See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/223075818

The Good, the Bad, and the Ugly: 30 Years of US Airline Deregulation

Article  in  Journal of Transport Geography · July 2009

DOI: 10.1016/j.jtrangeo.2009.02.012

CITATIONS READS
75 2,207

2 authors:

Andrew R. Goetz Timothy M. Vowles

University of Denver University of Northern Colorado
41 PUBLICATIONS   938 CITATIONS    24 PUBLICATIONS   468 CITATIONS   

SEE PROFILE SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Passenger and Freight Rail Partnerships in Shared Use Corridors: Case Studies in Boston, Chicago, and Denver View project

All content following this page was uploaded by Timothy M. Vowles on 22 November 2017.

The user has requested enhancement of the downloaded file.

 The Good, the Bad, and the Ugly: Thirty Years of US Airline Deregulation
Pre-Publication Draft 8/8/2008

Andrew R. Goetza
Timothy M. Vowlesb
a
Department of Geography, University of Denver, Denver, CO, United States
b
Department of Geography, University of Northern Colorado, Greeley, CO, United
States

1. Introduction to Airline Deregulation

It has been thirty years since the US Airline Deregulation Act was approved by
Congress on October 24, 1978 and was signed into law by President Jimmy Carter
four days later. This act meant that the government would no longer be engaged in
economic regulation of the airline industry, after forty years of regulatory control by
the Civil Aeronautics Board (CAB). Instead, private airlines were allowed to make
all decisions regarding entry, exit, frequency of service, and fares, while authority
over mergers and acquisitions was transferred to the Department of Transportation
(and later to the Department of Justice) upon the CAB’s termination on December 31,
1984.

The US airline industry was one of the first to be deregulated, and has come to
symbolize the beginning of a tectonic shift in global economic policy toward
neoliberalism that started in the late 1970s and 1980s. Seen from today’s perspective,
deregulation was part of the neoliberal policy agenda enacted by the Thatcher
government in the UK and the Reagan Administration in the US, based on the
economic theories of Frederick von Hayek, Milton Friedman, and the Chicago School
of Economics that favored a more laissez-faire approach to economic matters. From
the structural adjustment programs of the 1980s to the Washington Consensus in the
1990s, neoliberal economic policies held sway in the US and UK, and were actively
promoted around the world through the actions of the US government, the World
Bank, and International Monetary Fund, among other governments and agencies.
Thomas Friedman (2000) identified deregulation as one of the central characteristics
of the “golden straitjacket” approach for national success in the contemporary era of
globalization, along with privatization, free trade, reducing state bureaucracies,
opening markets to foreign investment and ownership, and other policies that favor
the private sector (Goetz 2002).

Airline deregulation in the US has been widely hailed as a success by government

agencies, several research organizations and think-tanks, the airline industry itself,
and the popular media. The US Department of Transportation (1990; 1996; 2000),
the US Government Accountability Office (2006), the Transportation Research Board
(1991; 1999), and the Brookings Institution (Morrison and Winston 1995; 2008;
Winston and Peltzman 2000), among others (Levine 2006) have each documented the
success of airline deregulation, especially in terms of lower fares, increased passenger

1
traffic, and more flights since 1978. The airline industry, mainly through the US Air
Transport Association and other trade groups, has also touted the benefits of
deregulation, and has remained publicly supportive. Two popular video
documentaries and companion books, Commanding Heights: The Battle for the World
Economy (Yergin and Stanislaw 2002) and The First Measured Century (Caplow,
Hicks, and Wattenberg 2001) featured airline deregulation as one of the marquee
successes of the neoliberal agenda over the last thirty years.

Yet, despite this chorus of support, numerous concerns regarding US airline

deregulation have emerged over the last thirty years. The industry has gone through
waves of mergers and consolidations that have resulted in high levels of single-firm
concentration in certain markets (USGAO 1988; 1998c; 1999a; 2000; 2001c). The
widespread adoption of hub-and-spoke networks, in conjunction with industry
consolidation and barriers to entry, has led to the establishment of “fortress hubs”,
where a single airline has come to control 70%, 80%, or even 90% of the market in
those cities (USGAO 1989; 1990b; 1996b; 1997a; 1998a). This domination has
resulted in a fare premium, or “monopoly rent” that travelers from those cities have
been forced to pay (Borenstein 1989; USGAO 1990a; 1991b; 1994; 1999b). In
addition to the fortress hubs, many mid-sized and smaller communities have
encountered substantially increased average fares and reduced levels of service,
leading to the development of programs to ameliorate these problems (USGAO
1990c; 1991a; 1996a; 1997b; 2001a; 2002; 2003; 2005b; 2006b). Certain regions of
the US, such as the southeast Piedmont area, the upper Midwest, and parts of the
Northeast, have been identified as “pockets of pain” because of perennially high fares
and poorer quantity and quality of service (USGAO 1998b; 1999c; 1999d; Goetz
2002). Throughout the period of deregulation, and especially in the late 1990s,
smaller carriers have alleged that larger airlines engaged in predatory pricing
behavior to drive the smaller carriers out of lucrative markets or out of business
altogether (USDOT 2001). And, the financial condition of the US airline industry
since deregulation began has been highly erratic, as losses have overwhelmed profits
by a wide margin.

Added to these concerns is the overall role that deregulation has played in other
industries, which has resulted in a number of major economic scandals. The Savings
and Loan (S&L) crisis of the late 1980s and early 1990s was caused in part by federal
legislation, such as the Depository Institutions Deregulation and Monetary Control
Act (the Garn-St Germain Act), that deregulated the industry and ultimately led to a
$125 billion US government bail-out when many S&Ls failed (Calavita, Pontell, and
Tillman 1997; Congressional Budget Office 1992; Lowy 1991; Mayer 1990;
Robinson 1990; White 1991). Energy deregulation in California facilitated corporate
fraud and abuse in the case of the Enron scandal and collapse in 2001 (Slocum 2001).
Financial deregulation is also implicated in the current sub-prime mortgage crisis that
is ravaging many homeowners, neighborhoods, and financial institutions, while
wreaking general havoc on the US economy (Kuttner 2007). So far, mortgage giant
Countrywide Financial received a $5 billion US government bail-out in 2007, the US
Federal Reserve assisted the sale of financial institution Bear-Stearns in March 2008

2
with $30 billion of funds and guarantees, and the US Treasury Department and
Federal Reserve bank have announced plans to support the Federal National
Mortgage Association [Fannie Mae] and the Federal Home Loan Mortgage
Corporation [Freddie Mac] in July 2008 due to the losses incurred as part of the sub-
prime mortgage crisis.

In comparison to these other industries that have been deregulated, the airlines have
been a relative success story. Yet, there are troubling similarities in each of the cases
of industry deregulation. While the airline industry has not yet experienced crises on
the scale of the savings and loan industry or the mortgage institutions, the
deregulatory ethos that dismisses the role of government oversight is the common
denominator. Fortunately for the airline industry and travelers, the problems of
deregulation have been relatively less severe, but experiences in the other industries
are important lessons that should be heeded.

After some discussion of theoretical and historical background, the good, bad, and
“ugly” results of US airline deregulation will be presented, followed by implications
and conclusions.

2. Theoretical and Historical Background

Relevant Economic Concepts

There are a number of economic concepts that are relevant to the theoretical
discussion of regulation and deregulation in industries and economies.

Many traditional neoclassical economic models are predicated on the assumption of

“perfect” or “pure” competition, wherein very large numbers of buyers and sellers
trade standardized products or services in a market and no one entity can control
prices. While few, if any, actual industries can be described as perfectly competitive,
some industries, such as traditional agriculture, have approximated this behavior. The
concept of perfect competition has attained considerable analytical importance
because it is a tractable starting point against which actual economic performance can
be compared and has been widely used as a basic assumption in economic models. In
a perfectly competitive market, there should be no need for government regulation
because the market is not subject to monopoly abuse.

At the other end of the spectrum is “perfect” or “pure” monopoly, wherein the market
for a product or service is controlled by only one seller, and prices are wholly
determined by that seller. An oligopoly refers to a market that is controlled by only a
few sellers, and can behave like a monopoly. Similar to perfect competition, there are
few, if any, actual industries that are perfect monopolies, but some industries with
large economies of scale and high barriers to entry such as classic public utilities
(e.g., electric power, water supply), have been considered to be monopolistic. An
industry that is characterized by only one buyer that can exert control over prices is
called a perfect monopsony. In an industry characterized by monopoly or monopsony

3
conditions, and in which there is a significant “public interest” in the operation of an
industry, it has been necessary for government to enact regulations so that single
entities cannot unduly control prices and quantity produced to the detriment of the
public.

Real-world industries and markets lie on a continuum somewhere between pure

competition and pure monopoly. The need for government regulation depends on the
degree to which an industry is subject to monopoly abuse, as well as the degree of
public interest in that industry. The extent of government regulation has changed
over time, depending on economic conditions and perceptions. Throughout much of
the 1800s in the US, a laissez-faire system of capitalism reigned supreme whereby
government played virtually no role in economic matters, and private firms had carte
blanche in business matters within the existing legal framework. This led to a period
of Darwinistic survival of the fittest, where large monopolies came to dominate
important industries, including steel, oil, railroads, banking, and communications.
The railroad industry was one of the first to be subject to significant government
regulation in the US because of the outcry from farmers as part of the Granger
movement which strenuously objected to monopoly pricing by the railroads. This
political movement led to the promulgation of the Interstate Commerce Act of 1887
that created the Interstate Commerce Commission (ICC) with the purpose of
regulating railroad rates, entry, and exit. This form of regulation was extended to
motor carriers (trucks) and airlines in the 1930s.

The US airline industry in the 1930s was just starting to become a contributor to the
movement of passengers and mail, although it was beset by a number of problems
due to its fledgling technology as well as depressed economic conditions of the time.
Market failure during the Great Depression of the 1930s led the federal government
to develop a variety of regulatory mechanisms to stabilize and bolster the national
economy. In the airline industry, the federal government had been supporting airline
delivery of mail through a subsidy program, but the cash subsidies were growing
larger, which was a problem. Numerous airline companies started and failed, creating
an air of instability in the industry, compounded by a disastrous safety record for a
technology that was still in its developmental phase. In response to these concerns,
the US Congress promulgated the 1938 Civil Aeronautics Act which created the Civil
Aeronautics Authority (renamed in 1940 as the Civil Aeronautics Board [CAB]) to:
• encourage and develop the air transport system
• promote safety and economic growth
• regulate route entry and exit, fares, mergers and acquisitions, and subsidies

The CAB was authorized to award “certificates of public convenience and necessity”
to airlines to serve specific markets. Sixteen airlines (including American,
Continental, Delta, Northwest, and United) were “grandfathered” in as original trunk
airlines. Local service airlines and air taxis (commuter airlines) were also allowed to
begin service during the 1940s. The CAB awarded routes to airlines so as to provide
a mix of larger and smaller markets to each airline, expecting that each airline would
be able to cross-subsidize losses in smaller markets with profits earned in larger ones.

4
Thus, each airline was required to serve certain less profitable routes but was also
given more lucrative routes to help compensate.

The system of regulation provided stability in the airline industry that facilitated its
technological and economic growth over the next forty years. But a number of
problems with the regulatory system led to the beginning of its reconsideration, as the
system created some market inefficiencies. Airlines were not able to compete with
each other based on price, due to regulated pricing by the CAB, and thus competed
with each other on quality of service. The CAB was very inflexible regarding
changes in pricing, entry, or exit, thus depriving travelers of different price/service
options. The CAB did approve fare increases regularly as airlines sought to pass
along increasing costs. And, the issue of regulatory capture (who regulates the
regulators?) by special interests is always a concern in any regulated environment.

By the 1970s, these concerns with the regulatory system led to a reexamination of the
efficacy of a regulated airline industry. A number of economic studies (Caves 1962,
Levine 1965, Jordan 1970, Keeler 1972, and Douglas and Miller 1974) laid the
groundwork for deregulation by showing that unregulated intrastate airlines in
California and Texas were able to offer lower fares and increased service in
comparison to regulated airlines. These and other studies (Crane 1944; Koontz 1951;
Proctor and Duncan 1954; Wheatcroft 1956; Cherrington 1958; Gordon 1965; Eads et
al. 1969; Straszheim 1969; Murphy 1969; White 1979) also found that there were no
significant economies of scale or barriers to entry in the airline industry, thus
supporting the claim that continued regulation was not needed. Other studies and
testimonies (Kahn 1977; 1978; Bailey and Panzar 1981; Baumol, Panzar, & Willig
1982) suggested that the theory of contestable markets, wherein just the potential
threat of entry would cause firms to eschew monopoly pricing and keep fares at lower
levels, was applicable to the airline industry. Armed with these studies, a political
consensus began to emerge that the airline industry should be deregulated.
Congressional hearings in 1975, led by Senator Edward Kennedy and assisted by
current Supreme Court Justice Stephen Breyer, and the appointment of deregulation
advocate Alfred Kahn as Chairman of the CAB in 1977 paved the way for the
decision to deregulate the airline industry.

The Airline Deregulation Act was promulgated by the US Congress and signed into
law in October 1978, calling for removal of CAB authority over fares, entry, and exit.
Any carrier that was “fit, willing, and able” would be allowed to serve any route at
any fare. After a transition period from 1978-1982, the CAB itself was sunsetted in
December 1984. Authority over mergers and acquisitions was transferred to the
Department of Transportation from 1985-1989, and then finally to the Department of
Justice in 1989.

3. Results of Airline Deregulation

Overview of the US Airline Industry since 1978

5
 Since 1978, the US airline industry has experienced several waves, or phases, of
expansion and retrenchment, with significant effects on industry structure,
profitability, patterns of service, and average fares. From 1978 to 1983, the newly
deregulated industry witnessed an influx of new entrants in many markets that had
previously been protected by the CAB. The ten trunk airlines that were in existence
at the start of deregulation (American, Braniff, Continental, Delta, Eastern,
Northwest, Pan Am, TWA, United, and Western) saw their market share decline from
87% to 75 % as a result of the growth among the formerly local service/regional
airlines (e.g., Frontier, Ozark, Piedmont, Republic, U.S. Air), the intrastate airlines
(e.g., Air California, Air Florida, Pacific Southwest, and Southwest), charter airlines
(e.g., American TransAir [ATA], Capitol and World), and completely new airlines
(e.g., America West, Jet America, Midway, Midwest Express, Muse, New York Air,
and People Express).

From 1984 to 1993, the former trunk airlines (now referred to as majors based solely
on their size) were able to grow through mergers, acquisitions, and bankruptcies
leading to increased concentration and market share. After the demise of Braniff,
Eastern, and Pan Am, and the absorption of Western into Delta, the remaining ten
largest airlines held a 97% market share in 1991 (Goetz 2002). American,
Continental, Delta. Northwest, United, and US Air became the dominant players
through acquisitions, alliances with regional and commuter airlines, increasing
control over airport gates and slots, and successful marketing strategies such as
development and use of computer reservation systems (CRSs), frequent flyer
programs, and travel agent commission overrides (Levine 1987). Smaller
independent airlines were unable to compete with the majors, and many were
acquired or folded.

In the mid-late1990s, another wave of expansion occurred that featured new entrants
such as Frontier1, Jet Blue, Kiwi, Midway2, Reno, Spirit, ValuJet/AirTran, Vanguard,
and Western Pacific. Together with the continued growth of Southwest Airlines,
America West, ATA, and Midwest Express, the larger carriers experienced a decline
in their market share through the 1990s. But by the late 1990s, buoyed by a strong
economy and increased demand for air travel, the majors reasserted their strength for
a brief time.

The post-2000 period has been very difficult for the US airline industry. The
principal catastrophe was the terrorist attacks on September 11, 2001, in which two
American Airlines and two United Airlines planes were hijacked, and deliberately
crashed into the World Trade Center, the Pentagon, and a field in southwestern
Pennsylvania. This event was followed by an unprecedented four-day shutdown of
the airline system, and a prolonged period of low demand due to economic recession,

1
The original Frontier Airlines was a local service carrier before deregulation and was acquired by
PeopleExpress and then folded into Continental in 1986. The new Frontier Airlines started operations in
1993.
2
The original Midway Airlines started shortly after deregulation began and ceased operations in 1991. The
new Midway Airlines started service in 1993.

6
heightened security restrictions, the SARS outbreak, concerns over the invasions of
Afghanistan and Iraq, and rising fuel costs. This “perfect storm” of events led to the
loss of nearly $35 billion from 2001 to 2005 (US Air Transport Association 2006), by
far the largest losses ever for the US airline industry. The largest and oldest airlines,
increasingly referred to as “legacy” carriers, were particularly hard hit.
Delta, Northwest, United, and US Airways (twice) filed for bankruptcy protection
since 2002, TWA was acquired by American in 2001, US Airways merged with
America West in 2005, and the publicly-supported Pension Benefit Guarantee
Corporation (PBGC) was forced to take over pension benefit plans from United and
US Airways. In contrast, low-cost carriers (LCCs) such as Southwest and Jet Blue
were profitable throughout this period, and other surviving low-cost carriers were not
as badly affected as the legacy carriers. Most recently, in 2008, the sharp increase in
the cost of fuel has hurt the entire industry, leading to the termination of service by
Aloha Airlines, ATA, and Skybus Airlines, bankruptcy protection for Frontier, and
massive financial losses for most other airlines.

Results of Deregulation--“The Good”

As mentioned previously, most assessments of US airline deregulation have been

positive. Reports from the Transportation Research Board (1991; 1999) endorsed
airline deregulation, noting that consumers had benefited from low prices and new
services, carriers had become more cost conscious, and industry productivity was
improving. The US Government Accountability Office (2006) stated that “the
change in fares and service since deregulation provides evidence that the vast
majority of consumers have benefited, though not all to the same degree.” They also
concluded that “reregulation of airline entry and fares would likely reverse much of
the benefits that consumers have gained and would not save airline pensions.” The
Brookings Institution (Winston and Morrison 2008) noted that the nation has reason
to celebrate the 30th anniversary of the Airline Deregulation Act because fares have
fallen significantly, flight frequency has increased, carriers have become more
efficient, and air travel safety continues to improve.

Indeed, there have been benefits to airline deregulation. The total number of
passengers flying on US airlines has nearly tripled over the past thirty years from
approximately 275 million in 1978 to nearly 750 million in 2006 (see Figure 1). It
could be argued that the number of passengers would have increased without
deregulation, but it most likely would not have been nearly as high. Every one of the
top 100 air passenger cities experienced an increase in the number of passengers over
the last thirty years (see Figure 2). The largest increases were for cities along the east
coast, Florida, Texas, and the far west. Many cities in the midwest and south had
smaller increases. The number of flight departures increased over twofold from 5
million in 1978 to over 11 million in 2006 (see Figure 3). Nearly every major air
passenger city experienced an increase in flight departures (see Figure 4). The largest
increases were in the northeast, Florida, and California, while Pittsburgh and New
Orleans were the only two cities with decreases.

7
 It has been well-documented that average fares have declined during the period of
deregulation (Transportation Research Board 1999; US Department of Transportation
2000). Figure 5 illustrates that average fares have continued to trend downward from
1993 to 2007, especially when controlling for inflation. Non-adjusted fares increased
slightly during the 1990s, dropped significantly during the first half of the 2000s, but
started to rise again in the last several years due to the rapidly rising cost of fuel.

Air safety has generally not been compromised during the period of deregulation,
despite concerns that carriers under financial stress might forego safety overhauls and
aircraft maintenance in order to save money. Airline fatalities have generally
declined over the last thirty years, including several years with no fatalities (see
Figure 6). Of course, 2001 stands out as a year with a sharp increase in fatalities but
that was due to the terrorist attacks of September 11. The number of fatal accidents
per 100,000 departures has also been trending downward.

US domestic airline deregulation has also had a major effect on the international
aviation regulatory environment. Since US aviation policy has embraced
deregulation in both the domestic and international arenas, a large number of
liberalized ‘open skies’ bilateral air service agreements have been signed with other
states that shared this policy initiative. As a result, international fares have been
reduced, international flights and passengers have increased, and more cities are now
receiving international service than before deregulation started.

Results of Deregulation--“The Bad”

Even though there have been some positive results as just discussed, there have also
been some negative aspects associated with U.S. airline deregulation. There has been
a tremendous amount of turnover in the U.S. airline industry over the last thirty years,
with many carriers being merged, acquired, or liquidated. This has led to increased
instability in employment and distinct periods of labor strife. The takeover of Eastern
Airlines by Continental CEO Frank Lorenzo in the late 1980s led to a particularly
acrimonious strike by Eastern’s mechanics which ultimately resulted in the demise of
Eastern and bankruptcy for Continental. Overall, labor-management relations in the
airline industry over the last thirty years have not been stellar. Labor strife has
negatively affected most of the major airlines, with some notable exceptions such as
Southwest Airlines and CEO Herb Kelleher.

Numerous studies by the US Government Accountability Office3 (1988, 1990a,

1990c, 1991a, 1991b, 1993, 1996a, 1996b, 1996c, 1997a, 1997b, 1997c, 1998a,
1998b, 1999b, 1999c, 1999d, 2002, 2003, 2005b, 2006a, 2006b), the Transportation
Research Board (1991, 1999) and others (Borenstein 1989; Brenner 1988; Debbage
1993; Dempsey and Goetz 1992; Fleming 1991; Goetz 2002; Goetz and Sutton 1997;
Ivy 1993; Reynolds-Feighan 1998; Vowles 2000) have identified some problems with
airline service and fares. In general, service and fares in shorter-distance4 and less-

3
called the US General Accounting Office prior to 2004
4
The GAO defined short-distance routes as less than 250 miles.

8
traveled city-pair markets (i.e. smaller cities) have not been as good as those in
longer-distance and heavily-trafficked markets (US Government Accountability
Office 2006). Travelers in concentrated markets subject to single-carrier domination
with market shares of 60% or higher have tended to pay higher fares. Travelers have
also experienced a decline in the quality of airline service, as measured by increased
congestion and delays, longer travel times, and poorer customer service.

The combination of these service and fare tendencies has exhibited a distinctive
spatial form, wherein certain cities in certain regions have chronically received poorer
service and higher fares. Figures 7a, 7b, and 7c show the low-fare regions in blue and
the high fare regions in red for 1993, 1998, and 2003, respectively. The southwest
and west coast have generally experienced lower air fares throughout this time period,
while the southeast, the upper Midwest, and parts of the northeast have had higher
fares. These geographic patterns have remained relatively stable throughout this time
period, resulting in certain places (e.g., Charlotte, NC; Cincinnati, OH; Memphis, TN,
and Richmond, VA) that can be identified as “pockets of pain,” i.e., places that have
not benefited from airline deregulation (see Figure 8). Figure 9 displays average fares
for 2007, showing continued higher fares in the southeast, upper midwest, and parts
of the northeast, in addition to higher fares along the west coast. Lower fares are
concentrated in Florida, Texas, and parts of the northeast, midwest and west.

Results of Deregulation-- “The Ugly”

What is undoubtedly the ugliest aspect of the US airline industry over the last thirty
years has been its financial performance. Figure 10 illustrates the cyclical nature of
US airline financial performance from 1977 to 2006. While there have been some
highly profitable periods, such as 1995-2000, there have been some spectacularly
unprofitable periods, such as 1990-1994 and especially 2001-2005. The most
troubling aspect of this cyclical pattern is that the amplitudes of the cycle keep getting
larger and the degree of losses is larger than the previous degree of gains. This trend
does not bode well for the future of the airline industry, especially considering the
sharp increase in fuel costs since 2005 which shows no sign of abating.

The financial problems in the US airline industry have led to many changes in
industry structure. Table 1 documents significant bankruptcies, terminations,
mergers, and acquisitions just from 2000 to 2008. Industry stalwarts Delta,
Northwest, United, and US Airways (twice) have each declared bankruptcy since
2000, as has 1990s startup Frontier. Aloha, ATA, and Skybus have ceased operations
as of 2008. TWA was acquired by American in 2001, US Airways merged with
America West in 2005, and Delta and Northwest announced their merger plans
(subject to Department of Justice approval) in 2008. United and Continental agreed
to an alliance, or “virtual merger” in 2008 to link international networks and share
technology and passenger perks (Johnsson 2008).

Another disturbing consequence of the financial disasters in the airline industry has
been the move by some airlines under bankruptcy protection to terminate their

9
defined benefit pension programs. Both United and US Airways since 2000, and
Eastern and Pan Am in 1991, were successful in paring their pension obligations thus
necessitating the federal Pension Benefit Guarantee Corporation (PBGC) to assume
some of the pension liabilities. Together with the major steel companies, the airlines
dominate the list of the largest pension bailouts in PBGC history (See Table 2). In
many cases, the PBGC does not cover the full amount of pensions that workers in the
original pension plans were entitled to receive. Nevertheless, these workers are
provided some level of pension benefits from the PBGC, which is funded through
insurance premiums paid by sponsors of defined benefit plans and through other
funds.

4. Conclusions and Reflections

After experiencing thirty years of deregulation in the US airline industry, most
observers agree that it has been a success, particularly in lowering average fares,
providing more flights, and increasing carrier efficiency, while maintaining a good
safety record. On the negative side, airlines have encountered wide swings in
profitability, with losses being much larger than gains. This financial turbulence has
resulted in increasing instability in industry structure and employment, while service
quality has declined. Fares and service for smaller cities, shorter-haul routes, and
more concentrated markets (where single-carrier domination persists) have also been
negatively affected.

The experience with deregulation in the airline industry has been better than in some
other industries that have been deregulated. Deregulation in the financial services
industry caused, at least in part, the savings and loan scandal of the 1980s, and is
implicated in the current sub-prime mortgage crisis of the mid-late 2000s. Energy
deregulation in California was one of the catalysts that allowed Enron to engage in its
speculative and abusive behavior, leading to the collapse of the company and
devastating effects on Enron’s workers and energy consumers. Though not
experiencing nearly as much turmoil, the airline industry shares some of the troubling
developments that have affected other deregulated industries, especially financial
instability and the need for “non-market interventions” (i.e., governmental bailouts).
In important “public interest” industries like financial services, energy, aviation, and
others, there is a necessary role for government oversight. Many industries were
deregulated in the “frenzy” of the movement of the 1980s and beyond, oftentimes
with insufficient regard for the long-term consequences. A “deregulation mindset”
took over wherein it seemed that well-established, well-intentioned, and common-
sense regulations no longer mattered and that the invisible hand of the laissez-faire
market would solve all problems. In retrospect, in the most egregious cases of abuse,
an ounce of regulatory prevention would have been worth more than a pound of cure.
It is thus the irrational aversion to government regulation, no matter the justification,
that typified the excesses of the deregulation movement and ultimately laid the
groundwork for the deregulation-attributed scandals that have occurred. Fortunately,
at least in comparison, the airline industry and travelers have not experienced a
complete meltdown.

10
 The principal concern for the future of the airline industry is sustainability, both
financial and environmental. Financial losses on the order of those encountered by
the US airlines especially since 1990 are clearly not sustainable. Outside of
Southwest Airlines, no airline has been able to maintain a consistent record of
profitability. It is inevitable that fares will increase via industry consolidation as a
result of the need to cover costs, especially rising fuel costs. What is not clear is the
effect that rising fares will have on passenger demand. Many travelers have grown
accustomed to relatively low fares, but may balk at significant fare increases.
Changes in business and leisure travel behavior may signal the need for retrenchment
in airline service capacity. Other modes of travel (e.g., rail) or telecommunication
alternatives to travel (e.g., videoconferencing), will become more attractive as the
fares rise. The demand for air travel is relatively elastic, and substantial increases in
fares will have a depressing effect on demand.

Ultimately, the long-term future of the airline industry revolves around energy and
environmental sustainability, both in terms of the price and availability of jet fuel, and
the ability to develop alternative fuel aircraft with reduced pollution emissions.
Airlines are the premier long-distance form of passenger and light, high-value cargo
transportation, conveying great economic benefits in linking together far-flung places.
But there is a major concern with the future of petroleum resources, both in terms of
its cost and ultimate availability. Aviation needs to develop more efficient and
alternative fuel aircraft in order to remain sustainable. A switch to alternative fuels
can also lessen air transport’s considerable environmental costs, especially emissions
that contribute to global warming and local air pollution. Aviation is currently an
unsustainable mode of transportation, and requires massive changes for its continued
survival.

References

Air Transport Association (ATA). 2006. Annual revenue and earnings, US airlines-all
services. ATA, Washington, DC.

Bailey, Elizabeth E. and John C. Panzar. 1981. The Contestability of Airline Markets
during the Transition to Deregulation. Law and Contemporary Problems 44: 125-45.

Baumol, William, John C. Panzar, and Robert Willig. 1982. Contestable Markets and the
Theory of Industry Structure. New York: Harcourt Brace Jovanovich.

Borenstein, S. 1989. Hubs and High Fares: Airport Dominance and Market Power in the
U.S. Airline Industry. Rand Journal of Economics 20: 344-365.

Brenner, M. 1988. Airline Deregulation—A Case Study in Public Policy Failure.

Transportation Law Journal 16: 179-227.

11
Calavita, Kitty, Henry N. Pontell, and Robert H. Tillman. 1997. Big Money Crime: Fraud
and Politics in the Savings and Loan Crisis. Berkeley: University of California Press.

Caves, R. E. 1962. Air Transport and Its Regulators: An Industry Study. Cambridge, MA:
Harvard University Press.

Cherrington, P. W. 1958. Airline Price Policy: A Study of Domestic Airline Passenger

Fares. Cambridge: Harvard University, Graduate School of Business Administration.

Congressional Budget Office. 1992. The Economic Effects of the Savings & Loan Crisis.
Washington, D.C.: Congress of the U.S., Congressional Budget Office.

Crane, J. B. 1944. The Economics of Air Transportation. Harvard Business Review 22:
495-508.

Debbage, Keith G. 1993. U.S. Airport Market Concentration and Deconcentration.

Transportation Quarterly 47: 115-36.

Dempsey, Paul Stephen and A. R. Goetz. 1992. Airline Deregulation and Laissez Faire
Mythology. Westport, CT: Quorum Books.

Douglas, G. W. and J. C. Miller III. 1974. Economic Regulation of Domestic Air

Transport: Theory and Policy. Washinton, DC: The Brookings Institution.

Eads, G. L., M. Nerlove, and W. Raduchel. 1969. A Long-Run Cost Function for the
Local Service Airline Industry: An Experiment in Non-Linear Estimation. Review of
Economics and Statistics 51: 258-270.

Fleming, Douglas K. 1991. Competition in the U.S. Airline Industry. Transportation

Quarterly 45: 181-210.

Friedman, Thomas L. 2000. The Lexus and the Olive Tree: Understanding Globalization.
New York: Anchor Books.

Goetz, Andrew R. 2002. Deregulation, competition, and antitrust implications in the US

airline industry. Journal of Transport Geography 10(1): 1-19.

________ and Christopher J. Sutton. 1997. The Geography of Deregulation in the U.S.
Airline Industry. Annals of the Association of American Geographers 87: 238-263.

Gordon, R. J. 1965. Airline Costs and Managerial Efficiency. In Gordon, R. J. (ed.)

Transportation Economics: A Conference, pp. 61-91. National Bureau of Economic
Research.

Ivy, Russell L. 1993. Variations in Hub Service in the U.S. Domestic Air Transportation
Network. Journal of Transport Geography 1: 211-218.

12
Johnsson, Julie. 2008. United, Continental join forces. Chicago Tribune. June 20, 2008.

Jordan, W. 1970. Airline Regulation in America. Baltimore: Johns Hopkins Press.

Kahn, Alfred. 1977. Testimony in Hearings on Aviation Regulatory Reform before the
Subcommittee on Aviation of the Committee on Public Works and Transportation, 95th
Congress, 1st Session, at 178.

________. 1978. Talk to the New York Society of Security Analysts, February 2, p. 24.

Koontz, H.D. 1951. Economic and Managerial Factors Underlying Subsidy Needs of
Domestic Trunk Line Air Carriers. Journal of Air Law and Commerce 18: 127-156.

Kuttner, Robert. 2007. The Bubble Economy. The American Prospect, September 24.

Levine, Michael E. 1987. Airline Competition in Deregulated Markets: Theory, Firm

Strategy, and Public Policy. Yale Journal on Regulation 29: 393-494.

________. 2006. Why Weren’t the Airlines Reregulated? Yale Journal on Regulation
23(2): 269-297.

Lowy, Martin. 1991. High Rollers: Inside The Savings And Loan Debacle. New York:
Praeger.

Mayer, Martin. 1990. The Greatest-Ever Bank Robbery: The Collapse of the Savings and
Loan Industry. New York: C. Scribner's Sons.

Morrison, S. and C. Winston. 1995. The Evolution of the Airline Industry. Washington,
DC: Brookings Institution.

________. 2008. The State of Airline Competition and Prospective Mergers. Statement
for “Competition in the Airline Industry” Hearing before the Judiciary Committee
Antitrust Task Force, United States House of Representatives, Washington, DC, April 24.

Murphy, N. B. 1969. Sources of Productivity Increases in the U.S. Airline Passenger

Industry. Transportation Science 3: 233-238.

Proctor, J. W. and J. S. Duncan. 1954. A Regression Analysis of Airline Costs. Journal of

Air Law and Commerce 21: 282-292.

Reynolds-Feighan, Aisling J. 1998. The Impact of U.S. Airline Deregulation on Airport

Traffic Patterns. Geographical Analysis 30: 234-253.

Robinson, Michael A. 1990. Overdrawn: The Bailout of American Savings. New York:
Dutton.

13
Slocum, Tyson. 2001. Blind Faith: How Deregulation and Enron’s Influence Over
Government Looted Billions from Americans. Public Citizen’s Critical Mass Energy &
Environment Program. Washington, DC: Public Citizen.

Straszheim, M. R. 1969. The International Airline Industry. Washington, DC: The

Brookings Institution.

Transportation Research Board. 1991. Special Report 230: Winds of Change: Domestic
Air Transport Since Deregulation. Washington, DC: National Research Council.

________. 1999. Special Report 255: Entry and Competition in the U.S. Airline
Industry—Issues and Opportunities. Washington, DC: National Research Council.

U.S. Department of Transportation. 1990. Secretary’s Task Force on Competition in the

U.S. Domestic Airline Industry. Washington, DC.

________. 1996. The Low Cost Airline Service Revolution. Office of Aviation and
International Economics. Washington, DC.

________. 2000. Changes in Pricing since Deregulation. Office of Aviation Analysis.

Washington, DC.

________. 2001. Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air
Transportation Industry (Docket OST-98-3713): Findings and Conclusions on the
Economic, Policy, and Legal Issues. Issued by the Department of Transportation:
January 17, 2001.

U.S. General Accounting Office (now U.S. Government Accountability Office). 1988.
Airline Competition: Fare and Service Changes at St. Louis Since the TWA-Ozark
Merger. GAO/RCED-88-217BR, September.

________. 1989. Airline Deregulation: Barriers to Competition in the Airline Industry.

GAO-T-RCED-89-65, September.

________. 1990a. Airline Competition: Higher Fares and Reduced Competition at

Concentrated Airports. GAO/RCED-90-102. Washington, DC, July.

________. 1990b. Airline Competition: Industry Operating and Marketing Practices

Limit Market Entry. GAO/RCED 90-147. Washington, DC, August.

________. 1990c. Airline Deregulation: Trends in Airfares at Airports in Small and

Medium-Sized Comunities. GAO/RCED 91-13, Washington, DC, November.

________. 1991a. Fares and Concentration at Small-City Airports. GAO/RCED-91-51.

Washington, DC.

14
________. 1991b. Airline Competition: Effects of Airline Market Concentration and
Barriers to Entry on Airfares. GAO/RCED-91-101. Washington, DC, April.

________. 1993. Airline Competition: Higher Fares and Less Competition Continue at
Concentrated Airports. GAO/RCED-93-171, July.

________. 1996a. Airline Deregulation: Changes in Airfares, Service, and Safety at

Small, Medium-Sized, and Large Communities. GAO/RCED-96-79. Washington, DC,
April.

________. 1996b. Domestic Aviation: Changes in Airfares, Service and Safety Since
Airline Deregulation. GAO/RCED-96-126, April.

________. 1996c. Domestic Aviation: Barriers to Entry Continue to Limit Competition in

Several Key Domestic Markets. GAO/RCED-97-4, October.

________. 1997a. Domestic Aviation: Barriers to Entry Continue to Limit Benefits of

Airline Deregulation. GAO/T-RCED-97-120, May.

________. 1997b. Airline Deregulation: Addressing the Air Service Problems of Some
Communities. GAO-T-RCED-97-187, June.

________. 1997c. Domestic Aviation: Barriers Continue to Limit Competition. GAO/T-

RCED-98-32, October.

________. 1998a. Airline Competition: Barriers to Entry Continue in Some Domestic

Markets. GAO/T-RCED-98-112, March.

________. 1998b. Domestic Aviation: Service Problems and Limited Competition

Continue in Some Markets. GAO/T-RCED-98-176, April.

________. 1998c. Aviation Competition: Proposed Domestic Airline Alliances Raise

Serious Issues. Report GAO/T-RCED-98-215. Washington, DC, June 4.

________. 1999a. Aviation Competition: Effects on Consumers from Domestic Airline

Alliances Vary. Report GAO/RCED-99-37. Washington, DC, January.

________. 1999b. Airline Deregulation: Changes in Airfares, Service Quality, and

Barriers to Entry. GAO/RCED-99-92. Washington, DC, March.

________. 1999c. Airline Deregulation: Changes in Airfares and Service at Four South
Carolina Communities. GAO/T-RCED-99-117, March.

________. 1999d. Airline Deregulation: Changes in Airfares and Service at Buffalo, New
York. GAO/T-RCED-99-286. September.

15
________. 2000. Aviation Competition: Issues Related to the Proposed United Airlines-
US Airways Merger. GAO/01-212, December.

________. 2001a. Aviation Competition: Regional Jet Service Yet to Reach Many Small
Communities. GAO-01-344, Washington, DC, February 14.

________. 2001b. Aviation Competition: Restricting Airline Ticketing Rules Unlikely to

Help Consumers. GAO-01-831, Washington, DC, July 31.

________. 2001c. Proposed Alliance Between American Airlines and British Airways
Raises Competition Concerns and Public Interest Issues. GAO-02-293R, Washington,
DC, December 21.

________. 2002. Commercial Aviation: Air Service Trends At Small Communities Since
October 2000. GAO-02-432, Washington, DC, March 29.

________. 2003. Commercial Aviation: Factors Affecting Efforts to Improve Air Service
at Small Community Airports. GAO-03-330, Washington, DC, January 17.

U.S. Government Accountability Office (formerly General Accounting Office). 2004.

Commercial Aviation: Legacy Airlines Must Further Reduce Costs to Restore
Profitability. GAO-04-836, Washington, DC, August 11.

________. 2005a. Commercial Aviation: Bankruptcy and Pension Problems Are

Symptoms of Underlying Structural Issues, GAO-05-945 September 30.

________. 2005b. Commercial Aviation: Initial Small Community Air Service

Development Projects Have Achieved Mixed Results, GAO-06-21, November 30.

________. 2006a. Airline Deregulation: Reregulating the Airline Industry Would Likely
Reverse Consumer Benefits and Not Save Airline Pensions. GAO-06-630, Washington,
DC, June.

________. 2006b. Commercial Aviation: Programs and Options for the Federal Approach
to Providing and Improving Air Service to Small Communities. GAO-06-398T,
Washington, DC, September 14.

Vowles, Timothy M. 2000. The Effects of Domestic Alliances on Air Service Patterns in
the United States. Journal of Transport Geography 8: 277-284.

Wheatcroft, S. 1956. The Economics of European Air Transport. Manchester:

Manchester University Press.

White, Lawrence J. 1979. Economies of Scale and the Question of ‘Natural Monopoly’ in
the Airline Industry. Journal of Air Law and Commerce 44: 545-573.

16
________. 1991. The S & L Debacle : Public Policy Lessons for Bank and Thrift
Regulation. New York: Oxford University Press.
Winston, Clifford and Sam Peltzman, eds. 2000. Deregulation of Network Industries:
What’s Next? Washington, DC: AEI Brookings Joint Center for Regulatory Studies

17
List of Figures

Figure 1. Total US Airline Passengers, 1977-2006 (in thousands)

Figure 2. Percent Change in US Airline Passenger Enplanements for the Largest 100 US
Air Passenger Cities, 1978-2007

Figure 3. Flight Departures, 1977-2006

Figure 4. Percent Change in Flight Departures for the Largest 100 US Air Passenger
Cities, 1978-2007

Figure 5. Average One-Way Fares, 1993-2007 (in US dollars)

Figure 6. Fatalities and Fatal Accidents, 1977-2006

Figure 7. Geography of Air Fares for FAA-Defined Large, Medium, and Small Hub
Cities,
a. 1993
b. 1998
c. 2003

Figure 8. “Pockets of Pain” in the U.S. Air Transport System

Figure 9. Geography of Air Fares for the Largest 100 US Air Passenger Cities, 2007

Figure 10. Profits and Losses in the U.S. Airline Industry, 1977-2006 (millions of US
dollars)

List of Tables

Table 1. Significant US Airline Bankruptcies, Terminations, Mergers, and Acquisitions,

2000-2008

Table 2. Pension Benefit Guarantee Corporation (PBGC) Largest Bailouts

18
 800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

Figure 1

19
Figure 2

20
 14,000,000

12,000,000

10,000,000

8,000,000

Departures

6,000,000

4,000,000

2,000,000

0
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Figure 3

21
Figure 4

22
 $310.00

$290.00

$270.00

$250.00

Non-Adjusted
$230.00
Inflation Adjusted

$210.00

$190.00

$170.00

$150.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Figure 5

23
 Fatalities Fatal Accidents / 100,000 departures

700 0.140

600 0.120

500 0.100

400 0.080

300 0.060

200 0.040

100 0.020

0 0.000
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Figure 6

24
Figure 7a

Figure 7b

Figure 7c

25
Figure 8

26
Figure 9

27
 $9,000

($ millions)
$6,000

$3,000

$0
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

-$3,000

-$6,000

-$9,000

-$12,000

Figure 10

28
Table 1. Significant US Airline Bankruptcies, Terminations, Mergers, and Acquisitions,
2000-2008

Bankruptcies and Terminations

Airline Entered Bankruptcy Exited Bankruptcy Ceased Operations

Midway August 2001 October 2003
Sun Country January 2002
Vanguard July 2002
US Airways August 2002 March 2003
United December 2002 February 2006
Hawaiian March 2003 June 2005
US Airways September 2004 September 2005
ATA November 2004 March 2006 April 2008
Delta September 2005 April 2007
Comair September 2005 April 2007
Northwest September 2005 May 2007
Independence November 2005 January 2006
Big Sky January 2008
Champion March 2008 May 2008
Aloha March 2008
Skybus April 2008
Frontier April 2008

Mergers and Acquisitions

Airlines Date
TWA acquired by American April 2001
US Airways merged with America West September 2005
Delta merged with Northwest April 2008 (subject to regulatory approval)
United alliance agreement with Continental June 2008

29
 Table 2. Pension Benefit Guarantee Corporation (PBGC) Largest Bailouts

Amount Company Year of Termination

$3.6 billion Bethlehem Steel 2003
$1.9 LTV Steel 2002
$1.4 United Airlines pilots 2005
$1.2 National Steel 2003
$0.84 Pan American Airlines 1991
$0.73 US Airways pilots 2003
$0.69 Weirton Steel 2004
$0.67 TWA 2001
$0.57 Kaiser Aluminum 2004
$0.55 Eastern Air Lines 1991

30

View publication stats