History of US Airline Deregulation
Part 4 : 1979 - 2010 : The
Effects of Deregulation - Lower Fares, More Travel, Frequent
from 14 Aug 1978, published as the deregulation law was in the final
stages of being enacted,
captures the ambivalence of an anxious public about the
impacts of deregulation on their future flying experiences.
Part of a series on US airline
regulation and deregulation
- see extra articles listed in the right hand column.
The airlines were deregulated
in stages from 1979 - 1984, and at each step of the way, the net
result was cheaper fares and more people traveling.
At the same time as these
tangible and valuable benefits occurred, none of the negative
impacts that the airlines and some sectors of the traveling
public had worried about prior to deregulation came to pass.
The case for US airline
deregulation, as seen in the 1970s (see the preceding
article in this series), was compelling, and the outcome, as
seen in the 1980s and beyond (please read on below and continued
further in part 5), proved the wisdom of this move.
A Transition from Airline
Regulation to Deregulation
The path from regulatory
oversight to a more free market environment was defined in the
Airline Deregulation Act of 1978 and completed in the CAB Sunset
Act of 1984 which saw the end of the Civil Aeronautics Board on
31 December 1984.
In some respects, the
airlines went a bit 'wild and crazy' when freed from their
regulatory chains - for example, scrambling to open up new
routes with no real sense underlying their expansion, other than
because they now could.
And in some respects, they
continued to act the same way they always had done - it being
hard to throw off the formerly imposed constraints of
perspective caused by the distorting presence of regulation.
This too was shown in their rapid growth -
because routes had formerly been things of great value and
almost impossible to secure; and so now the
airlines were slow to realize that the concept of 'owning' a
route and imputing any underlying value to such route 'ownership' was now
A number of new airlines
sprung into life, and almost as quickly disappeared again.
This is not something unique to the airline industry - it is a
classic outcome of a regulated marketplace becoming unregulated,
where first there is a rush of new entrants, followed by a
period of rationalization and a reduction in the total number of
participants - possibly even to levels lower than prior to
Essential Air Service
In addition to airlines
adding new routes, they also gleefully shed routes they no
longer wanted, and for a while, the fears of some secondary
cities at losing their air service seemed to be justified.
But a combination of
government support in the form of the provisions of the 'Essential Air Service'
section of the Airline Deregulation Act, and
the subsequent growth of regional carriers, prevented all such locations
from losing air service entirely.
The Essential Air Service
concept was written into the Airline Deregulation Act to address
the concerns of communities that feared they would lose air
service. Any and all of the 746 communities that were
receiving scheduled air service in November 1978 were guaranteed
to continue receiving 'essential air service', and if this meant
the government had to subsidize an airline to encourage it to
continue flying to the community, it would do so.
Currently 45 communities in
Alaska and a further 108 in the rest of the US and Puerto Rico
receive subsidies to allow them to get between two and four
roundtrip flights a day, usually on 19 seater commuter planes.
This cost the US government $123 million in 2009.
This was clearly a political
concession at the time that deregulation was passed, and it has
been argued (quite convincingly) that much of this $123 million
is an inappropriate subsidy to both airlines and communities
that in some cases are not unusually needy to start with (due to
being within 100 or so easy driving miles of a much larger
The bottom line is that no
communities have been harmed by the effects of allowing airlines
to set their own schedules as they commercially wish to do, and
many have benefitted enormously, due to the huge growth in air
To take a random example, Bakersfield, CA
initially lost service after deregulation, but these days has nine
roundtrip flights a
day, operating to Denver, Phoenix, San Francisco and Los
Angeles. These flights have between them 440 seats,
and are operated by two different airlines (US
Airways and United Express), and due to the flights going to
hubs, service on from there to the rest of the country is convenient.
Most visibly, the airport
also boasts a lovely new
terminal, opened in 2006, and its older terminal is now being
converted to a separate international terminal.
The Multiple Waves of Change
interesting article describes events since deregulation in
terms of four 'waves of change' or periods of evolution.
The first period was the
expansion of the traditional airlines, and the growth of the new
'hub and spoke' model, which filled planes and made it more
convenient for people to travel to more destinations.
The second period was a
counterbalancing growth in point to point services, largely by
new carriers, most notable of which was Southwest.
The third period saw the
growth of regional jet services by regional carriers, filling in
the 'gaps' of the major airline's schedules.
The fourth period - which we
are in at present - sees the 'unbundling of fares' with many
things that used to be included in a ticket's price now being
charged extra or no longer being offered at all. At the
same time, there is a reduction in airlines.
The Six Major Results of
Okay, enough about the
'behind the scenes' intricacies of what happened since 1978.
What do these things actually mean to us - the traveling public?
Happily, the impacts of
deregulation on us are profound and positive. I've grouped
the most significant of them into six categories.
Result 1 : Airfares
In round figures, and in
inflation adjusted dollars, airfares today are almost three
times cheaper than they were in the late 1970s.
There is various data out there offering differing versions of this
statistic, depending on the sources of the data they are using
and the time period over which they are measuring the change.
A July 2010
Wall St Journal article refers to the cost to fly one mile
in 1977 as being 8.42c and in 2009, it was 13.5c. The
article says that 8.42c in 1977 equates to 'more than 30c' in
today's money. That would suggest fares are 2.22 times
The WSJ article cites the Air
Transport Association as the source of its figures. I
can't find the data on their website, but they do have
this fascinating page that shows airfare costs in 1978
(rather than 1977) and 2009 (with a different number than that
quoted in the WSJ), plus a series of comparisons for other goods
and services over the 21 years too. The ATA table shows
that domestic air travel costs per mile increased from 8.49c in
1978 up to 12.07c in 2009, an increase of 42%. This
contrasts with a weighted CPI that went from 65.2 up to 214.5
over the same period. In other words, the 8.49c in 1978 is
the same as 27.93c in today's money, which contrasts with the
actual cost of 12.07c - ie, 2.31 times cheaper.
There's one other
interesting fact in this table - a table which is crammed full of
fascinating facts great for your next trivial pursuit game. Note how the (unindexed for inflation)
cost of international travel increased by 52%, compared to the
unindexed increase of 42% for domestic travel. When you
consider that international travel, although also now vastly
less regulated than domestic travel, is still somewhat more
regulated, this would seem to gently show, from another
dimension, the benefits of greater deregulation.
There is plenty of anecdotal
evidence about fares being lower as well, and as in any
situation, when one looks only at averages, one overlooks some
of the better bargains that are now possible that weren't
possible before (due to restrictions on discounting). In
other words, the average fare might be 2.3 times less
expensive, but a bit of careful shopping around might find you a
fare that is now 5 times cheaper than before.
For example, a roundtrip ticket between
New York and Los Angeles was $208 in 1958, which translates
to $1570 in today's (2010) money. And whereas you'd fly
nonstop today, you'd probably have made one or two stops back
then (but you can't completely credit deregulation with making
planes better and giving them longer range, although note our
point 6 below for commentary on that point).
Overall Annual Savings Since
Another perspective is to
look at how much we all saved, in total, each year.
A study that looked at the
effects of deregulation through 1986
suggested passengers were saving $6 billion a year in fares,
while airlines were getting $2.5 billion a year in extra revenue
too. Truly a win-win.
A more recent 1997 study, after
adjusting for poorer service and fewer amenities, suggested that
80% of all passengers are benefitting from deregulation (and
between them they fly 85% of all miles flown), with an overall
saving per year of $19.4 billion compared to what the costs
would have been with continued regulation.
This study is particularly
convincing, because it was
co-authored by Robert Crandall, at the time CEO of American
Airlines, and a former strident opponent of deregulation.
Clearly deregulation is
saving us huge amounts of money on every ticket we buy, and
enabling us to travel more regularly.
Airfares compared to Canada
Many people would argue that
airfare drops are as much due to better technology and more
efficient planes as they are due to deregulation.
There is an element of truth
in this statement (although see on to
benefit 6 for an
interesting take on technological development). But the
massive drop in travel costs is due to a great deal more than
improved airplane efficiency.
Here is an interesting
chart, taken from
this analysis, that puts this into clear context.
Compare the steadily decreasing airfares in the US after
deregulation with the more or less steady airfares in the more
regulated and less competitive Canadian market.
This analysis shows very
vividly the extra savings inspired by deregulation.
Result 2 : Air Travel
Again using round figures,
there are twice as many flights and three times as many
people traveling, compared to the 1970s.
To be specific, in 1978 the US airlines
carried 275 million passengers. In 2009, they carried 770
million passengers. In 1969 there were 5.4 million
flights, in 2009, there were 10.1 million.
In a lovely circle of
positive reinforcement, lower fares encouraged more people to
travel, which justified more flights, which allowed for lower
fare, and for more people to travel, and so on.
Air travel, once reserved
for the wealthy and elite, has been truly democratized and
become freely available for all.
Airlines fly to more
There is another dimension
to the growth in air travel. Individual airlines could now
offer service to more places. For example, American
Airlines flew to only 39 destinations prior to deregulation.
Now it flies to 260 different locations - six times more than
This ability for individual
airlines to build comprehensive (and subsequently, global too)
route systems meant that airlines could now try to get all the
travel business from each individual traveler, which in turn
lead naturally to one of the paradigm shifting approaches to
earning passenger loyalty - keep on reading for result 3.
Result 3 : Frequent Flier
American Airlines is
generally credited with developing the first frequent flier
program, its Aadvantage program, launched in May 1981, and
quickly followed by United Airlines with its Mileage Plus
program, launched one week later.
In fact, the first airline
frequent flier program was launched by Frank Lorenzo's Texas
International Airlines in 1979 (subsequently merged into
Continental Airlines in 1982), but it gained little traction and
has been largely forgotten about.
No matter who was first, frequent
flier programs have become a very important (some would say a
too important) part of our travel experience, and are
entirely a child of the deregulation era.
There are approximately 125
million Americans enrolled in airline frequent flier programs.
And while it is true that it can sometimes be difficult to find
space on flights when wishing to redeem earned miles (there are
about 10 trillion as yet unspent miles in our combined
accounts), many people do succeed in doing this. In 2004,
20 million free tickets were redeemed by frequent fliers.
So next time you check your
frequent flier mileage balance, next time you earn miles on your
Visa card, and next time you redeem your miles for an upgrade or
a free ticket, thank deregulation.
A $20 billion annual
saving seems like a compelling argument in favor of airline
deregulation. The fact that no community enjoying air
service in 1978 has suffered subsequently negates any concerns
about the downsides of allowing airlines to choose where they
fly to, and the clear result - twice as many flights and three
times as many passengers - is further conclusive evidence of the
benefits of deregulation.
As a cherry on top of the
icing on the cake, there are also the frequent flier programs we all
love so much.
However, there are three
more equally compelling reasons still to come. To read
about these, please click now to learn about
more benefits of airline
deregulation - job creation, safety and better more efficient
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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13 Aug 2010, last update
28 May 2011
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