Robert W. Poole, Jr. Explains The Benefits Of Airline Deregulation

See If You Can Afford a Plane Ticket, Thank Deregulation: Forty years after the Civil Aeronautics Board was abolished, look how far we've come in Reason. Robert W. Poole Jr., an MIT-trained engineer, is co-founder and director of transportation policy at Reason Foundation, where he has advised numerous federal and state transportation agencies. He is also a member of the Government Accountability Office's National Aviation Studies Advisory Panel and author of Rethinking America's Highways (University of Chicago Press).

Excerpts: 

"Airline deregulation had many fathers. As early as the mid-1960s, economists were studying airline markets within California and Texas—since the flights didn't cross state lines, they were not subject to the same regulations—and finding that competition led to more affordable prices.

That work came to the attention of a Harvard law professor knowledgeable about regulatory policy, Stephen Breyer, who joined the staff of a congressional committee headed by Sen. Ted Kennedy (D–Mass.) in 1974. At the time, the CAB was under media scrutiny for imposing a moratorium on new airline routes, and Breyer urged Kennedy to hold hearings. They happened in 1975, helping to win support for deregulation from a diverse set of players including Ralph Nader, Common Cause, the National Association of Manufacturers, and the National Federation of Independent Businesses.

President Gerald Ford's CAB chairman, John Robson, had begun allowing a degree of price competition and relaxed some other rigid rules. Jimmy Carter went further, openly advocating airline regulatory reform during his successful 1976 campaign for the presidency. He then appointed as CAB chairman economist Alfred Kahn, who expanded Robson's reforms by allowing even more price competition, including the "super-saver" fares introduced by American and widely emulated by other carriers. Kahn also exempted cargo airlines from CAB price and entry regulations.

Meanwhile, in Congress, Kennedy joined forces with Sen. Howard Cannon (D–Nev.) to sponsor the Airline Deregulation Act. As Peter Samuel reported in Reason in 1989, the sunset provision that eliminated the CAB was actually added to the bill by Rep. Elliott Levitas (R–Ga.), an opponent of reform. It was intended as a poison pill.

Levitas' provision was never debated. Fortunately, it was never deleted, either. As Samuel noted, this was "the first time in the history of federal regulation that a major agency was simply abolished by law."

The initial results of deregulation were dramatic. Some existing airlines, like Braniff, expanded recklessly and ended up in bankruptcy. Others, like Eastern and Pan American, struggled to adjust to the newly freed market, lost money for years, and ended up in bankruptcy, too.

Those that survived—including American, Delta, and United—did so by developing innovations such as the hub-and-spoke route system. (Instead of serving all cities directly, flights from smaller cities converge on large "hub" airports, where passengers can connect to numerous other destinations. This model allows an airline to serve far more locations with a given number of planes.) A few companies, like Southwest, focused on no-frills service with style. To build customer loyalty, nearly all airlines adopted frequent-flyer programs.

As legacy names such as Pan American and TWA met their demise, a new generation of startups, such as JetBlue and Virgin America, emerged. These prospered by combining competitive pricing with in-flight amenities, such as JetBlue's TV in every seat back. More recently, America has witnessed the birth of ultra-low-cost airlines such as Allegiant, Frontier, and Spirit, whose economical fares make flying an option for even the most budget-conscious travelers.

These developments have been a bonanza for regular Americans. As air travel was democratized, passenger numbers soared. Commercial airlines carried 317 million domestic passengers in 1979. That figure had doubled to 636 million by 1999. Despite a decrease following the 9/11 attacks, growth soon resumed, reaching a new high of 704 million in 2009. Last year saw a total of 849 million passengers—nearly three times the number in 1979.

Since deregulation, commercial flight prices have followed an ongoing downward trend. In 1995, economists Steve Morrison of Northeastern University and Clifford Winston of the Brookings Institution built a model to determine what fares would have been if the CAB's pricing structure had remained intact. They found that deregulation had reduced fares by 20–30 percent in real terms.
And these benefits continue to accrue. In 1979, the first year of deregulation, the average domestic fare was $616 (in 2016 dollars), or 1.2 percent of average household income that year. The most recent comparable data I can find is for 2016, when the average fare was $344—a mere 0.6 percent of average household income."

"Fatalities per million miles flown is the most commonly cited airline safety statistic, but it's also somewhat misleading, since long-haul flights in large planes are safer than short flights in smaller planes. A more stringent measure is fatal accidents per million departures, which better accounts for the 49 percent of flights operated by smaller regional airlines.

According to figures from the National Transportation Safety Board, there were 2.1 fatal accidents per million departures in the 1950s, which decreased to 0.88 per million in the 1970s. During the first decade of deregulation, the 1980s, the rate fell by half to 0.46, and we've averaged just 0.12 in the 2000s. Even more impressive, from 2010 through 2017 there were zero fatal accidents in the United States on U.S. scheduled airlines."

" In 1978, on the verge of the Airline Deregulation Act, employment in the industry was 313,000. By 2000, after more than two decades of deregulation, it had climbed to 547,000.
Higher fuel prices and a drop-off in passengers after the 9/11 attacks did trigger cuts in airline employment as most airlines lost money. But they have now recovered, and employment has rebounded to 422,800 in 2017—35 percent higher than at the dawn of deregulation."

"In a study commissioned by the commercial airline trade association Airlines for America, economists Daniel Kasper and Darin Lee of CompassLexicon, a consulting firm, found that ticket prices are at or near historical lows. They also found that competition among airlines flying between a large array of U.S. cities has increased since 2000.

While the "big four" carriers control most of the market, smaller airlines are growing far faster in terms of available seat-miles (ASMs). American, Delta, and United saw annual ASM growth of just 3 percent in 2016. By contrast, the figure was 53 percent for JetBlue, 65 percent for Alaska/Virgin, and 111 percent for Allegiant, Frontier, and Spirit.

In 2017, researchers at the University of Virginia Darden School of Business looked into the so-called "Southwest effect"—the historical phenomenon that when Southwest Airlines joins a market, fares across carriers decline significantly. They examined 109 daily nonstop markets that Southwest entered between 2012 and 2015—after the wave of big-airline mergers—and found that prices decreased by 15 percent on average. The amount of traffic, meanwhile, increased by 28 percent on average. Even though Southwest has become one of the industry's biggest airlines, and despite the fact that it no longer offers the lowest fares, its mere presence in a market stimulates price competition."


"when faced with the choice between more legroom at higher fares or less legroom at lower fares, the majority of U.S. passengers opt for the lower fares (not me, but I'm nearly 6 feet tall).
Some carriers have learned that lesson the hard way. In 2000, American Airlines increased its economy-class seat spacing, widely advertising "More Room Throughout Coach." With fewer seats than its competitors, it hoped to recover those losses by attracting more business overall. The experiment didn't work out, and after finding no real increase in passengers, American switched back to higher-density seating. A decade earlier, TWA had tried the same thing, with the same result."

"There's little in the way of data to suggest that fees imposed by airlines are a problem. In 2016, according to the U.S. Department of Transportation (DOT), the average domestic passenger paid $22.70 in ancillary fees, for a total ticket price of $366.92 (not including federal taxes and fees). The total was comparable in 2010 ($370.80) but higher in 2000 ($442.00), 1990 ($529.83), and 1980 ($652.67), all in 2016 dollars. So these ancillary fares are hardly undercutting the benefits of airline deregulation.

Moreover, ancillary fees are the key to the very low fares charged by budget carriers Allegiant, Frontier, and Spirit. Their business models are based on undercutting "legacy" airlines on basic fares but generating some additional revenue by charging for certain optional items (like non-alcoholic drinks) that others provide at no charge. It's these no-frills carriers that continue the work of democratizing U.S. air travel."

"In 2008, the Department of Transportation changed federal rules on runway charging to permit congestion pricing in addition to the traditional weight-based fees. But none of America's overburdened airports have taken advantage of this more dynamic system. Privatized London Heathrow and Gatwick in the United Kingdom have done so, motivating their airlines to increase the average size of their planes and hence serving more passengers with their limited runway capacity. Stodgy U.S. airports, operating as state-owned enterprises, succumb to political pressure from legacy airlines, which benefit from limits on capacity at airports where they are already well-entrenched."