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Impacts of ROBERT PETERSON J P immy The author is President of ommercial was the first transportation hoto C : W :

mode in the United States to be deregulated. In a rter RMPAero. Before retire­ hite

L 1977, air cargo rates and services were deregu- H i b r a ry ment, he spent 41 years C ouse

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 ap hers in Business Development prognosticators, and government regulators—Con- and Strategy. gress passed the Act of 1978,

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 signed the Airline Impacts rippled throughout the aviation indus- Deregulation Act in 1978, freeing passenger try, affecting all stakeholders—airlines, , 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 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 TR NEWS 315 MAY–JUNE 2018 11 ) meets center ). The two groups right Civil Aeronautics Authority chair Edward Nobel ( Safety with Aviation Board chair Sumter Smith ( merged in 1940 to form CAB. In the years following In the years Deregulation the Airline employees Act, many and some lost their jobs, airlines went bankrupt —including one of the largest, . - - - The primary objective airline of deregulation was stillIt is a matter debate whether of these out

service. comes were intentional objectives regulatory of pol icy merely or were the result the of CAB approval anyproposed change in fare level, structure, route ownershipor had to be approved by the federal whose predecessor (CAB), wascreated by an act Congress of and in was 1938 the precursor to the Federal Aviation Administra tion (FAA). The approval process, which required administrative and judicial reviews, take could many months—and sometimes years. market-focused. Many economists argued that the regulatory environment created and administered byCAB limited to the detriment of travelers, resulting in high prices and unresponsive in government virtually of every aspect theof airline business. Essentially, that meant that

, F , C : P h a heel hoto kr c li ------Because deregulationwas and still is an experi In the airline industry, fares and rates decreased

was created the for railroads in the late 19th cen turyeventually wasadapted aviation, for resulting Expectations of Change Historically, U.S. transportation policy emerged from the beliefthat transportation was necessary to sup port commerce. The basic regulatory structure that and service innovations that followed deregulation havewould been matched in a regulated structure. tively; that is, can one no be sure the how deregulated industries have would evolved in its absence. is It difficult,however, to imagine that the manypricing detractors. ment, declaring a success it cannot objec be done fortable, and tightening security created additional burdens travelers. for All these changes occurred asthe industry achieved unprecedented levels of safety—surprising many early deregulation’s of significantly,load factorsskyrocketed, more people began to travel, seats became smaller and less com laid off, small towns lost services, and many and old new companies bankrupt went were or absorbed by others. ers declared deregulation in general a success, even though the process left many victims in its wake. Shareholders lost billions dollars, of employees were wasemulated in rail and in other surface transpor tation modes before long its results were apparent inthe aviation industry. Most analysts and observ

H : P L , E & C rris a hoto ry a r b i ing w ongress f o 12 TR NEWS 315 MAY–JUNE 2018

Photo: Southwest that Carterwould sign. Airline DeregulationAct ally, cosponsoringthe most ardent deregulation became theSenate’s Senator EdwardKennedy deregulation. argument forairline model bolsteredthe the Southwestbusiness regulation. Thesuccessof not subjecttofederal the stateofTexas, itwas Airlines flewonlywithin Because Southwest ling of Wall Street and passenger favorite—and the the favorite—and passenger and Street of Wall ling dar Southwest—a between contrast the observers, To many offerings. service and price different with airlines of new raft a unleashing by consumers efit could ben deregulation of how interstate example an as cited were market intrastate unregulated the in growth rapid and low fares Airlines’ Southwest Toward Legislation malaise. economic general 1970s as of the well as prices and oil inflation high of the because eroded been had profitability whose industry, airline robust about amore would bring deregulation that argued also Economists real. were issues but the process, - - period. 1 industry consolidation, the loss of small community community of small loss the consolidation, industry safety, reduced of deregulation: effects adverse about possible concerns raised industry aviation cial commer of the members longtime many itself, lation ( astronomical” is cost that And consumer. on the to passed always is regulation this of cost The behavior. anticompetitive and service, inadequate prices, high unreasonably approve or encourage often too all “Regulators said, sachusetts of Mas Kennedy Edward Senator subject, on the ings support. bipartisan garnered and of deregulation benefits of the Congress vinced con 1970s, end of the economists the By many try. indus profitable and dynamic amore to eventually, and, demand passenger more to would lead argued, for deregulation. argument declining mainline interstate carriers was a sufficient very large airlines with significant pricing power. pricing significant with airlines large very afew by industry of the dominance the would be of deregulation result the that regularly argued lines, Air of American then-president Crandall, Robert deregulation. opposed manufacturers engine and workers. airline to harm and services, Theauthorworked directlywithRobertCrandallduringthis During these hearings and leading up deregu to leading and hearings these During hear of congressional statement opening his In it was industry, airline entire the Deregulating Most airlines, authorities, and airplane airplane and authorities, airport airlines, Most 1 ).

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A R A N , P S H W : P tion a dministr ords c e nd a hives c r l a tion a hers ap hotogr aff t ouse hite hoto TR NEWS 315 MAY–JUNE 2018 13 formed the first successful large hub at DFW airport, adapting routes for profitability. Deregulation opened Deregulation for new opportunities models, airline business were some of which successful and some of which ultimately failed— like People Express, which focused on low fares, good service, and an employee-owned concept. - - - It did takeIt not other for long airlines to emu American had just moved its headquarters from

ship. late American’s strategy. they Together created hubs in Cincinnati; Dulles, near St. Washington, D.C.; Louis, Missouri; ; Raleigh; Charlotte; Pitts burgh;Minneapolis; Detroit; Nashville; and Salt Lake Existing . in hubs Atlanta and Chicago CityNew York to Dallas, to the adjacent new but airport. (DFW) Worth Dallas–Fort underutilized American took advantage DFW’s of excess capacity to develop the first truly successful hub. Although it was originally to lower overhead, done American’s relocationfortuitously enabled its strategy hub to succeedwith the full support corporate of leader

, F , M W : P kr c li lik a f si a hoto - - - - An example a new of business model was Peo

pioneered by American Airlines. vivaland profitability in markets that had become highly competitive. The winning adaptation turned to be theout creation the of hub-and-spokenetwork, New Route Systems their adapted airlines incumbent longstanding The systemsroute and aircraft fleets to enhance their sur reacheda size that hindered the coordinated deci sion making needed efficient for operations. each with the power to make operational decisions. Express People grew both rapidly, organically and through acquisitions; burst, its bubble however, when its too load got big and debt its workforce airline executive Don Burr. Its business strategy focused a “low-fare on with good service” concept. Theairline also made every an employee owner, the predicted market diversity and dynamism. Express ple Airlines, in founded 1980by longtime all the new start-ups focused a low-fare on business model,unashamedly some emulating Southwest and exemplifying models, business new following others Immediately after act was the passed, 1978 airlines began to adapt to their new Within world. the first two years, many new airlines were formed. Nearly airline safety. safety. airline Initial Effects New Business Models cerns. In retrospect, the most important these of requirements was that a federal agency—what is thenow FAA—continue to oversee all aspects of As a result, Congress included several specific requirements in the that wereintended to assuageand mitigate these con

I RHL : P , W , ges a m hoto a ikimedi 14 TR NEWS 315 MAY–JUNE 2018 union contracts. major airlinescanbypass operating regionaljets, American Eagle.By regional jetsubsidiary, American Airlines’ scale layoffs. also resultedinlarge- reduce laborcostsbut enabled airlinesto and packagedsnacks— catering, buy-onboard, Outsourcing services— labor relations. Although industry leaders and labor labor and leaders industry Although relations. labor on airline– seen could be impact biggest its passed, Act Deregulation Airline the after years ten to Five Intermediate Effects capability. core acritical agement be to man yield consider Today, airlines most passengers. segment to restrictions fares using levels, at different flight same on the seats price airline—to other every tools allowed American—and, eventually, almost Sophisticated flight. on each sales ticket passenger from of money collected amount the maximize to ing Boe by developed concept first scheme able pricing avari management, yield introduced also American Pricing Concepts successful. hubs major afew were only eventually —but Dayton, in as minihubs—such create to attempted airlines Some strengthened. were also

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, F , C K : P , F , C D T : P kr c li n a h evin hoto kr c li oro el omás hoto the present. present. the through continued have and 1980s late the up in picked Mergers carriers. other by absorbed or were bankruptcy went into either carriers failing the as suffered bondholders and shareholders and sheets, balance companies’ many gutted start-ups new and airlines incumbent between Competition employees. airline of unionized layoffs large-scale in resulting reduction, cost for labor strategy amain became of services Outsourcing entrants. new with petitive com stay to levels or staff employee wages reduce unions. labor with aggressively negotiate to for management incentive the reduced This rose. wages as fares raise to airlines allowed CAB when 1960s, early the to back dated rates wage high the root of The levels. justifiable economically above were wages industry that acknowledged ally gener outsiders rates, wage for high argued groups Lufthansa, All Nippon Airways, and others. and Nippon Airways, All Lufthansa, and France–KLM; Air with partnered and Am Pan others; and Airlines, Japan Pacific, Cathay Airways, British with partnered and ing: partners. airline foreign with 3) and alliances lines, air other with 2) mergers markets, international new to 1) route expansion markets: international pursue to tactics three deployed U.S. airlines countries, eign for many with “open agreements skies” negotiated of federally promulgation the and 1990s the During Open SkiesAgreements destinations. additional provide to and effectively more demand passenger with service match to them allowed sizes smaller airplanes’ the hubs, as of the wages. lower even earned RJs the fly to hired pilots the and rates, at lower paid were generally carriers mainline for the directly working pilots hired newly wages; high their retained deregulation before started careers whose pilots emerged: themes common some differed, contract each Although structures. wage two-tier in hubs. their from operate to of RJs number alarge ordered and contracts union their by ered not cov were that airlines up set subsidiary airlines Mainline strategy. another enabled 75 seats, than fewer with jets regional or efficient of RJs, advent Approximately 10 years after deregulation, the the deregulation, 10 after Approximately years to had carriers incumbent the 1980s, the By u u u follow the included alliances of these Examples success the cemented RJs of the entrance The resulted unions pilots’ with negotiated Contracts

Star Alliance: partnered with with partnered Airlines United Alliance: Star absorbed Lines Air Delta SkyTeam Alliance: TWA acquired American Alliance: ------TR NEWS 315 MAY–JUNE 2018 15 By unbundling—charging By unbundling—charging for services separate fees bags or like checking selecting seats—airlines avoid the federal ticket tax. ------). 2 Airline deregulationhas worked. would be It ironicif, by misdiagnosing our present discon tents,we were to return to policies protec of tionism and centralized planning the at very time when countries as dissimilar as China, the Soviet Union, Chile, Australia, France, Spain, andPoland are all discoveringthe superiority of the ( The Airline Deregulation Act provided subsidies as thisIn 1991, process was playing Alfred out, many communities saw their air service levels dwin dle. In the places that kept these services, the fares often were substantially higher than comparable fares routes on between larger . Kahn wrote money for airport for money facility expansion and FAA for air trafficoperations and modernization. Industry in Transformation Throughout this intermediate period, airports often themselves found in two of one camps. Larger air portshad sufficient traffic to maintain service levels and were to grow able and improve. Smaller airports that had been supported by regulated cross-subsidi zation suffered from poor service. no or smaller for airports short a time; for although Con gress extended this support lower at funding levels, taxes airline on tickets and is the principal source of ------Avoiding federal ticket tax puts an incremental 7.5 Some arguments suggest that unbundling is a Each alliance fortifiedits ownhubs and interna

That fund is primarily made federally of up mandated percent collected of monies into an airline’s col umn instead into of the national Aviation Trust Fund. truth to this belief, a seldom-mentioned contributor to strategy’s success is that the airlines are to able avoid federal ticket tax these on fees and charges. tickets based on lowest ticket price, ignoring the additional fees associated with such things as check ingbaga selecting or seat.a Although there is some addition to and separate from the price an of . successful strategy because air travelers tend to buy to become part the of airline business model. Among the most significantof these was unbundling, the or introduction ancillary of fees in Unbundling Several tactics introduced in response to new indus try entrants and low-cost carriers survive would focusing service on is, (that schedules and ameni Thisties). competition continues today. petition. Long-haul business flying became espe ciallypricey as airlinesbegan the to for compete deep pockets international of business travelers by tional airfares began to increase, leading many to view the alliances as harmful to international com

T : P , F , H s a om hoto kr c li k aw 16 TR NEWS 315 MAY–JUNE 2018 accommodations. experience luxurious premium farescanstill travelers willingtopay have decreased, general airlinepassenger Although servicesforthe close-city counterparts. to behigherthantheir smaller airportstend Angeles. Thefaresat miles southofLos Airport islocated35 ’s JohnWayne and increased load factors to unanticipated levels. unanticipated to factors load increased and mix, market-appropriate to a fleets their transformed profitability, to sheets balance their restored had airlines in 2008, hit crisis financial the time the By years. the following in survival on financial focused partners, alliance their with along carriers, viving today. sur The dominate that carriers few the into airlines of the of consolidation 9/11 the accelerated events The for airlines. struggle economic an caused once again 2000s early the in dot-comThe bust Long-Term Effects transformation. in still was time at the industry airline the that apparent it is rect, Although his observation has proven to be cor be to proven has observation his Although

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, F , G G : P kr c li er b ru regor hoto raised about too much consolidation in the aviation aviation the in much about consolidation too raised being are concerns administration, presidential business-friendly current the under even unlikely; appears consolidation further time, . this At comment: to asked was Crandall June 2008, restrooms, packed rows, and minimal service. Inten service. minimal and rows, packed restrooms, tiny seating, tight from suffer plane of the back the in but passengers of jet travel, days early the with associated comforts creature enjoy the still airfares premium pay to willing passengers and travelers Business market. consumer segmented ahighly to led has this and traveler, typical for the comfortable less and less become have interiors aircraft tions, aircraft. on the amenities and space personal to regard in at least services, of air for regulation argue to begun have groups passenger air Various industry. The U.S. airline industry has morphed into an an into morphed has industry U.S.The airline however. remained, In naysayers Deregulation As the airlines continue to focus on cost reduc on cost focus to continue airlines the As standard, has become unacceptable ( unacceptable become has standard, any by service, Airline skyrocketed. have plaints com Passenger find. to harder and harder are seats Last-minute airports. wrong the to or sent lost are of bags percentage ever-higher An shows. comedy of late-night astaple become has gestion con Airport time. on are flights fewer and Fewer reputation. international and quality, service age, fleet including category, every in laggards now are leaders, world once airlines, Our rated. deterio greatly has system airline America’s 3 ). - - -

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, F , /\ : P kr c li ltus hoto TR NEWS 315 MAY–JUNE 2018 17 Airport terminals Airport terminals from have evolved hubs to transportation shopping, centers for dining, and even art galleries.

. - , April New York Times New York The Concise Encyclopedia The Politics of Deregulation The Politics , 1st ed., Library of Economics and , , 1st ed., Library of Economics and Liberty, Derthick, M., and P. Quirk. Derthick, M., and P. D.C., 1985. Press, Washington, Deregulation.” Kahn, A.E. “Airline of Economics 1993. www.econlib.org/library/Enc1/AirlineDeregulation. html. Charge more, merge less, fly better. 21, 2008, www.nytimes.com/2008/04/21/opinion/21 crandall.html. It isIt clear, not that however, current levels of appearsIt thatbalance a may recently havebeen 3. market consists now a small of operating set of air lines. Alliances have proliferated across the globe, creatingconsistenta worldwide marketplace. Does this represent a stable market? Ask that question again in another years. 20 References 1. 2. aircraft manufacturers are rolling new aircraft out at a record pace. market diversity exactly match the vision early of deregulation advocates. Airlines made profits since the beginning the of economic recovery, airline but startupswere few and far in between. New marketing ideas were scarce as the airlines continued to hone costs and reduce waste. After consolidation, airlines’ financial power enabled to them compete extremely aggressively with any new entrants to the market. reached in the domestic marketplace; that is, the mode of transportationmode of by far. After years layoffs, of staff shortages are causing industry wages up to go as airlines strive to continue growth. The remaining ------Although Crandall’s predictiona few of large air The industry’s financialstability is global, not Interestingly, the airline industry has become

portation The airline hubs. industry is the safest bothdomestically and internationally. Airlines and aircraft manufacturers are profitable. Major airports have become malls shopping in addition to trans ney was different than anticipated. he Collectively, air travelers have benefited from substantiallylower fares. Passenger volumes have grown considerably, described by deregulation advocates in the 1970s. lines dominating the market was correct, the jour Successful Legacy deregulationWas successful? By virtually all mea sures, the answer is sys yes; today’s however, tem bears little resemblance to the aviation future Airbus, Bombardier, and Embraer are experiencing five- to seven-year production backlogs. just domestic, and this has led to large backlogs of new airplanes order on with manufacturers. Boeing, their heads as to whether this is the new normal or merely a manifestation the of current economic long recoverysince the Great in the late 2000s. consistently profitable—in contrastitsof much to history—since recovering and its from immedi 9/11 ateaftermath. Longtime industryobservers scratch ior hasior trained the air traveler to expect discomfort whenflying, as well as service charges for any type of ancillary activity. tionally not, or airline pricing and marketing behav

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