In the '50s and '60s, when I was growing up, air travel was a luxury. People dressed up as if going to church. There were lots of empty seats, so on night flights you could often get a row of three together and sprawl out. There was ample legroom, and full meals were served in coach.
My family and I were able to take vacations by plane only because my dad worked for an airline, and we flew on company passes when space was available. Since planes were typically only half full, we nearly always got seats on our chosen flights. But we were some of the lucky few.
Flying was a luxury because it was expensive, and it was expensive largely because of detailed federal economic regulations governing how air carriers could operate and, importantly, what they could charge. The government treated airlines as a kind of public utility and regulated them under the rationale that dog-eat-dog competition would threaten profitability and lead to skimping on safety.
Back then, the Civil Aeronautics Board (CAB) allowed only one or two airlines to serve a given route. It also unilaterally set airfare rates, seeking to keep them high enough for the airlines to stay safely in business. No price competition was allowed, which meant no incentive for carriers to seek out greater efficiencies and pass the savings to consumers. Economists described the situation as a government-sponsored airline cartel.
The result was a huge amount of waste—and a mode of travel that was out of reach for millions of people. In 1977, the year before deregulation, only a quarter of adult Americans took a trip by air, compared with nearly half in 2017. And only 63 percent had ever flown in 1977, compared with 88 percent today.
The Airline Deregulation Act of 1978 laid the groundwork for all these restrictions to be swept away. If you've set foot on a commercial airplane in the last four decades, you probably have that law—and the many people who pushed for it—to thank.
A Bonanza for Passengers
My very first Reason article, in 1969, argued that airlines should be allowed to fly wherever they wanted and charge whatever prices they thought sensible. My dad, then a facilities engineer at Eastern Airlines, read the article, laughed, and told me that would never happen.
Nine years later, the impossible did happen. Congress moved to phase out price and entry controls and set a date—January 1, 1985—for the CAB to disband, which it did, on schedule.
Airline deregulation had many fathers. As early as the mid-1960s, economists were studying airline markets within California and Texas—since the flights didn't cross state lines, they were not subject to the same regulations—and finding that competition led to more affordable prices.
That work came to the attention of a Harvard law professor knowledgeable about regulatory policy, Stephen Breyer, who joined the staff of a congressional committee headed by Sen. Ted Kennedy (D–Mass.) in 1974. At the time, the CAB was under media scrutiny for imposing a moratorium on new airline routes, and Breyer urged Kennedy to hold hearings. They happened in 1975, helping to win support for deregulation from a diverse set of players including Ralph Nader, Common Cause, the National Association of Manufacturers, and the National Federation of Independent Businesses.
United Airlines played a uniquely important role. After repeatedly being denied access to new routes by the CAB, it broke with the other major carriers and refused to support the status quo. The company pushed for reform starting in 1974, which prevented the airline trade association from choosing sides, since its policy was to take positions on policy issues only if all member airlines agreed.
Breyer—who would later be appointed to the Supreme Court—related the whole story of how airline deregulation came about as a chapter in Instead of Regulation, a 1982 book I edited for Reason Foundation, the nonprofit that publishes this magazine. As he noted there, the 1978 law "did not mark any new beginning for the airline industry. Rather, it legitimated and extended the reform process that had begun in 1975."
President Gerald Ford's CAB chairman, John Robson, had begun allowing a degree of price competition and relaxed some other rigid rules. Jimmy Carter went further, openly advocating airline regulatory reform during his successful 1976 campaign for the presidency. He then appointed as CAB chairman economist Alfred Kahn, who expanded Robson's reforms by allowing even more price competition, including the "super-saver" fares introduced by American and widely emulated by other carriers. Kahn also exempted cargo airlines from CAB price and entry regulations.
Meanwhile, in Congress, Kennedy joined forces with Sen. Howard Cannon (D–Nev.) to sponsor the Airline Deregulation Act. As Peter Samuel reported in Reason in 1989, the sunset provision that eliminated the CAB was actually added to the bill by Rep. Elliott Levitas (R–Ga.), an opponent of reform. It was intended as a poison pill.
Levitas' provision was never debated. Fortunately, it was never deleted, either. As Samuel noted, this was "the first time in the history of federal regulation that a major agency was simply abolished by law."
The initial results of deregulation were dramatic. Some existing airlines, like Braniff, expanded recklessly and ended up in bankruptcy. Others, like Eastern and Pan American, struggled to adjust to the newly freed market, lost money for years, and ended up in bankruptcy, too.
Those that survived—including American, Delta, and United—did so by developing innovations such as the hub-and-spoke route system. (Instead of serving all cities directly, flights from smaller cities converge on large "hub" airports, where passengers can connect to numerous other destinations. This model allows an airline to serve far more locations with a given number of planes.) A few companies, like Southwest, focused on no-frills service with style. To build customer loyalty, nearly all airlines adopted frequent-flyer programs.
As legacy names such as Pan American and TWA met their demise, a new generation of startups, such as JetBlue and Virgin America, emerged. These prospered by combining competitive pricing with in-flight amenities, such as JetBlue's TV in every seat back. More recently, America has witnessed the birth of ultra-low-cost airlines such as Allegiant, Frontier, and Spirit, whose economical fares make flying an option for even the most budget-conscious travelers.
These developments have been a bonanza for regular Americans. As air travel was democratized, passenger numbers soared. Commercial airlines carried 317 million domestic passengers in 1979. That figure had doubled to 636 million by 1999. Despite a decrease following the 9/11 attacks, growth soon resumed, reaching a new high of 704 million in 2009. Last year saw a total of 849 million passengers—nearly three times the number in 1979.
Since deregulation, commercial flight prices have followed an ongoing downward trend. In 1995, economists Steve Morrison of Northeastern University and Clifford Winston of the Brookings Institution built a model to determine what fares would have been if the CAB's pricing structure had remained intact. They found that deregulation had reduced fares by 20–30 percent in real terms.
And these benefits continue to accrue. In 1979, the first year of deregulation, the average domestic fare was $616 (in 2016 dollars), or 1.2 percent of average household income that year. The most recent comparable data I can find is for 2016, when the average fare was $344—a mere 0.6 percent of average household income.
Safer Than Ever
Despite the apparent success of airline deregulation, critics have persisted.
Initially, the worry was that an unleashed profit motive would lead to more accidents and deaths. John Nance's Blind Trust (1986) was a case in point. "The passenger was not told by Congress or the proponents of deregulation the ultimate truth about the enticing free-market proposal," asserted Nance, a former Braniff pilot. "If prices are cut, costs must be cut, and something more than executive salaries and union contracts will have to give. The cost of safety would be one of those affected items." When this did not actually happen, William J. McKee's Attention All Passengers (2012) argued that the trend of airlines contracting out maintenance and overhaul work posed major safety risks.
Had the critics been right, the results would surely have shown up by now in accident and fatality numbers. Yet these have all trended steadily downward. Fatalities per million miles flown is the most commonly cited airline safety statistic, but it's also somewhat misleading, since long-haul flights in large planes are safer than short flights in smaller planes. A more stringent measure is fatal accidents per million departures, which better accounts for the 49 percent of flights operated by smaller regional airlines.
According to figures from the National Transportation Safety Board, there were 2.1 fatal accidents per million departures in the 1950s, which decreased to 0.88 per million in the 1970s. During the first decade of deregulation, the 1980s, the rate fell by half to 0.46, and we've averaged just 0.12 in the 2000s. Even more impressive, from 2010 through 2017 there were zero fatal accidents in the United States on U.S. scheduled airlines.
Airline deregulation has been a bonanza for regular Americans. In 1979, the average inflation-adjusted domestic fare was $616. By 2016, it had dropped to $344.
Rather than analyzing the actual safety record, critics like McKee have mostly repeated labor union talking points. His real complaint is that deregulation has supposedly decimated airline employment, thanks to the outsourcing of various tasks. But that's also far from the truth. In 1978, on the verge of the Airline Deregulation Act, employment in the industry was 313,000. By 2000, after more than two decades of deregulation, it had climbed to 547,000.
Higher fuel prices and a drop-off in passengers after the 9/11 attacks did trigger cuts in airline employment as most airlines lost money. But they have now recovered, and employment has rebounded to 422,800 in 2017—35 percent higher than at the dawn of deregulation.
More Competitive Than Ever, Too!
Still, the critics of today's relatively free market in air travel keep raising new concerns and proposing re-regulation as the solution. The focus is increasingly on the mergers that have reshaped the industry in the past decade: Southwest acquired AirTran, Delta acquired Northwest, United acquired Continental, and American merged with U.S. Airways.
The resulting "big four" concentrated on expanding their route networks, which led to significant passenger growth at large and medium airports but very little growth (and in some cases declines) at small airports.
Whereas early opponents of reform thought competition was the enemy, modern critics think government is needed to keep the market humming. They allege that the post-merger configuration created a new cartel—a shared monopoly—that disadvantages passengers via fewer airline choices and higher fares. But if this were true, we should be noticing two things: rising airfares and fewer airlines serving certain routes. Instead, the data reveal exactly the opposite.
In a study commissioned by the commercial airline trade association Airlines for America, economists Daniel Kasper and Darin Lee of CompassLexicon, a consulting firm, found that ticket prices are at or near historical lows. They also found that competition among airlines flying between a large array of U.S. cities has increased since 2000.
While the "big four" carriers control most of the market, smaller airlines are growing far faster in terms of available seat-miles (ASMs). American, Delta, and United saw annual ASM growth of just 3 percent in 2016. By contrast, the figure was 53 percent for JetBlue, 65 percent for Alaska/Virgin, and 111 percent for Allegiant, Frontier, and Spirit.
In 2017, researchers at the University of Virginia Darden School of Business looked into the so-called "Southwest effect"—the historical phenomenon that when Southwest Airlines joins a market, fares across carriers decline significantly. They examined 109 daily nonstop markets that Southwest entered between 2012 and 2015—after the wave of big-airline mergers—and found that prices decreased by 15 percent on average. The amount of traffic, meanwhile, increased by 28 percent on average. Even though Southwest has become one of the industry's biggest airlines, and despite the fact that it no longer offers the lowest fares, its mere presence in a market stimulates price competition.
When they take a break from worrying unnecessarily about competition, critics are keen to inject government into the relationship between airlines and their customers. For example, many carriers have divided their coach cabins into premium and regular sections, with seats placed closer together in the regular section and a higher price charged for premium coach seats. This has sparked calls for federal regulation of seat spacing. But when faced with the choice between more legroom at higher fares or less legroom at lower fares, the majority of U.S. passengers opt for the lower fares (not me, but I'm nearly 6 feet tall).
Some carriers have learned that lesson the hard way. In 2000, American Airlines increased its economy-class seat spacing, widely advertising "More Room Throughout Coach." With fewer seats than its competitors, it hoped to recover those losses by attracting more business overall. The experiment didn't work out, and after finding no real increase in passengers, American switched back to higher-density seating. A decade earlier, TWA had tried the same thing, with the same result.
We've also seen a push to regulate how airlines charge passengers for various services. Sen. Ed Markey (D–Mass.) has introduced a bill that would require the Federal Aviation Administration (FAA) to regulate change fees and cancellation fees and would direct the agency to "establish standards" for assessing whether baggage and seat-selection fees are "reasonable." The bill has been approved by the Senate Commerce Committee as an amendment to the pending FAA reauthorization bill.
There's little in the way of data to suggest that fees imposed by airlines are a problem. In 2016, according to the U.S. Department of Transportation (DOT), the average domestic passenger paid $22.70 in ancillary fees, for a total ticket price of $366.92 (not including federal taxes and fees). The total was comparable in 2010 ($370.80) but higher in 2000 ($442.00), 1990 ($529.83), and 1980 ($652.67), all in 2016 dollars. So these ancillary fares are hardly undercutting the benefits of airline deregulation.
Moreover, ancillary fees are the key to the very low fares charged by budget carriers Allegiant, Frontier, and Spirit. Their business models are based on undercutting "legacy" airlines on basic fares but generating some additional revenue by charging for certain optional items (like non-alcoholic drinks) that others provide at no charge. It's these no-frills carriers that continue the work of democratizing U.S. air travel.
More Deregulation on the Horizon?
In March 1978, six months before the passage of the Airline Deregulation Act, CAB Chairman Alfred Kahn warned FAA staff about the coming upheaval. He predicted the airline industry would grow more quickly after deregulation, recalls economist Dorothy Robyn in a forthcoming paper for the Transportation Research Board. Kahn recommended that the FAA push airports to change the pricing structure for using runways, in order to get more use out of a given amount of capacity. Alas, that message fell on deaf ears.
The gains from airline deregulation mostly result from the increased competition it fosters. But air travelers will continue to benefit only if the airline business remains competitive. While there's a lively market for air travel today, there are also serious constraints arising from this sector's largely unreformed airport and air traffic control (ATC) infrastructure.
The lack of competition at airports is a function of geography, which for obvious reasons often makes it difficult to add more runways as demand increases. But there are better and worse ways to allocate the finite amount of space. In a 1988 interview with Reason, Kahn argued for scrapping traditional runway charges based on aircraft weight in favor of market pricing. "When a Learjet with one or two or three passengers uses up space that would otherwise be used by 200 or 300 people on a larger plane," he said, "I do not believe in excluding them arbitrarily, but I believe in making them pay the price."
In 2008, the Department of Transportation changed federal rules on runway charging to permit congestion pricing in addition to the traditional weight-based fees. But none of America's overburdened airports have taken advantage of this more dynamic system. Privatized London Heathrow and Gatwick in the United Kingdom have done so, motivating their airlines to increase the average size of their planes and hence serving more passengers with their limited runway capacity. Stodgy U.S. airports, operating as state-owned enterprises, succumb to political pressure from legacy airlines, which benefit from limits on capacity at airports where they are already well-entrenched.
Increasing the number of airports would increase competition, but here again, political problems tend to arise. In his 1988 Reason interview, Kahn described testifying in Fulton County, Georgia, in favor of opening up the local airport to compete with giant Hartsfield Atlanta. Delta—whose largest hub is at Hartsfield—lobbied hard against the proposal, and it failed. Two subsequent efforts have met the same fate.
America's air traffic control system is in desperate need of reform as well. Outdated technology, grindingly slow bureaucracy, and a politicized funding structure continue to hobble a key part of the air travel system.
While some 60 nations now have self-funded ATC corporations (including Australia, Canada, Germany, and the U.K.), the United States still plods along with its tax-funded FAA bureaucracy. A serious corporatization bill was approved in 2017 by the House Transportation & Infrastructure Committee, and it looked for a moment like the legislation might have the needed momentum. Alas, it was withdrawn by its sponsor in February in the face of heavy opposition from business-jet and private-pilot organizations.
Despite these failures to further democratize air travel, competition in the industry is alive and well. Forty years after the historic Airline Deregulation Act of 1978, we're all better off for it. Here's hoping it doesn't take another four decades for America to go the last few miles.
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