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

FURTHER READING

Brown, Anthony E. The Politics of Airline Deregulation. Knoxville: University of Tennessee Press, 1987.

Dempsey, Paul S. Flying Blind: The Failure of Airline Deregulation. Washington, DC: Economic Policy Institute, 1990.

Heppenheimer, T. A. Turbulent Skies: The History of Commercial Aviation. New York: John Wiley and Sons, Inc., 1998.

Morrison, Steven A., and Clifford Winston. The Evolution of the Airline Industry. Washington, DC: Brookings Institution, 1994.

Peterson, Barbara S. and James Glab. Rapid Descent: Deregulation and the Shakeout in the Airlines. New York: Simon and Schuster, 1994.

Reynolds-Feighan, Aisling J. The Effects of Deregulation on U.S. Air Networks. New York: Springer-Verlag, 1992.

AIR TRANSPORTATION

Americans in the Air

Between 1971 and 1973 more than half of the U.S. population boarded scheduled air-liners, and Americans were responsible for some 60 per-cent of the world's air traffic. By 1973 there were thirteen thousand flights a day as Americans took advantage of the convenience of air travel. The airlines made flying easy. Student discount fares allowed travelers under age twenty-one to buy tickets at half price; standby fares could be purchased at deep discounts on the basis of the availability of space at flight time; and other discounts attracted casual travelers who filled the seats left after business travelers bound to set schedules had purchased their seats at full fare.

Skyjacking

Airline hijacking became a serious problem at the beginning of the decade. Between 1930 and 1970 there had been about two hundred skyjackings, as airline hijackings were called, and over half of them occurred in the eighteen months prior to June 1970, during which ninety-six persons were killed. During eleven days in September 1970 alone there were six acts of air piracy worldwide among the eighty for the year. The situation was dire. In 1970 approximately 1.7 million passengers a year flew on international routes considered by the Federal Aviation Administration (FAA) to be at high risk for skyjackings.

The Solution

In 1971 the federal government spent $37 million on the problem, and there were still thirtytwo acts of air piracy that year. On 5 January 1973 the first of two phases of an order from President Richard Nixon went into effect, requiring U. S. airlines to inspect all luggage and scan all passengers for weapons or explosives. The second phase stationed armed policemen in the boarding area for every commercial flight. These moves abruptly stopped skyjackings in the United States. Over the previous two years skyjackings had occurred at the rate of about two a month. In 1973 only one plane was pirated in the United States, and that in January. Searches at boarding gates in 1973 yielded 749 guns, 5,400 knives, and 120 explosive devices.

The CAB

Even though Americans were flying in record numbers in the 1970s, the industry faced serious problems at the beginning of the decade. The airlines were suffering financially, and federal regulation prevented them from reacting promptly to market forces. The federal Civil Aeronautics Board (CAB) regulated the industry with an iron hand. Flight routes and fare schedules had to be approved by the board before they could be implemented.

Financial Strains

The problem became severe when the Arab oil embargo of 1974 increased fuel costs dramatically. Due to domestic price on fuel controls American carriers fared better than airlines in other parts of the world, but even so the fuel cost to domestic carriers increased from about eleven cents per gallon in 1973 to over twenty-three cents. Bigger jets were introduced in the early 1970s, notably the Boeing 747, the McDonnell-Douglas DC-10, and the Lockheed 747, that carried as many as five hundred passengers but cost dramatically more to fly over short distances. These planes were efficient for use on highly traveled routes, but they were so expensive to operate that they had to fly full or the air-lines lost money. Airlines began complaining about over-capacity.

The Skytrain

By the late 1970s it seemed apparent that the airline industry was overregulated. In 1976 U.S. airlines lost $250 million while serving more passengers than ever before. In 1977 there was a moderate increase in profits after the CAB granted fare increases of 5 per-cent in 1976 and 2 percent in 1977, but discounts were limited to 15 percent during peak flying times and 20 percent on off-peak flights, and the airlines felt they needed more leeway to establish their own pricing policies. Events of 1977 brought the pricing issue to the forefront. British entrepreneur Freddie Laker announced his low-fare Skytrain service in New York. For $135 a passenger could fly to London. There was limited baggage service and no free beverage or food service. Pan American and Trans World Airlines (TWA) responded with a round-trip fare between New York and London for $280, but Laker's statement resounded: air travel was too expensive, he held, because airlines wasted money on services people were happy to do without. It was time for a democratization of air travel.

The CAB Dissolves

Lower fares increased travel dramatically, and by 1978 the industry was flourishing, largely because the CAB allowed more leeway than ever before in pricing practices. Discount fares were good for the industry, because they allowed the airlines to serve passengers more efficiently by flying full planes. The experiment in loose regulation was so successful that Congress passed a deregulation bill in the fall of 1978 that ended CAB authority over routing by 1981 and over pricing by 1983. The bill provided that a decision should be made by 1 January 1984 whether to abolish the agency altogether by 1985. The CAB petitioned to end its own existence on 1 October 1983.

BAILING OUT LOCKHEED

In 1970 the Lockheed Aircraft Corporation faced imminent bankruptcy that would have caused the loss of an estimated sixty thousand jobs. What made the company's problem a major concern was that Lockheed was then the largest defense contractor in the United States. Caught between a disputed government contract for a military transport plane, the C5A, and a problem-laden commercial airliner, the L-1011, Lockheed was suffering severe cash flow problems. The C5A project, while over budget and hostage to the entire company's cash flow problems, did not pose the problems created by the L-1011. Lockheed's main problem was that the design for the L-1011 did not include the ability to upgrade the plane for long-range flights, thus making the plane much less desirable to foreign airlines.

By July 1970 Lockheed had received only 173 orders for the plane, far short of the 225 needed to break even. The company maintained that if the company could find the cash to stay afloat through 1972 the L-1011 project would become both profitable and cash generating, thus saving the company. Daniel J. Haughton, Lockheed chairman, approached Congress for $250 million in loan guarantees to provide the needed cash cushion.

Lockheed had support in Congress, mainly because of its importance to the military. Regardless of that importance, many in Congress hesitated to intervene in the credit markets in a situation in which the commercial banks had refused to make loans available. As William Proxmire (D-Wisc), the chief opponent of the rescue, asserted, "You are removing a great part of the discipline of the American system." Such sentiments were widely held among a bipartisan group of senators and representatives.

The disintegrating economic situation in the United States during 1971 swayed enough votes to approve the loan guarantees by a narrow vote, 192-189 in the House of Representatives on 29 July 1971 and 49-48 in the Senate on 2 August 1971. The arguments for and against the loan guarantees foreshadowed the conflict over the Chrysler bailout at the end of the decade.

Sources:

"Depression Fear Carries Loan Bill," Aviation Week & Space Technology (9 August 1971): 24-25;

"A Knock for Lockheed, " Newsweek (21 June 1971): 71-72;

"Lockheed Seeks a Place to Land," Business Week (11 July 1970): 23 24.

Sources:

Elizabeth E. Bailey, David R. Graham, and Daniel P. Kaplan, Deregulating the Airlines (Cambridge, Mass.: MIT Press, 1985);

Anthony E. Brown, The Politics of Airline Deregulation (Knoxville: University of Tennessee Press, 1987).

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.

BIBLIOGRAPHY

Morrison, Steven A., and Clifford Winston. The Evolution of the Airline Industry. Washington, D.C.: Brookings, 1995.

KentGreenfield

See alsoAir Transportation and Travel ; Civil Aeronautics Board ; Federal Aviation Administration .

air transportation see aviation .