Readers of this post have often seen references to the US Airline Deregulation Act of 1978 as being responsible for seismic shifts in the industry. Its passage had a profound effect on aviation for decades. For better or worse, the law transformed the industry. Airline deregulation had begun with initiatives by economist Alfred E. Kahn during the Nixon Administration, carried through the Ford Administration and finally, at the behest of Senator Ted Kennedy, was signed into law by President Jimmy Carter in October of 1978. The new law removed Federal Government control over many critical aspects of the aviation industry. Subsequently, there was a significant shift in the market, with some effects still being felt today. Before this act took effect, the Civil Aeronautics Board (CAB) regulated domestic interstate routes. The board set most of the routes, schedules and even fares. However, the new legislation gave greater freedom to carriers and helped them have better control over their own operations. It sought to increase competition by creating a favorable climate for startups to break into the industry and for existing carriers to enter new markets.
Before the close of the 1970s, ten major groups controlled 90% of the US market. There were also eight smaller, regional firms operating the majority of the other services. In the preceding decades, air travel was a luxury that only a privileged few could afford. Even though the introduction of the jet helped to reduce ticket fees, there was still room to open the door for many more passengers. Subsequently, deregulation allowed for a genuinely free market in the commercial airline industry and gave birth to a wave of low-cost carriers in the United States. More members of the general public now had an opportunity to fly with cheaper fares and had an array of carriers from which to choose. Less than 20% of the US population had flown on an aircraft in 1965. But, by the turn of the century, half of the nation had booked at least one round trip every year.
The marked increase in the numbers of tickets booked across different carriers meant that before too long, the former industry powerhouses saw their market share drop. The middle of the Twentieth Century is often viewed as the “Golden Age” of passenger aviation. Luxurious aircraft cabins with gourmet meals, extra attentive flight attendants, and roomy interiors were the standard. However, deregulation helped put a nail in the coffin for many of these practices. Ultimately, many of the previous dominators struggled and met their demise in the decade or two that followed. Major airlines such as Braniff International, Continental Airlines and the original Frontier Airlines all faced bankruptcy in the 1980s. Pan American World Airways managed to hold out until the beginning of the 1990s and venerable Trans World Airlines ceased operations as it was absorbed by American Airlines early in the new century.
The shift in the market forced several veteran carriers like American and United Airlines to drop their prices. Generally, the inflation-adjusted constant dollar yield for operators fell from 12.3 cents in 1978 to 7.9 cents in 1997. In order to compete, these carriers had to find ways to reduce their costs. In the short term, many airlines abandoned less profitable routes that took passengers to smaller cities. For example, United Airlines had been serving Bakersfield, CA, a growing oil town of 225,000 people. With deregulation, United pulled out of Bakersfield, depriving the city of any flights to larger cities such as San Francisco or Las Vegas. A second and related effect was the growth of hub and spoke routes. The major airlines “adopted” key cities as centers for their operations; these key cities served as stops for most flights, even if they were not on a direct route between two other end points. Delta Air Lines had a major hub at Atlanta while Eastern Air Lines ran its hub operations from Miami. Both airlines operated many daily roundtrip flights from their hubs, thus keeping planes in the air for more hours each day and filling more seats. For example, the number of daily nonstop flights between New York and West Palm Beach, Florida, jumped from five to 23.
Deregulation also allowed start-up airlines to flourish. The best known of these success stories is that of Southwest Airlines. Founded in 1971 serving only Houston and San Antonio from Dallas, Southwest benefitted enormously from deregulation and is today one of the largest airlines in the US. On the other side of the coin was PEOPLE Express Airlines. The airline was founded in 1981 by Donald Burr, a shrewd entrepreneur who introduced unconventional methods of management such as low salaries, fewer managers, workers who could perform multiple jobs, and equitable stock ownership by all employees. Burr ran an extremely tight operation where passengers had to pay for meals on planes and were charged for checked-in baggage. Fares were so low that they were comparable to intercity bus lines. PEOPLE Express revenues increased dramatically through the early 1980s, reaching a billion dollars by 1985. Eventually, though, PEOPLE couldn't compete with established airlines that also cut their prices but offered significantly better service. After having its fares matched and undercut by legacy rivals, eventually by February of 1987, PEOPLE Express was bought by Texas Air Corporation and merged with Continental Airlines. Continental maintained the Newark hub built by PEOPLE Express, which passed to United Airlines after United and Continental merged in 2010.
Unfortunately for the airline industry, fuel costs, economic recession, and unbridled over expansion in the wake of deregulation began to have serious negative consequences. US airlines recorded a net operating loss of $421 million as early as 1981, when the number of passengers fell to 286 million. The problems were worsened by the nationwide strike of the Professional Air Traffic Controllers Organization (PATCO) in 1981 and the subsequent firing of participating controllers by President Reagan. Resulting airport traffic restraints created millions in new losses for US airlines, which were already reeling from the recession, and also triggered the layoffs of thousands of pilots, mechanics and other airline employees. One airline, Braniff, collapsed completely in 1982. Other airlines continued to expand in the face of economic problems, putting them at even greater risk.
Nonetheless, the state of the industry seems to have gone full circle. Deregulation was supposed to break down the market share between a select group of airlines. For a while, it did just that, but at the expense of several legacy carriers. Now, with less powerful players on the scene, only four airlines (American, Delta, Southwest and United) control 80% of the domestic market. The competitive edge following deregulation is still prevalent in certain aspects. For instance, JetBlue Airways saw a quick rise as a force to be reckoned with since its emergence at the beginning of the millennium. If the legislation had not been enacted, then the low-cost carrier may not have been able to proliferate its network. Flying has undoubtedly become more accessible since deregulation overseas as well. Europe went through a similar scenario following passage of the Single European Act of 1986. This was the beginning of a continuous process to open up competition across the continent. This act helped Europe's low-cost carriers like Ryanair and easyJet to become the forces they are today.
There were some positive consequences of deregulation. The average airfare, for example, dropped by more than one-third between 1977 and 1992 (adjusting for inflation). It is estimated that ticket buyers saved as much as $100 billion on fares alone. Deregulation also allowed the proliferation of smaller airlines that took over the shorter routes that were no longer profitable for the big carriers. In sum, the major airlines probably suffered the negative consequences of deregulation the most. New and smaller airlines and the millions of passengers flying with them probably gained the most.
Until next time…safe travels.
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