Airline deregulation

In 1938 the U.S. government, through the Civil Aeronautics Board (CAB), regulated many areas of commercial aviation such as routes, fares and schedules. The CAB had three main functions: to award routes to airlines, to limit the entry of air carriers into new markets, and to regulate fares for passengers.[7]

Much of the established practices of commercial passenger travel within the US, went back even farther, to the policies of Walter Folger Brown, the US postmaster general from 1929 to 1933 in the administration of President Herbert Hoover. After passage of the Air Mail Act of 1930, also known as the McNary-Watres act, Brown had changed the mail payments system to encourage the manufacture of passenger aircraft instead of mail carrying aircraft.[8] His influence was crucial in awarding contracts so as to create four major domestic airlines: United, American, Eastern, and Transcontinental and Western Air (TWA). Contracts for each of three transcontinental air mail routes were awarded to United Aircraft and Transport Corporation (later United), Robertson Aircraft Corporation (later American), and Transcontinental Air Transport (later TWA).[9][10] The contract for the New York to Washington route was awarded to Eastern Air Transport,[8] which would later become Eastern Air Lines. By 1933, United, American, TWA, and Eastern accounted for about 94% of air mail revenue. Similarly, Brown had also helped give Pan American a monopoly on international routes. (See also the US Centennial of Flight Commission [11])

Typical regulatory thinking from the 1940s onward is evident in a Civil Aeronautics Board report. In the absence of particular circumstances presenting an affirmative reason for a new carrier, there appears to be no inherent desirability of increasing the present number of carriers merely for the purpose of numerically enlarging the industry.[12]

The Airline Deregulation Act of 1978 removed many of the previously mentioned controls. Prior to deregulation, it was required that airlines first seek regulatory approval to serve any given route.[13] Thus incumbent airline operators could raise barriers to the challenge of new competition. This system was dismantled as a result of the Airline Deregulation Act. (See also the Centennial of Flight Commission[11]) It also dismantled the notion of a flag carrier.

In the immediate aftermath of deregulation, many large airlines adopted a hub-and-spoke system. In this system, several smaller routes ("spokes") are connected to a single larger route ("hubs") are selected an airport, the hub, as the point for flights from a number of origination cities, the spokes. Because hubs allowed passenger travel to be consolidated in "transfer stations", capacity utilization increased, with customers avoiding decreasing costs and ticket prices.[14]

While deregulation led legacy airlines to switch to a hub-and-spoke model, the old point-to-point transit model was quickly adopted by the new generation of low-cost carriers (LCCs) that emerged in the 1970s and 80s. While previously, LCCs such as Southwest Airlines were only permitted to serve routes that did not cross state borders (placing them outside the purview of the CAB), deregulation allowed low-cost airlines to choose their own domestic routes, fares, and schedules, increasing competition across state lines and creating new markets outside the two largest states (California and Texas). As the cost of flying dropped, the number of potential customers increased, making many smaller routes viable.

Base ticket prices have declined steadily since deregulation.[15] The inflation-adjusted 1982 constant dollar yield for airlines has fallen from 12.3 cents in 1978 to 7.9 cents in 1997,[16] and the inflation-adjusted real price of flying fell 44.9% from 1978 to 2011.[17] Along with a rising US population[18] and the increasing demand of workforce mobility, these trends were some of the catalysts for dramatic expansion in passenger miles flown, increasing from 250 million passenger miles in 1978 to 750 million passenger miles in 2005.[19]

Over the past several years the public's view of airline service quality has shown a significant drop.[20] According to the 2008 American Customer Satisfaction Index, a University of Michigan study of 80,000 consumers' expectations and preferences, the major US airlines ranked last among all the industries surveyed. In 2009, the airlines have moved up to being one point ahead of Cable & Satellite TV and the newspaper industry (though results for all industries were not available at the time of this writing).[21]

In 2011 Congress finally responded to repeated calls for the United States government to pass an "Air Passenger Bill of Rights" to provide specific requirements about what must happen to air passengers in certain conditions.[22] The push for the bill stemmed from several high-profile passenger strandings over the last several years. On April 25, 2011, the Enhancing Airline Passenger Protections rule, 76 Fed. Reg. 32,110, was enacted.[23] Among other items, the rule includes raising the minimum "denied boarding compensation" to customers with valid tickets yet still not allowed to board the aircraft. The legislation further penalizes airlines up to $27,500 a passenger if left stranded aboard an aircraft, on a tarmac for more than three hours.[24] In 2010, the largest trade associations representing airline management interests before Capitol Hill, Airlines for America and the Regional Airline Association, opposed this legislation stating that they could self-regulate themselves and they already had begun implementing systems by which to mitigate any tarmac delays.[25][26] Later American Eagle, an RAA airline member, was the first airline to be fined under the new legislation. A total settlement including fines and compensation paid to passengers totaled $800,000 for tarmac delays incurred in Chicago in May 2011.[24]

Deregulation advocate Alfred Kahn noted a deterioration in the quality of airline service following deregulation, including the "turmoil" of massive restructuring of airline routes, price wars, conflicts with airline employee unions, airline bankruptcies, and industry consolidation.[27] He also noted unexpected congestion and delays "that have plagued air travelers in recent years".[27] However, he also argued that such congestion and delays was also a sign of deregulation success (because they were caused by lower prices leading Americans to book more flights).[27] Kahn considered the turmoil, congestion, and delays to be unforeseen "surprises" from deregulation, but believed they continued to support deregulation in spite of these events.[27]

Competing carriers at Tokyo Narita Airport, Japan

A major goal of airline deregulation was to increase competition between airline carriers, leading to price decreases. As a result of deregulation, barriers to entry into the airlines industry for a potential new airline decreased significantly, resulting in many new airlines entering the market, thus increasing competition.[15]

A key indicator of the volatility of deregulation[2][3] from 1976 to 1986 in the US revolves around employee affairs. Airlines saw a 39% increase in employees (according to Alfred Kahn),[27] and saw continued yet less rapid growth throughout the 1990s.[15] Subsequently, between 2000 and 2008, 100,000 jobs were shed - approximately 20% - and formerly busy hub airports (such as Pittsburgh and St. Louis) reduced staffing due to a significantly decreased number of flights.[15]

Immediately following the September 11th attacks, the Air Transportation Safety and System Stabilization Act provided the US airlines with $15 billion in loans and an additional $5 billion in grants by the US government. Despite these loans and grants, nearly every major carrier fired 20% of its staff, with United and American both cutting 20,000 jobs.[28] It is difficult to determine the precise job losses due to the effects of deregulation, given such layoffs. Then-retired former CEO of American Airlines Robert Crandall stated, "I'm not sure 9/11 by itself had any particular profound impact [on the industry], but it exacerbated the problems they had before 9/11."[29]

Although regular pay-cuts had become commonplace in the years following deregulation, of the employees remaining after September 11, 2001, the average pay cut has been 18%,[2] with many of the highest earners seeing as much as 40% reductions. Further, virtually every regularly scheduled airline has shifted its pension obligations to its employees.[30]

According to a study by economist David Card, deregulation resulted in the shift of approximately 5,000 to 7,000 airline mechanic jobs from the major trunk airlines to smaller carriers between 1978 and 1984.[31] Because such smaller carriers typically pay less than the major airlines, the average hourly wage of airline mechanics decreased by up to 5 percent; however, this decrease is said to be relatively small.[32]

Beyond the domestic liberalization of the airlines in the US, Open Skies agreements are bilateral agreements between the US and other countries to open the aviation market to foreign access and remove barriers to competition. These agreements give airlines the right to operate air services from any point in the US to any point in the other country, as well as to and from third countries. The first major Open Skies agreements were entered into in 1979.

The US has Open Skies agreements with more than 60 countries, including 15 of the 28 EU nations. Open Skies agreements have been successful at removing many of the government-implemented barriers to competition and allowing airlines to have foreign partners, access to international routes to and from their home countries, and freedom from many traditional forms of economic regulation.