Airline Deregulation Act

The Airline Deregulation Act (ADA) was a piece of US legislation signed into law on October 28, 1978. The main purpose of the act was to remove government control from commercial aviation and expose the passenger airline industry to market forces.

Contents

1 History of airline regulation and the CAB 2 Legislative terms 3 Effects 4 References

History of airline regulation and the CAB

Since 1938, the federal Civil Aeronautics Board (CAB) had regulated all domestic air transport as a public utility, setting fares, routes, and schedules. The CAB promoted air travel, for instance by generally attempting to hold fares down in the short-haul market, to be subsidized by higher fares in the long-haul market. The CAB was also obliged to ensure that the airlines had a reasonable rate of return.

It also earned a reputation for bureaucratic complacency; airlines were subject to lengthy delays when applying for new routes or fare changes, which were not often approved. World Airways applied to begin a low-fare New York City to Los Angeles route in 1967; the CAB studied the request for over six years only to dismiss it because the record was "stale." Continental Airlines began service between Denver and San Diego after eight years only because a U.S. Court of Appeals ordered the CAB to approve the application.

This rigid system encountered tremendous pressure in the 1970s. The 1973 energy crisis and stagflation radically changed the economic environment, as did technological advances such as the jumbo jet. Most of the major airlines, whose profits were virtually guaranteed, favored the system. But passengers forced to pay escalating fares did not, nor communities which subsidized air service at ever-dearer rates. Congress became concerned that air transport in the long run might follow the nation's railroads into trouble; in 1970 the Penn Central railroad had collapsed in what was then the largest bankruptcy in history, resulting in a massive taxpayer bailout in 1976.

In 1975 the United States Senate Judiciary Committee began hearings on airline deregulation; it was deemed a friendlier forum than the more appropriate place, the Aviation Subcommittee of the Commerce Committee. Airlines' dire predictions of a post-deregulation world were mitigated by the experience of thriving unregulated intrastate carriers such as PSA and Southwest Airlines and by the successful deregulation of air cargo in 1977.

In 1977, President Jimmy Carter appointed Alfred E. Kahn, a professor of economics at Cornell University, to be chair of the CAB. He would be the last, and earn the moniker "father of airline deregulation." Kahn argued that rather than sustain air travel, the CAB in fact acted to inhibit growth and encourage inefficient practices. He argued that removing regulation would help foster a new, efficient equilibrium of price, quantity, and quality of air service; that long-haul fares would decline, barriers to entry for new airlines would drop, and airlines could effectively deploy different aircraft for different roles (e.g. turboprops over jetliners in smaller markets).

Legislative terms

Senator Howard Cannon of Nevada introduced S.2493 on February 6, 1978. It passed and was signed by Carter, becoming Public Law 95-504 on October 24, 1978.

The act intended for various restrictions on airline operations to be removed over four years, with complete elimination of restrictions on domestic routes and new services by December 31, 1981, and the end of all domestic fare regulation by January 1, 1983. In practice, changes came rather more rapidly.

Among its many terms, the Act

• gradually eliminated the CAB's authority to set fares;
• required the CAB to expedite processing of various requests;
• liberalized standards for the establishment of new airlines;
• allowed airlines to take over service on routes underutilized by competitors or on which the competitor received a local service subsidy;
• authorized international carriers to offer domestic service;
• placed the evidentiary burden on the CAB for blocking a route as inconsistent with "public convenience";
• prohibited the CAB from introducing new regulation of charter trips;
• terminated certain subsidies for carrying mail effective January 1, 1986 and Essential Air Service subsidies effective ten years from enactment;
• terminated existing mutual aid agreements between air carriers;
• authorized the CAB to grant antitrust immunity to carriers;
• directed the FAA to develop safety standards for commuter airlines;
• authorized intrastate carriers to enter into through service and joint fare agreements with interstate air carriers;
• required air carriers, in hiring employees, to give preference to terminated or furloughed employees of another carrier for ten years after enactment;
• gradually transferred remaining regulatory authority to the U.S. Department of Transportation (DOT), and dissolved the CAB itself.

Safety inspections and air traffic control remained in the hands of the Federal Aviation Administration, and the act also required the U.S. Secretary of Transportation to report to Congress concerning air safety and any implications deregulation would have in that matter.

Effects

A GAO report in 1996 found that the average fare per passenger mile was about 9 percent lower in 1994 than in 1979. Between 1976 and 1990 the paid fare had declined approximately 30 percent in inflation-adjusted terms. Passenger loads have risen, partly because airlines can now transfer larger aircraft to busier routes and replace them with smaller ones on shorter, low-traffic routes.

However, these benefits of deregulation have not been evenly distributed through the national air transportation network. Costs have fallen more dramatically on heavily trafficked, longer-distance routes than on shorter, lighter ones.

Exposure to competition led to heavy losses and conflicts with labor unions at a number of carriers. Between 1978 and mid-2001 nine major carriers (including Eastern, Midway, Braniff, Pan Am, Continental, America West Airlines, and TWA) and over 100 smaller airlines had gone bankrupt or been liquidated—including most of the dozens of new airlines founded in deregulation's aftermath. Mergers and acquisitions among the survivors have created a "Big Six" club of "mega-carriers" and oligopolistic conditions in many markets.

For the most part, smaller markets did not suffer the loss of service predicted beyond losses projected during regulation. However, until the advent of low-cost carriers, point-to-point transit declined in favor of a more pronounced hub-and-spoke system, meaning they were served with smaller aircraft. While more efficient for serving smaller markets, this system has also allowed some airlines to drive out competition from their "fortress hubs."

Quality of service is generally acknowledged to have declined. However, the popularity of no-frills airlines such as People Express and the success of low-cost carriers such as Southwest Airlines which do not offer many traditional amenities indicates that a substantial proportion of passengers are more swayed by price than comfort.

Increases in the average level of safety are sometimes attributed to the Act. Since safety regulations remained enforced throughout, and based on the technological improvement of aircraft and air traffic control, over time such claims are probably specious.

Deregulation has in many cases led to predatory pricing and other anti-competitive behavior, and to airlines overextending themselves financially; several bankruptcies and takeovers of airlines in the years following deregulation may be attributable to this. Another common anti-competitive practice of major airlines is to charge substantially less for a round trip on a given itinerary than for a one-way trip, or to charge substantially more for a given segment of a multi-segment itinerary than for the complete itinerary, which constitutes a form of tying.

References

• Kahn, Alfred E. "Airline deregulation (http://www.econlib.org/library/Enc/AirlineDeregulation.html)" in Concise Encyclopedia of Economics.
• Barnum, John W. "What Prompted Airline Deregulation 20 Years Ago? (http://articles.corporate.findlaw.com/articles/file/00037/004355)," Presentation to the Aeronautical Law Committee of the Business Law Section of the International Bar Association, September 15, 1998.