Airline Deregulation and its Consquences

Andrew Wang

Deregulation is, and always will be, a detriment to the American people. Despite what may initially seem as benefits, the American people will eventually have to reap the costs. There is no free lunch, not today, not ever, and especially not during a recession. Deregulation in essence severs the tie that connects the federal government with a certain industry. Without government regulation, private firms are free to do whatever they wish. Even though the prices of the good or service may be lowered due to a more competitive environment, there are externalities that balance – if not exceed – the positive. The most glaring negative externality stems from the fact that there is no regulation. This may encourage firms and businesses to engage in malpractices and under dealings and cheat the American people. Also, there is no more incentive for firms to deliver a high quality product without hounding government officials. Sure, the prices will be lower, but now the product quality will reflect upon that as well. To simply add it up, deregulation will only create inroads to corruption.

President Carter, however, signed the Airline Deregulation Act into law on October 24, 1978. Its main purpose, like almost all deregulatory acts, was to remove government authority over fares, routes and market entry of new airlines from commercial aviation. The agency that oversaw this before the bill passed was the Civil Aeronautics Board – and its powers of regulation were to be revoked. Perhaps the only redeeming clause of the act was that it did not remove the regulatory authority of the Federal Aviation Administration (FAA). [1] The Civil Aeronautics Board had a vital place in the airline industry as it had three main functions; those were to assign routes to airlines, to set guidelines onto air carriers that sought to enter new markets, and lastly, and probably the most important to the people, it regulated fares for passengers. Among its goals was to “provide the American public with the safest, most efficient, least expensive, and widest ranging air service possible.” [2] In order to ensure this, the CAB regulated fares for passengers and cargo, safety protocols, financing, and quality of the industry service. Furthermore, in an attempt to help out those carriers flying on a less profitable route, the government frequently subsidized them. [2] As listed, the board played an instrumental role in the regulation of the airline industry – it prevented the forming of a cartel or monopoly, one that could potentially dominate the market and thus put in a position to set high prices. The Civil Aeronautics Board, through federal regulation, ensured the industry operated both efficiently and ethically.

Without the Civil Aeronautics Board and with the new Airline Deregulation Act into play, there was no more regulation. Quickly and as expected, airlines abandoned the less profitable routes to increase profits. An example would be the town of Bakersfield, CA, a town that was frequently a stop for aircrafts. However, without regulation, the airlines pulled out of the town and thus deprived the city of flights to bigger cities. [2] Now because of this negative externality, the government would have to subsidize airlines to encourage them to do what they had been doing under the Civil Aeronautics Board. Another harmful effect that developed was that new airlines seeking to enter the market did not have to agree to demands of larger and established airlines. A prime example would be the People’s Express, an airline founded by Donald Burr, a man who utilized quite unorthodox techniques. He was able to keep his costs low by offering low pay and hiring multitasking personnel. However, despite the low costs, Burr did not offer commodities to his customers. Nevertheless, the prices were low, so low that that it competed with those of larger airlines. Almost inevitably, the People’s Express closed as it could not sustain its competition as it could not compete in the sector of service. [2]

The American people began to pay the price of lower prices. Due to problems such as fuel costs, economic recession, and the unlawful expansion of airlines, they recorded an operating loss of a staggering $421 million by 1981 when the number of passengers plummeted to 286 million. It was also not an uncommon sight to see airlines bankrupt due to the sometimes vicious cycle of competition. For example, the airline Braniff collapsed in 1982 as it could not handle the industry. For the other airlines that continued to expand and ignore these economic problems were placed at a great jeopardy. [2] According to the FAA, the cost incurred by passenger time and airline operating costs approach a number of $5 billion every year. Without regulations by the Civil Aeronautics Board, airlines were free to crowd its airports which put safety at risk. [3] Critics constantly accuse the deregulation act for such safety hazards and this led to the airport congestion crisis of 1978. [3]

The former CEO of American Airlines, Robert Crandall, claimed that “The consequences of deregulation have been very adverse. Our airlines, once world leaders, are now laggards in every category, including fleet age, service quality and international reputation. Fewer and fewer flights are on time. Airport congestion has become a staple of late-night comedy shows. An even higher percentage of bags are lost or misplaced. Last-minute seats are harder and harder to find. Passenger complaints have skyrocketed. Airline service, by any standard, has become unacceptable.” [4] All in all, the Airline Reregulation Act was an irresponsible act on part of Carter, and the consequences show that without government regulation, companies – not limited to airlines – will act unethically in promises of increased profits.

[1] Breyer, Stephen (2011-01-20). “Airline Deregulation, Revisited”. Business Week.

[2] http://www.centennialofflight.gov/essay/Commercial_Aviation/Dereg/Tran8.htm

[3] Airline Deregulation and Public Policy

Steven A. Morrison and Clifford Winston

Science , New Series, Vol. 245, No. 4919 (Aug. 18, 1989), pp. 707-711

Published by: American Association for the Advancement of Science

Article Stable URL: http://www.jstor.org/stable/1704032

[4] http://www.usatoday.com/travel/columnist/mcgee/2008-09-02-airline-regulation_N.htm

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s