1 Airline Entry Following Us Deregulation
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AIRLINE ENTRY FOLLOWING U.S. DEREGULATION: THE DEFINITIVE LIST OF STARTUP PASSENGER AIRLINES, 1979-2003 by William A. Jordan*© Professor Emeritus of Economics Schulich School of Business York University Toronto, Canada 18331 Verano Place San Diego, CA 92128-1240 [email protected] Paper for presentation at the 2005 Annual Meeting of the TRANSPORTATION RESEARCH FORUM The George Washington University Washington, DC March 6-8, 2005 ABSTRACT During the debate leading to airline deregulation, it was widely predicted that a number of new airlines would enter the scheduled passenger airline industry following the elimination of economic regulation of interstate operations by the Civil Aeronautics Board (CAB). These airlines would join the eleven trunk, eight local service, two Alaskan and two Hawaiian carriers that were authorized by the CAB to operate scheduled passenger service with jet aircraft at the time the Airline Deregulation Act of 1978[92 Stat. 1705] was adopted on October 24, 1978. Over 25 years have passed since 1978 and it is well known that a great deal of entry has occurred. However, there have been incorrect statements regarding the actual number of such airlines. For example, the Economist (July 10, 2004, p. 59) contained the following statement regarding “America’s airlines”: “Of the 34 newcomers created after deregulation, 32 soon went bust.” This paper will show that information is wrong by a factor of almost four; it does so by identifying and listing 129 “startup” airlines that inaugurated interstate scheduled passenger service with jet aircraft. Clearly, it is past time to publish a definitive list of startup airlines that entered the industry following the implementation of deregulation in late 1978, both to promote accurate reporting and to facilitate future research. The purpose of this paper is to provide such a list. Furthermore, it will identify which of those startup airlines emerged from existing airlines that the CAB had prohibited from providing interstate scheduled passenger service with large aircraft prior to 1978 – such as the former supplemental, air cargo, intrastate and commuter carriers – and which were newly organized after deregulation. Finally, it also identifies those startup scheduled passenger airlines that operated independently of all other carriers and those which were affiliated with larger carriers. One requirement for a new carrier to obtain an operating certificate under the much-reduced criteria of the Airline Deregulation Act has been for it to report traffic, financial and operating data on Form 41 or Form 298 schedules. Each carrier’s data were then compiled and published -- initially by the CAB to 1984, and then by the Department of Transportation’s Bureau of Transportation Statistics, Office of Airline Information. A few startup airlines may have never actually inaugurated operations, or have been so short-lived that they failed to file any reports before they disappeared. However, the great majority did file for varying periods. The carrier information in this paper is obtained from those filings. This means that not only did the carriers listed actually provide service, but also that consistent traffic and financial data are available to evaluate the performance of each carrier over all or most of its operating life. 1 AIRLINE ENTRY FOLLOWING U.S. DEREGULATION: THE DEFINITIVE LIST OF STARTUP PASSENGER AIRLINES, 1979-2003 INTRODUCTION 2003 marked the end of a quarter century of airline deregulation following the adoption of the Airline Deregulation Act of 1978 [92 Stat. 1705] on October 24, 1978. The coming and going of many “startup” carriers have been noted by the media and in research reports, but incorrect total numbers of carriers have been noted in many of these sources. One glaring example of misreporting appeared in the Economist (July 10, 2004 p. 59), which contained the following statement regarding “America’s airlines”: “Of the 34 newcomers created after deregulation, 32 soon went bust.” This paper will demonstrate that this number understates by a factor of almost four the total number of U.S. startup carriers that inaugurated interstate scheduled passenger service with jet aircraft. It does so simply by listing the 129 startup carriers that entered the industry following October 1978. Hopefully this will promote accurate reporting as well as facilitate research in the future. ORIGINAL AIRLINES One result of the economic regulation of U.S. airlines by the Civil Aeronautics Board (CAB) between 1938 and 1978 was the severe limitation on the entry of airlines into interstate trunk, international or territorial scheduled passenger services. Twenty-three of these “original” airlines received certificates of public convenience and necessity effective August 22, 1938 under the “grandfather” provisions of the Civil Aeronautics Act of 1938 [52 Stat 973] Sec.401 (e)(1).1 From then through 1978 just four other airlines received comparable certificates for long- haul operations, all for international service.2 No certificates for domestic interstate trunk service were issued after 1938 despite the fact that between 1950 and 1974 the CAB received 79 applications for permission to offer such service from firms outside the domestic scheduled passenger industry, most of which were dismissed without hearing.3 As shown in Appendix A, by 1978, only eleven of the original trunk/international carriers remained in service, the others having been merged into the surviving certificated carriers.4 All of these carriers operated only jet/turbojet aircraft by 1978. Even though the CAB authorized only four new international carriers (and no new domestic trunk carriers) during its 40 years of full regulation, between 1942 and 1950 it did authorize entry by a series of small carriers consisting of 21 local service and 9 Intra-Alaska airlines, plus one Intra-Hawaii airline.5 In addition, three more Intra-Alaska carriers were certificated in 1959, 1960 and 1976, bringing the total Intra-Alaska carriers to 12.6 As the names of their categories imply, these carriers were limited to short-haul services between small towns and nearby cities, or within Alaska and Hawaii. Initially, none of these carriers was allowed to provide long-haul, trunk-type interstate service between larger cities. Instead, each carrier was awarded mainly monopoly routes for largely subsidized regional service and was protected by the CAB from entry by new airlines. Two of the Intra-Alaska carriers were authorized to fly to the “Lower 48 States” in 1951,7 and, over time the local service carriers worked to reduce their various operating restrictions and to be allowed to operate larger aircraft.8 By the 1978, eight local service, five Alaskan and the two Hawaiian carriers survived; with all but three small Intra-Alaska carriers operating at least some two-engine jet aircraft. Again, the attrition was via mergers, except for four local service carriers whose initial temporary operating certificates were not renewed.9 At the time the Airline Deregulation Act was adopted, the original certificated scheduled passenger carriers had operated for 40 years within the following regulatory environment with regards to entry: first, they were the only airlines authorized to operate large aircraft in scheduled interstate or international passenger service and; second, the entry of new airlines into each category was nonexistent or very limited after the initial period of entry for each category. This was due to the CAB’s extremely high standards of “public convenience and necessity” and to its procedural practices which prevented many applications from even being heard. Because of these CAB policies and because substantial exit did occur through mergers, by the end of 1978 only 26 of the 61 original certificated carriers remained in existence, 23 of which operated jet aircraft -- eleven trunk/international, eight local service, two Alaskan and two Hawaiian. Appendix A lists these 23 carriers and shows that only five of the eleven trunk/international carriers were still operating in 2003. This included United, which was operating under Chapter 11 bankruptcy at the end of 2003. Of the eight local service carriers, only US Airways remained, but it had recently emerged from Chapter 11 bankruptcy and was to reenter Chapter 11 2 bankruptcy for a second time in 2004.10 The four Alaskan/Hawaiian carriers did relatively better. One airline (Wien) had gone bankrupt in 1984, leaving three still in business, with Hawaiian operating under Chapter 11 bankruptcy in 2003.11 In total, only nine (39 percent) of the 23 original certificated carriers operating jet aircraft in 1978 remained after 25 years of deregulation.12 Fourteen were no longer in business. The above analysis shows that most of the original certificated carriers did not survive under deregulation, but the analysis also shows that their survival wasn’t too good under regulation as well. Twenty-six airlines in 1978 out of the 61 original carriers means that only 43 percent survived after 40 years of regulation (23 jet operators plus the three Intra-Alaska non-jet operators).13 What was different between the two periods was not the relative extent of exit, but how it occurred. Under regulation, so long as a carrier had a CAB operating certificate, exit was via merger.14 In contrast, under deregulation, while ten of the original carriers were merged into or acquired by other original carriers through 2003, the other four original carriers (Braniff, Eastern, Pan Am and Wien) terminated service through bankruptcy.15 This was a first for the industry. Between 1979 and 1984 the CAB continued to be responsible for approving mergers prior to its disappearance on December 31, 1984 under the “sunset” provision of the 1978 Act16 During these years it approved the Pan Am/National, North Central/Southern, Republic/Hughes Air West and Continental/Texas International mergers.17 Obviously, if full economic regulation and mergers had both continued beyond 1984, eventually there would have been very few carriers left in the industry.