History of US Airline Deregulation
Part 3 : The 1970s : Seven
Airline Regulation was Removed
As best I can
ascertain, this picture shows President Carter officially
signing the Airline Deregulation Act on 24 October, 1978.
Part of a series on US airline
regulation and deregulation
- see extra articles listed in the right hand column.
Deregulation didn't just happen
by some random chance event.
Deregulation was the result of
an increasingly - and obviously - broken system that was dysfunctional,
and benefiting neither the airlines nor the traveling public.
What started off as a well
meant series of protective measures to nurture the new airlines
of the 1930s, and what was meant to bring about a strong and
successful airline system had evolved to the point that it was
doing nothing of the sort, but was grossly interfering with both what
the airlines and the public wanted.
As a result a bipartisan
consensus, lead by Democrats, brought about the dismantling of
the government regulations that were preventing an efficient
effective and economical air transportation system in the US.
In this third part of our
series on airline regulation and deregulation in the US, we look
at the seven major factors that brought about deregulation.
Regulation Becomes Increasingly
Out of Step
By the mid 1970s, airline
regulation was 40 years old. Most industries change
appreciably in 40 years, and while it is hard to think back to
what the airlines were like and their changes over that time
period - a time period during which many of us were neither
alive nor traveling, here are some examples of the changes that
In the mid 1930s, the DC-3 was just starting to appear (first
flight with American Airlines in 1936), and it was a
revolutionary improvement over all previous planes. It
seated 20 - 25 passengers, and had a range of about 1500 miles,
and a cruising speed of about 150 mph.
Also new in the mid 1930s
were flying boats, the latest and greatest of which was the Martin M-130 which entered
service in 1935 (what's that - you've never even heard of a
- that serves to prove my point! Similarly the
manufacturer has disappeared, too - becoming first Martin
Marietta and then getting gobbled up by Lockheed and becoming
In January 1935 Amelia Earhart made the first
solo flight from Hawaii to the mainland.
1935 also saw the demise of
the US airship industry after the crashes of the Akron in 1933
and the Macon in 1935 (the Hindenburg crashed in 1936).
The world's first experimental helicopters were starting to appear.
In 1936, for the first time
ever, more than 1 million people took flights in the US
(1,020,000), flying an average of 438 miles.
Now, flash forward 40 years.
Air travel - only just evolving from an experimental novelty in
the first half of the 1930s - had now become the standard mode
of transportation for most people going most places.
In 1976, 223 million people flew, with an average flight length
of 802 miles (see
the US, passenger trains had almost all disappeared, being
replaced by Amtrak. Internationally, airplanes had
replaced passenger liners for trans-oceanic travel.
By the mid 1970s, the 747
had already been flying for half a decade (since 1969). These
planes, bigger than anything thought possible 40 years
previously, had a range of up
to 8200 miles and cruised at 600 mph (747SP), and carried up to
400 passengers (747-200). The Concorde started flying in 1976,
carrying 100 passengers up to 4500 miles at a speed of 1350 mph,
twice the speed of sound.
And let's not forget related
developments. We'd gone from bottle rockets to landing a
man on the moon in the same 40 years.
The pace of evolution - or
should one say, revolution - in aerospace was astonishing, and
the future seemed to be as exciting as the past.
Is it any wonder that the
regulatory environment created in the mid 1930s and little
changed since then was struggling to match the completely
changed world of aviation in the 1970s?
Let's now look at seven prominent reasons why there was a growing consensus
understanding of the desperate need for airline deregulation
Reason 1 : Planes Were
Only Half Full - But Airlines Couldn't Offer Discounted Fares
The Civil Aeronautics Board
- the agency that regulated the airlines - set very restrictive
rules about what fares airlines could charge for their flights.
In particular, the CAB prohibited discounting of fares.
They allowed for full fares, and sometimes one or two categories
of mildly discounted fare, and occasionally things such as
'student fares', but beyond that, the airlines were not allowed
to discount their tickets.
So the airlines saw their
planes flying only half full, and wanted to be able to sell some
cheaper fares to fill up the rest of their flights, and were
frustrated that they couldn't do this.
At the same time, the public
saw air fares that were unaffordable for most people most of the
time, and wondered why the fares were so high when half the
plane was empty.
No-one was benefitting from
the artificially too-high airfares.
Reason 2 : Airlines
Couldn't Add New Routes
The CAB controlled the
routes airlines would fly. To get permission to fly a
new route was a complex process and basically any airline
already flying that route could veto another airline's
application to start competing service on the route.
In one celebrated case,
World Airways applied for permission to fly a new route between
New York and Los Angeles in 1967. After 6½ years of delays
and frustrations, the CAB turned around and said 'This
application is 6½ years out of date,
it is no longer current or relevant' and dismissed it, even
though it was the CAB's fault that the application was so old.
On other occasion, Continental
Airlines eventually had to get the US Court of Appeals to force
the CAB to approve its request for a new route between Denver
and San Diego - a request that had been in the system for eight
Even though the population
was changing and redistributing itself around the country, and
even though there were new patterns of potential (and actual) air travel, no
new routes had been added since 1969, and the process was so
fraught with delays and difficulties the airlines had basically
given up even trying to get new routes approved.
This wasn't benefitting
Reason 3 : Airlines
Couldn't Remove Old Routes
The flipside to reason #2 is
that just as the country's demographics and potential air
travel/traffic patterns were changing, opening up new routes
that airlines would want to offer service on, so too were some
routes becoming less popular.
But the airlines had to get
CAB approval to discontinue service on a route, exactly the same
as they needed to get approval to add service. And just as
the CAB was loathe to allow any new routes, inevitably whenever
an airline applied to discontinue a route, the affected city
would object, and the CAB would therefore refuse to allow the
airline to discontinue the route.
So picture this if you can -
the airlines were forced to fly where they didn't want to, but
were not allowed to fly where they did want to. Is it any
wonder then that their flights were only half full (reason #1)?!
Reason 4 : The Airlines
Were Not Profitable
After reading the first
three reasons, you'll be unsurprised to learn that even though
one of the prime purposes of airline regulation was to help
ensure the airlines were profitable (the CAB considered a very
generous 12% return on capital to be acceptable), this was not in effect
At the start of regulation,
there were 16 main 'trunk' airlines in the US. After 40
years of regulation, this number had reduced down to 10.
Clearly the present system
was totally broken. But wait - there are still three more
Reason 5 : New Airlines
Couldn't Start Up
Even if there was a group of
investors were crazy as to want to start a new airline in this
regulated environment (and there's something about airlines that
encourages people to tilt at windmills and try to create
successful airlines, even when everything seems to argue against
any possibility of the venture succeeding) the CAB was not
permitting any new entrants. No new trunk carrier had been
approved since 1938.
So even though the number of
carriers had dropped from 16 down to 10, the CAB was not
allowing new carriers to start service. Choices were
dropping, and anti-competitive agreements between airlines were
Reason 6 : An Industry
Sum up these five preceding
reasons, and what do you have? An industry in a fatal
death cycle, just as had occurred previously to the railroads.
The airlines were forced to operate unprofitable routes, they
were not allowed to abandon them, and they were not allowed to
create new routes that promised the possibility of profit - all
very similar to the scenario inflicted on the railroads by their
own regulatory body, a scenario that lead to the collapse of the
passenger railroads and the creation of Amtrak in their place.
The airlines were also forced to
charge too-high fares, which restricted the number of people who
would fly, which forced the airlines to charge higher fares,
which further restricted the number of people flying, and so on
and so on.
Reason 7 : Lessons from
Southwest and PSA
The CAB only regulated
inter-state aviation - that is, flights between two different
states. It did not regulate intra-state aviation - flights
that took off and landed within the same state.
And so new carriers were starting to appear in the larger states,
offering intra-state service. The two most prominent
examples of this were PSA in California and Southwest in Texas.
In both cases, these
airlines offered excellent reliable service on a par with the
inter-state airlines, but with fares that were about half the
price that the regulated carriers charged for flights of
As these unregulated (by the
CAB - they were still answerable in much milder form to state
agencies and also to the FAA in terms of safety issues)
carriers continued to grow and prosper, they became impossible
to ignore, and the lessons they showed became similarly
impossible to overlook. If they could operate profitably with
fares half the levels of the main trunk airlines, while the
trunk airlines were struggling to break even with fares twice as
high, that was clearly signaling the failure of the CAB's regulation.
Unregulated (or, to be
exact, more mildly regulated) aviation was
working, tightly regulated aviation via the CAB was an abject
And So - Deregulation
At the same time the
airlines were struggling against their regulatory bonds, the economic
climate as a whole was becoming more unsettled - the 1973 oil
crisis rewrote many of the country's basic assumptions and
flowed through to massive losses in the airline industry (even
with its protected status). The stagflation that followed the
oil crisis caused a general feeling of malaise to settle, and
lead to the development of the 'Misery Index' (the combination
of the unemployment rate and the inflation rate) which in part
was credited with a change in administration to a Democrat
administration headed by President Carter in 1976.
Stagflation of a sort was
setting in to the airlines, too. Higher fares were impacting on
passenger numbers, and lower numbers of passengers made for
higher fares, in a vicious cycle. Even the least responsive of
the airlines were starting to get frustrated at their inability
to create more flexible fares, which would have allowed them to sell some seats
at discounted rates in an attempt to bring more people onto
their planes and to then truly reduce the average fare they
needed to charge everyone.
Congress was concerned about the successive failures of the
nation's passenger railroads, culminating in what was the
largest bankruptcy in history by the Penn Central Railroad in
1970, the creation of Amtrak in 1971, and a huge taxpayer
bailout of Penn Central and five other railroads in that same
year. Congress feared that the ills of the passenger railroads might
flow over to the airlines too - something that at the time,
fresh after the oil crisis shock, seemed far from unthinkable.
Adding to the industry ills was a second massive taxpayer bailout, this
time of Lockheed, late in 1971.
Other deregulation activity
was occurring at the same time. The trucking industry was
largely deregulated in 1980 (it had been regulated since 1935).
The railroads - initially regulated as part of the Interstate
Commerce Commission in 1887, were partially deregulated by the
Railroad Revitalization and Regulatory Reform Act of 1976, and
further deregulated by the Staggers Rail Act of 1980.
Meanwhile, although the
airlines were almost guaranteed profitability, some of them
still managed to fail. There were sixteen 'trunk' carriers in
1936; forty years later in 1976, six of these had disappeared,
leaving only ten, while not a single new airline had
been allowed to commence operations.
The remaining airlines had
grown fat and lazy. Load factors of 50% or less were common, and
a 55% load factor was the target for the airlines to operate
profitably (they claimed that a load factor higher than this
would prevent them from providing good service - a strange claim
to make in light of today's (2010) 90% load factors).
mirrored the situation with the railroads where they
too had become complacent, inefficient, and underutilized during
their own regulatory protected environment.
Add to all of this a quiet
evolution in conventional economic wisdom, which no longer
propounded government regulation as the best way to manage
economies. Leading economists were now suggesting that regulated
industries were inefficient and had higher costs than did
In 1977 President Carter
appointed Professor (of Economics) Alfred E Kahn to head up the
CAB as its chairman, while a general union of political forces
and public advocacy groups all supported airline deregulation.
The airlines had repeatedly
'cried wolf' before about how occasional changes to their
operating environment would spell the end of life as we knew it
- predictions always contradicted by the reality of what
subsequently happened, and so their opposition was discounted
and ignored, and the CAB itself had precious little to point to
that could demonstrate any value or benefit at all from their
regulatory involvement. And so, legislation quickly passed
through both the Congress and Senate in 1978 and was signed into
law on 24 October, 1978.
The airlines were
deregulated in a series of stages starting from 1979, and the
CAB itself finally closed down at the end of 1984.
Here is an
excellent article about the reasons for deregulation
(written in 1998), and here are two more articles -
two - an interview with and profile of Professor Kahn (in
the late 1990s and 2007, respectively) that are a bit more
scholarly but still very interesting.
Myths About Deregulation
Many myths have sprung up
about the deregulation process. Let's clarify a few of
Debunked : The airlines
tricked the government into deregulation
In large part, the airlines
did not want deregulation. Well, they sort of did and sort
of didn't. They were terrified of a competitive future,
while frustrated with their regulated present situation.
And so the airlines were very equivocal about the issue, with
some of them supporting some elements, some of them objecting to
some elements, and with no clear consensus.
Debunked : Deregulation
was introduced by Republican shills for big business
At the time of deregulation
in 1978, there was a Democrat as President (Jimmy Carter,
President from 1976 - 1980), and the Democrats controlled both
the Senate (61-38) and Congress (292-143). The initial
Senate Judiciary Committee hearings on deregulation in 1975, and
subsequent strong support of deregulation, were chaired by Ted
Kennedy, a staunch Democrat.
President Carter appointed
Professor Alfred E Kahn, sometimes referred to as 'the father of
deregulation' and arguably the greatest advocate for
deregulation in all industries; Kahn is also a Democrat.
The Republicans generally
supported deregulation too, but it was a process that was lead
by the Democrats all the way through.
Debunked : Airline
safety has suffered in a deregulated environment
As will be shown in the next
article in this series, airline safety has actually massively
improved over the last 40 years. There have been no safety
compromises at all.
Debunked : Smaller towns
and cities have lost essential air service
Let's not even start to
consider the implicit assumption in this complaint - by what
right does any town have the ability to claim an entitlement for
air service if it causes the airlines to lose money?
Fortunately, this fear/claim is again shown to be not correct.
While there were some short term losses of service, the
subsequent growth in regional carriers replaced flights
cancelled by the major airlines - also discussed in the next
part of our series.
The Effects of Airline
The effects of airline
deregulation in the US swiftly and strongly became apparent.
Read the next part of our series (coming soon) for details on
Part of a series on US airline
regulation, deregulation, and whether or not there should be
reregulation introduced again now
- please see extra articles listed at the top in
the right hand column
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6 Aug 2010, last update
28 May 2011
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