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Impacts of Airline Deregulation ROBERT PETERSON J P Immy the Author Is President of Ommercial Aviation Was the First Transportation Hoto C : W

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Impacts of Airline Deregulation ROBERT PETERSON J P Immy the Author Is President of Ommercial Aviation Was the First Transportation Hoto C : W P HOTO : J ORD A N F IS C HER , F LI C KR Impacts of Airline Deregulation ROBERT PETERSON J P IMMY The author is President of ommercial aviation was the first transportation HOTO C : W A mode in the United States to be deregulated. In RTER RMPAero. Before retire­ HITE L 1977, air cargo rates and services were deregu- H I B OUSE ment, he spent 41 years R A C RY lated by an act of Congress; the next year—and after S at Boeing as a Technical T simmering debate among industry leaders, economic AFF Fellow and Chief Analyst P HOTOGR in Business Development prognosticators, and government regulators—Con- gress passed the Airline Deregulation Act of 1978, AP and Strategy. HERS which deregulated passenger aviation fares and ser- , vices. Together, this legislation unleashed decades of upheaval and adjustments as the airline industry mor- phed from a protected, regulated business environ- ment to a largely unregulated marketplace. President Jimmy Carter signed the Airline Impacts rippled throughout the aviation indus- Deregulation Act in 1978, freeing passenger airlines try, affecting all stakeholders—airlines, airports, to control their fares and services. Airline deregulation had airplane and engine manufacturers, investors, travel an immediate and long­ term impact on airlines, agents, shippers, and the traveling public. Winners an industry seen its regulations and business prac- TR NEWS 315 MAY–JUNE 2018 airports, manufacturers, and losers came and went as the industry responded tices change so dramatically in such a short period. 10 and the traveling public. to the demands of the new marketplace. Seldom has The vast experiment in laissez-faire economics KR was emulated in rail and in other surface transpor- C In the years following LI , F H the Airline Deregulation tation modes long before its results were apparent A Act, many employees in the aviation industry. Most analysts and observ- HEEL ers declared deregulation in general a success, even : C lost their jobs, and some HOTO P airlines went bankrupt though the process left many victims in its wake. —including one of the Shareholders lost billions of dollars, employees were largest, Pan Am. laid off, small towns lost services, and many old and new companies went bankrupt or were absorbed by others. In the airline industry, fares and rates decreased significantly, load factors skyrocketed, more people began to travel, seats became smaller and less com- fortable, and tightening security created additional in government regulation of virtually every aspect burdens for travelers. All these changes occurred of the airline business. Essentially, that meant that as the industry achieved unprecedented levels of any proposed change in fare level, route structure, safety—surprising many of deregulation’s early or ownership had to be approved by the federal detractors. Civil Aeronautics Board (CAB), whose predecessor Because deregulation was and still is an experi- was created by an act of Congress in 1938 and was ment, declaring it a success cannot be done objec- the precursor to the Federal Aviation Administra- tively; that is, no one can be sure how the deregulated tion (FAA). The approval process, which required industries would have evolved in its absence. It is administrative and judicial reviews, could take many difficult, however, to imagine that the many pricing months—and sometimes years. and service innovations that followed deregulation The primary objective of airline deregulation was would have been matched in a regulated structure. market-focused. Many economists argued that the regulatory environment created and administered Expectations of Change by CAB limited competition to the detriment of Historically, U.S. transportation policy emerged from travelers, resulting in high prices and unresponsive the belief that transportation was necessary to sup- service. port commerce. The basic regulatory structure that It still is a matter of debate whether these out- was created for the railroads in the late 19th cen- comes were intentional objectives of regulatory pol- tury eventually was adapted for aviation, resulting icy or merely were the result of the CAB approval ONGRESS C F O RY A R B I L , ING W E & RRIS A H : HOTO P TR NEWS 315 MAY–JUNE 2018 Civil Aeronautics Authority chair Edward Nobel (center) meets with Aviation Safety Board chair Sumter Smith (right). The two groups merged in 1940 to form CAB. 11 EST declining mainline interstate carriers was a sufficient W OUTH argument for deregulation. S : Deregulating the entire airline industry, it was HOTO P argued, would lead to more passenger demand and, eventually, to a more dynamic and profitable indus- try. By the end of the 1970s, many economists con- vinced Congress of the benefits of deregulation and garnered bipartisan support. In his opening statement of congressional hear- ings on the subject, Senator Edward Kennedy of Mas- sachusetts said, “Regulators all too often encourage or approve unreasonably high prices, inadequate service, and anticompetitive behavior. The cost of this regulation is always passed on to the consumer. And that cost is astronomical” (1). Because Southwest process, but the issues were real. Economists also During these hearings and leading up to deregu- Airlines flew only within argued that deregulation would bring about a more lation itself, many longtime members of the commer- the state of Texas, it was robust airline industry, whose profitability had been cial aviation industry raised concerns about possible not subject to federal eroded because of the high inflation and oil prices adverse effects of deregulation: reduced safety, regulation. The success of of the 1970s as well as general economic malaise. industry consolidation, the loss of small community the Southwest business model bolstered the services, and harm to airline workers. argument for airline Toward Legislation Most airlines, airport authorities, and airplane deregulation. Southwest Airlines’ low fares and rapid growth in the and engine manufacturers opposed deregulation. unregulated intrastate Texas market were cited as an Robert Crandall, then-president of American Air- example of how interstate deregulation could ben- lines, argued regularly that the result of deregulation efit consumers by unleashing a raft of new airlines would be the dominance of the industry by a few with different price and service offerings. To many very large airlines with significant pricing power.1 observers, the contrast between Southwest—a dar- 1 The author worked directly with Robert Crandall during this ling of Wall Street and passenger favorite—and the period. P HOTO : W HITE H OUSE S T AFF P HOTOGR AP HERS , N A TION A L A R C HIVES A ND R E C ORDS A DMINISTR A TION Senator Edward Kennedy became the Senate’s most ardent deregulation ally, cosponsoring the TR NEWS 315 MAY–JUNE 2018 Airline Deregulation Act 12 that Carter would sign. A Deregulation opened IKIMEDI opportunities for new , W airline business models, GES A M I some of which were RHL successful and some of : which ultimately failed— HOTO P like People Express, which focused on low fares, good service, and an employee­owned concept. As a result, Congress included several specific American had just moved its headquarters from requirements in the Airline Deregulation Act that New York City to Dallas, adjacent to the new but were intended to assuage and mitigate these con- underutilized Dallas–Fort Worth (DFW) airport. cerns. In retrospect, the most important of these American took advantage of DFW’s excess capacity requirements was that a federal agency—what is to develop the first truly successful hub. Although it now the FAA—continue to oversee all aspects of was originally done to lower overhead, American’s airline safety. relocation fortuitously enabled its hub strategy to succeed with the full support of corporate leader- Initial Effects ship. New Business Models It did not take long for other airlines to emu- Immediately after the 1978 act was passed, airlines late American’s strategy. Together they created hubs American Airlines formed began to adapt to their new world. Within the first in Cincinnati; Dulles, near Washington, D.C.; St. the first successful large two years, many new airlines were formed. Nearly Louis, Missouri; Denver; Raleigh; Charlotte; Pitts- hub at DFW airport, all the new start-ups focused on a low-fare business burgh; Minneapolis; Detroit; Nashville; and Salt adapting routes for model, some unashamedly emulating Southwest and Lake City. Existing hubs in Atlanta and Chicago profitability. others following new business models, exemplifying KR C the predicted market diversity and dynamism. LI , F LIK An example of a new business model was Peo- A M F SI ple Express Airlines, founded in 1980 by longtime A airline executive Don Burr. Its business strategy : W HOTO focused on a “low-fare with good service” concept. P The airline also made every employee an owner, each with the power to make operational decisions. People Express grew rapidly, both organically and through acquisitions; its bubble burst, however, when its debt load got too big and its workforce reached a size that hindered the coordinated deci- TR NEWS 315 MAY–JUNE 2018 sion making needed for efficient operations. New Route Systems The longstanding incumbent airlines adapted their route systems and aircraft fleets to enhance their sur- vival and profitability in markets that had become highly competitive. The winning adaptation turned out to be the creation of the hub-and-spoke network, pioneered by American Airlines. 13 P HOTO groups argued for high wage rates, outsiders gener- : K EVIN ally acknowledged that industry wages were above C H economically justifiable levels. The root of the high A N , F wage rates dated back to the early 1960s, when CAB LI C KR allowed airlines to raise fares as wages rose. This reduced the incentive for management to negotiate aggressively with labor unions.
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