Air Transportation Deregulation

Abstract

One of the most significant events in the air transportation industry was the Airline Deregulation Act of 1978. This paper will review what deregulation, in general is, and then move specifically to the Airline Deregulation Act of 1978. From there, this paper will explore what effects the Act has had on the industry. By understanding these concepts, one can better understand the environment the industry now operates in, and how far it has come.

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One of the most significant events in the air transportation industry was the Airline Deregulation Act of 1978. This paper will review what deregulation, in general is, and then move specifically to the Airline Deregulation Act of 1978. From there, this paper will explore what effects the Act has had on the industry. By understanding these concepts, one can better understand the environment the industry now operates in, and how far it has come.

Deregulation:

Deregulation is, in its most simplistic terms, when the government removes certain regulations on businesses, to encourage the industry. The premise behind deregulation is that with fewer regulations impeding operations, businesses will become more competitive. This increased competition will then result in higher productivity levels, increased efficiencies, and lower prices for consumers (“Deregulation”, 2004).

There have been some failures in attempts to deregulate certain industries. Most notably, the deregulation of the Savings and Loan industry in the 1980s was perceived as a failure and was subjected to re-regulation in order to balance out the industry. The Savings and Loan scenario is a perfect example of why regulation or deregulation must be handled responsibly and intelligently, taking into account and utilizing sophisticated economic theories to help predict the future results (“Deregulation”, 2004).

The Airline Deregulation Act was signed into law on October 28, 1978. The Act was created to remove governmental control and open up the passenger air transport industry to free market forces. As noted above, the desire was to increased efficiencies within the industry by promoting competition, which would hopefully lead to reduced airfares for consumers (“Airline Deregulation”, 2004).

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Civil Aeronautics Board:

Before the Act was enabled, the Civil Aeronautics Board (CAB) regulated all domestic air travel. They were in control of establishing fares, setting air traffic routes, and creating airline schedules. “The CAB promoted air travel, and due to their beliefs they held fares down in the short-haul market and let them be higher in the long-haul market. The CAB was also obliged to ensure that the airlines had a reasonable rate of return” (“Airline Deregulation”, 2004).

However, Congress, as well as others, began to see that the CAB was inhibiting the growth of the industry. They saw that because of the regulations that were in place, the CAB was actually encouraging inefficiencies. This was exacerbated in the 1970s when skyrocketing oil prices and inflation led to increased fares and capacity moratoriums. Congress felt that by deregulating the industry, the market forces within the industry would determine pricing, and improve the quantity and quality of air services within the United States. They also saw the potential for these market forces to reduce the inflated long-haul fares, as well as lower the barriers to entry for new airlines entering the industry (“Airline Deregulation”, 2004).

The deregulation took place faster than the anticipated four years schedule for complete deregulation of domestic routes. The CAB passed on many of its functions to the Department of Transportation (DOT), including the ability to grant antitrust immunity. In addition they were charged with the duty of ensuring smaller communities would still be serviced by air carriers, via the Essential Air Service program, by offering subsidies (“Airline Deregulation”, 2004).

As anticipated, the consumer did benefit from the deregulation. A General Accounting Office report conducted in 1996, reported that the average fare per passenger mile was actually 9 percent lower in 1994 than in 1979. However, airlines were struggling to survive in their newly created free market (“Airline Deregulation”, 2004).

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