rates that tended to subsidize low-cost fares on shorter flights by imposing above-cost fares on longer flights.

Believing that such strict regulation made the industry inefficient and inhibited its growth, Congress in 1978 adopted the Airline Deregulation Act. Championed by Congressional Democrats and signed into law by President Jimmy Carter, the Act represented a fundamental shift away from regulation and toward an air transportation system that relied on competitive market forces to determine the quality, variety, and price of air services. Congress, in the words of the statute, determined that "maximum reliance on competitive market forces" would best further "efficiency, innovation, and low prices" as well as "variety[and] quality… of air transportation services." The Act phased out the regulatory power of the CAB, eliminating the agency in 1984. The Act did not, however, change the government's role in overseeing and regulating air safety through the Federal Aviation Administration.

Deregulation had a number of effects. In most markets, fares per passenger mile fell. The key factor contributing to the lower fares was the increased competition brought about by the entry of low-fare airlines into popular markets. In some markets, however, where there was less competition, fares rose above where they had been under the rate structure established by the CAB. Owing to the generally lower prices, air travel increased. In 1978, approximately 250 million passengers traveled by air. About 600 million people traveled by air in 1997.

Another of the more lasting changes was the greater use of airline "hubs,"—major airports where many of an airline's flights originate or terminate—by airline companies. The hub system emphasizes greater frequency of service by smaller aircraft and reduces the number of cities directly connected by any single carrier. This system virtually eliminates the need for wide-body aircraft in domestic air travel. Another effect of deregulation was the transfer of shorter routes from major carriers to smaller, regional airline companies. In the twenty years following the passage of the Act, regional and commuter passenger traffic grew at almost twice the rate of larger air carriers.