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Airline Mismanagement

'The road to hell is paved with good intentions' - and the good intentions of airline regulation were certainly leading to an unpleasant scenario by the 1970s.

Regulation proved itself to be so totally broken that the only possible response was to abolish regulation entirely.

 
 
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A History of US Airline Deregulation

Part 3 :  The 1970s :  Seven Reasons Why 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 had developed.

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 Martin M-130 - 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 Lockheed Martin.).

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 this table).

In 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 6 years of delays and frustrations, the CAB turned around and said 'This application is 6 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 years.

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 anyone either.

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 occurring.

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 reasons.

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 increasing.

Reason 6 :  An Industry Death Cycle

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 comparable distances.

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 demonstrably working, tightly regulated aviation via the CAB was an abject failure.

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).

This 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 unregulated industries.

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.

Further Reading

Here is an excellent article about the reasons for deregulation (written in 1998), and here are two more articles - one 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 them.

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 Deregulation

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 this.

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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Originally published 6 Aug 2010, last update 28 May 2011

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
Related Articles
1.  The Development of the Aviation Industry prior to Regulation 1911 - 1926
2.  A History of Airline Regulation 1926 - 1979
3. The Seven Reasons for Airline Deregulation in the 1970s
4. The Effects of Deregulation post 1979
5. More Benefits of Deregulation post 1979
6. Present Day :  Remaining Regulatory Constraints
7. More on remaining regulatory constraints

coming soon
8. 2010+ : Should we Re-regulate the Airlines now?

Please see also
Is airline competition always fair?
Airline competition 1980 -2010 RIP
 
 
 

 


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