Mass Transit in the Sky: How Air Travel Went from Elite to Affordable

The golden age of airline service was also an era of restriction and high prices. From deregulation to the downfall of no-frills Spirit, competition exposes what travelers are truly willing to pay for. 

By Donald J. Boudreaux. Excerpt:

"Prior to deregulation that began in the late 1970s, interstate commercial air travel was governed by the 1938 Civil Aeronautics Act. With that legislation, the federal government restricted entry into the industry. It also established and assigned interstate routes, and regulated the fares that airlines charged passengers for seats on planes that flew those routes. This regulation was meant to ensure airline profitability and, thus, aimed to restrict competition among the airlines. On interstate routes, airlines could not compete for customers by lowering prices, which were set by the Civil Aeronautics Authority, later to become the Civil Aeronautics Board (CAB).

The airlines in the mid-20th century did indeed profit from the government’s regulatory efforts on their behalf. Nevertheless, even the government cannot prevent competition; its interventions can only divert competition into other channels that are less beneficial for consumers.

Unable to compete by lowering fares, airlines competed on the customer-service front. Compared to today, the standard coach seat during the era of regulation had more legroom. Full meals were common. As opposed to today’s use of the hub-and-spoke system, direct flights were the norm. (Although this costly feature was required by the regulators, it likely would have been commonplace even without being mandated.) And flight attendants were overwhelmingly young and attractive single women. Forced to pay high prices to fly, at least customers got something in return for the additional dollars the regulators obliged them to fork over for the privilege of flying.

Deregulation of fares allowed market experimentation to discover how better to serve airline passengers. Airfares fell dramatically, which seems necessarily to be an obvious benefit for consumers. But we know this fall in airfares to be a benefit to consumers only because it happened in a more-competitive market. Obviously, consumers would love to pay the lower fares while still having more legroom, more direct flights, and full meals with free booze in coach class served by attractive and charming flight attendants.

These nice amenities aren’t free, however. They must be paid for. If the flying public had valued those regulation-era amenities enough to continue paying regulation-era airfares, airlines would have been happy to continue to supply those amenities at those high fares. But the public spoke with its purse: competition revealed that most air passengers prefer to pay lower prices, even if doing so means fewer amenities, than to pay higher prices in exchange for the many amenities. (The relatively few customers with different preferences choose to upgrade to seats in ‘economy plus’ or in first class.)

Flying today is much less costly, in real terms, than it was before airlines were deregulated. (And, by the way, deregulation did nothing to slow the improvement in airline safety.) As such, the commercial-aviation experience today — unlike when I was a boy and young man — is commonplace and hardly luxurious (adjusting for the reality that, nevertheless, when in an airplane you are flying through the air while seated in a chair, an experience that everyone before the twentieth century would have regarded as miraculous). Even for a working-class American family today, going to the airport simply to behold a relative boarding an airplane is as unimaginable as going to a local bus stop simply to behold that same relative boarding a bus.

It’s worth noting that competition also reveals the limits to consumers’ tolerance for sacrificing amenities for lower fares. Spirit Airlines’ business model was to eliminate as many as possible ‘free’ amenities, stripping the base ticket price down and charging separately for virtually everything else, including carry-on bags, seat selection, snacks, even water. Spirit also offered infamously little legroom.

Because ‘optimal’ market outcomes cannot be divined in the abstract — because these outcomes can only be discovered through competitive market processes in which entrepreneurs are free to experiment — it was a good idea to run this experiment. As it happens, though, too few consumers were willing to pay even low fares for that level of minimal amenities. Spirit was on the verge of bankruptcy well before the price of aviation fuel was sent soaring by the war in Iran, which is why JetBlue in 2022 offered to merge with Spirit – a move that would have enabled JetBlue to obtain Spirit’s equipment and landing slots.

In a monumental feat of economic ignorance, the Biden administration sued to block the merger on the grounds that it would reduce competition and raise fares. Spirit has now gone forever to the economic spirit world.

Here’s the view from 30,000 feet. When producers are allowed to compete on all margins, including price, they discover the optimal mix of prices and amenities that best satisfy their customers. When governments obstruct that competition, it gets redirected into changing the quality of goods and services such that the resulting price-quality mixes are less desirable than would be the mixes that emerge without government intervention.

After airlines were deregulated almost 50 years ago, consumers revealed that they wanted lower prices with less quality. And by more recently rejecting the bare service offered by Spirit Airlines, consumers revealed that quality can be so low that even very low prices are insufficient compensation to put up with such low quality. These results emerged from competitive market processes and deserve respect. But alas, just as airline regulation forced American air passengers to buy what they would have preferred not to buy, the government’s continuing itch to override market processes will oblige consumers in the future — whenever such interventions occur — to suffer worse economic outcomes."