Air Transport World

Deregulation's mixed legacy.(ANALYSIS)

'THE ASSUMPTION THAT YOU ARE going to get really intense, severe, cutthroat competition just seems to be unrealistic when you are talking about a small number of carriers who meet in one market after another. I just do not see any reason to believe that the airline industry cannot prosper and attract capital"--Alfred Kahn, "father" of US airline deregulation, testifying before Congress in 1977.



This autumn the US airline industry will mark what for many of its former and current participants is a bitter anniversary: The passage of the Airline Deregulation Act, which was signed into law by President Jimmy Carter on Oct. 24, 1978, and began to take effect the following January.

At the time, US carriers generally were regarded as world leaders in terms of service, networks, safety and efficiency and had been profitable in 17 of the previous 20 years. However, a number of prominent economists, politicians and analysts, foremost among them Civil Aeronautics Board Chairman Alfred Kahn, believed that economic regulation was generally bad for the American consumer: It prevented the transportation market from performing efficiently, blocked new competitors from entering and kept fares higher than they would be if the forces of the free market were unleashed.

Prior to its enactment, deregulation was opposed by nearly every US major airline. The carriers, however, soon came to welcome their new freedoms and the majority view is that it has delivered on the promise of lower fares and a greater variety of consumer choices. This consensus notwithstanding, to this day a small but well-credentialed minority views it as a failure, citing among other things the loss of some of aviation's greatest companies, the bankruptcies of all but one of the major pre-deregulation carriers, the downward pressure on airline wages (most significantly since 9/11) and a widespread perception that customer service has declined.

Today, as the 30th anniversary approaches, US airlines are grappling with yet another major crisis, this one fueled by the price of oil, resulting in downsizing, layoffs and a torrent of red ink--expected to reach $10 billion for the full year, according to the Air Transport Assn. The cause of today's crisis may be unique, but during the deregulated era the industry has seemed to lurch from disaster to disaster, interrupted by relatively brief but intense periods of profitability, the longest lasting six years (1995-2000) (see related article, p. 30).

The debate on deregulation's legacy will rage as long as there are economists and universities. Each paper written by an expert builds a compelling case for its success or failure. With fuel prices soaring and the devastating effects of 9/11 still lingering, the proponents of failure, including former American Airlines Chairman and CEO Robert Crandall, are having a field day.


On June 10, Crandall addressed the Wings Club in New York and laid out his blueprint for stabilization of the US airline system, which not surprisingly involved a "dollop" of reregulation (ATW, 7/08, p. 5).

"I feel little need to argue that deregulation has worked poorly in the airline industry. Three decades of deregulation have demonstrated that airlines have special characteristics incompatible with a completely unregulated environment," he told members. …

Log in to your account to read this article – and millions more.