Airline Deregulation Act
Encyclopedia
The Airline Deregulation Act is a United States federal law signed into law on October 24, 1978. The main purpose of the act was to remove government control
Airline deregulation
Airline deregulation is the process of removing entry and price restrictions on airlines affecting, in particular, the carriers permitted to serve specific routes. In the United States, the term usually applies to the Airline Deregulation Act of 1978...

 over fares, routes and market entry (of new airlines) from commercial aviation
Commercial aviation
Commercial aviation is the part of civil aviation that involves operating aircraft for hire to transport passengers or cargo...

. The Civil Aeronautics Board's powers of regulation were to be phased out, eventually allowing passengers to be exposed to market forces in the airline
Airline
An airline provides air transport services for traveling passengers and freight. Airlines lease or own their aircraft with which to supply these services and may form partnerships or alliances with other airlines for mutual benefit...

 industry. The Act, however, did not remove or diminish the FAA's regulatory powers over all aspects of airline safety.

History of airline regulation and the CAB

Since 1937, the federal Civil Aeronautics Board (CAB) had regulated all domestic interstate air transport
Aviation
Aviation is the design, development, production, operation, and use of aircraft, especially heavier-than-air aircraft. Aviation is derived from avis, the Latin word for bird.-History:...

 routes as a public utility
Public utility
A public utility is an organization that maintains the infrastructure for a public service . Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies...

, setting fares, routes, and schedules. Airlines that flew only intrastate routes, however, were not regulated by the CAB. Those airlines were regulated by the governments of the states in which they operated. 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 also was obliged to ensure that the airlines had a reasonable rate of return
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...

.

The CAB 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
World Airways
World Airways, Inc. is an American airline headquartered at the HLH Building in Peachtree City, Georgia. For the most part, the company operates non-scheduled services. Its main aircraft and maintenance base is Tampa International Airport.-History:...

 applied to begin a low-fare New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...

 to Los Angeles
Los Ángeles
Los Ángeles is the capital of the province of Biobío, in the commune of the same name, in Region VIII , in the center-south of Chile. It is located between the Laja and Biobío rivers. The population is 123,445 inhabitants...

 route in 1967; the CAB studied the request for over six years only to dismiss it because the record was "stale." Continental Airlines
Continental Airlines
Continental Airlines was a major American airline now merged with United Airlines. On May 3, 2010, Continental Airlines, Inc. and UAL, Inc. announced a merger via a stock swap, and on October 1, 2010, the merger closed and UAL changed its name to United Continental Holdings, Inc...

 began service between Denver and San Diego after eight years only because a United States Court of Appeals
United States court of appeals
The United States courts of appeals are the intermediate appellate courts of the United States federal court system...

 ordered the CAB to approve the application.

This rigid system encountered tremendous pressure in the 1970s. The 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...

 and stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

 radically changed the economic environment, as did technological advances such as the jumbo jet
Wide-body aircraft
A wide-body aircraft is a large airliner with two passenger aisles, also known as a widebody aircraft or twin-aisle aircraft. The typical fuselage diameter is . In the typical wide-body economy cabin, passengers are seated seven to ten abreast, allowing a total capacity of 200 to 850 passengers...

. Most of the major airlines, whose profits were virtually guaranteed, favored the rigid system. But passengers forced to pay escalating fares did not, nor communities which subsidized air service at ever-higher rates. Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....

 became concerned that air transport in the long run might follow the nation's railroads
Rail transport in the United States
Presently, most rail transport in the United States is based on freight train shipments. The U.S. rail industry has experienced repeated convulsions due to changing U.S. economic needs and the rise of automobile, bus, and air transport....

 into trouble; in 1970 the Penn Central Railroad had collapsed in what was then the largest bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

 in history, resulting in a huge taxpayer bailout in 1976.

Leading economists had argued for several decades that this sort of regulation led to inefficiency and higher costs. The Carter administration argued that the industry and its customers would benefit from new entrants, the end of price regulation and reduced control over routes and hub cities

In 1970-71 the Council of Economic Advisers
Council of Economic Advisers
The Council of Economic Advisers is an agency within the Executive Office of the President that advises the President of the United States on economic policy...

 in the Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...

 administration, along with the Antitrust Division of the Department of Justice and other agencies, proposed legislation which would diminish price collusion
Price fixing
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...

 and entry barriers in rail and truck transportation
Trucking industry in the United States
The trucking industry involves the transport and distribution of commercial and industrial goods using commercial motor vehicles . In this case, CMVs are most often trucks; usually semi trucks, box trucks, or dump trucks...

. While this initiative was in process in the Gerald Ford
Gerald Ford
Gerald Rudolph "Jerry" Ford, Jr. was the 38th President of the United States, serving from 1974 to 1977, and the 40th Vice President of the United States serving from 1973 to 1974...

 administration, the United States Senate Judiciary Committee, which had jurisdiction over antitrust law
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....

, began hearings on airline deregulation
Deregulation
Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...

 in 1975. Senator Ted Kennedy
Ted Kennedy
Edward Moore "Ted" Kennedy was a United States Senator from Massachusetts and a member of the Democratic Party. Serving almost 47 years, he was the second most senior member of the Senate when he died and is the fourth-longest-serving senator in United States history...

 took the lead in these hearings. This committee was deemed a more friendly forum than what likely would have been the more appropriate venue, the Aviation Subcommittee
United States Senate Commerce Subcommittee on Aviation Operations, Safety, and Security
The Senate Commerce Subcommittee on Aviation Operations, Safety, and Security is one of the seven subcommittees within the Senate Committee on Commerce, Science and Transportation-Members, 112th Congress:...

 of the Commerce Committee
United States Senate Committee on Commerce, Science and Transportation
The United States Senate Committee on Commerce, Science, and Transportation is a standing committee of the United States Senate in charge of all senate matters related to the following subjects:* Coast Guard* Coastal zone management* Communications...

. The Gerald Ford
Gerald Ford
Gerald Rudolph "Jerry" Ford, Jr. was the 38th President of the United States, serving from 1974 to 1977, and the 40th Vice President of the United States serving from 1973 to 1974...

 administration supported the Judiciary Committee initiative.

In 1977, President Jimmy Carter
Jimmy Carter
James Earl "Jimmy" Carter, Jr. is an American politician who served as the 39th President of the United States and was the recipient of the 2002 Nobel Peace Prize, the only U.S. President to have received the Prize after leaving office...

 appointed Alfred E. Kahn
Alfred E. Kahn
Alfred Edward Kahn was an American professor, an expert in regulation and deregulation, and an important influence in the deregulation of the airline and energy industries...

, a professor of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 at Cornell University
Cornell University
Cornell University is an Ivy League university located in Ithaca, New York, United States. It is a private land-grant university, receiving annual funding from the State of New York for certain educational missions...

, to be chair of the CAB. A concerted push for the legislation had developed, drawing on leading economists, leading 'think tanks' in Washington, a civil society coalition advocating the reform (patterned on a coalition earlier developed for the truck-and-rail-reform efforts), the head of the regulatory agency, Senate leadership, the Carter administration, and even some in the airline industry. This coalition swiftly gained legislative results in 1978.

Dan McKinnon would be the last Chairman of the CAB and would oversee its final closure on January 1, 1985.

Legislative terms

Senator Howard Cannon
Howard Cannon
Howard Walter Cannon was an American politician. He served as a United States Senator from Nevada from 1959 until 1983 as a member of the Democratic Party.-Early life:...

 of Nevada
Nevada
Nevada is a state in the western, mountain west, and southwestern regions of the United States. With an area of and a population of about 2.7 million, it is the 7th-largest and 35th-most populous state. Over two-thirds of Nevada's people live in the Las Vegas metropolitan area, which contains its...

 introduced on February 6, 1978. It passed and was signed by Carter, becoming on October 24, 1978.

The stated goals of the Act included
  • the maintenance of safety as the highest priority in air commerce;
  • placing maximum reliance on competition in providing air transportation services;
  • the encouragement of air service at major urban areas through secondary or satellite airports;
  • the avoidance of unreasonable industry concentration which would tend to allow one or more air carriers to unreasonably increase prices, reduce services, or exclude competition; and
  • the encouragement of entry into air transportation markets by new air carriers, the encouragement of entry into additional markets by existing air carriers, and the continued strengthening of small air carriers.


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
    Essential Air Service
    Essential Air Service is a U.S. government program enacted to guarantee that small communities in the United States, which, prior to deregulation, were served by certificated airlines, maintained commercial service. Its aim is to maintain a minimal level of scheduled air service to these...

     subsidies effective 10 years from enactment (however, as of 2009, the EAS is still in existence, serving 146 communities in the U.S.);
  • terminated existing mutual aid agreements between air carriers;
  • authorized the CAB to grant antitrust
    Antitrust
    The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...

     immunity to carriers;
  • directed the Federal Aviation Administration
    Federal Aviation Administration
    The Federal Aviation Administration is the national aviation authority of the United States. An agency of the United States Department of Transportation, it has authority to regulate and oversee all aspects of civil aviation in the U.S...

     (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 10 years after enactment;
  • gradually transferred remaining regulatory authority to the U.S. Department of Transportation
    United States Department of Transportation
    The United States Department of Transportation is a federal Cabinet department of the United States government concerned with transportation. It was established by an act of Congress on October 15, 1966, and began operation on April 1, 1967...

     (DOT), and dissolved the CAB itself.


Safety inspections and air traffic control remained in the hands of the FAA, and the act also required the Secretary of Transportation
United States Secretary of Transportation
The United States Secretary of Transportation is the head of the United States Department of Transportation, a member of the President's Cabinet, and fourteenth in the Presidential line of succession. The post was created with the formation of the Department of Transportation on October 15, 1966,...

 to report to Congress concerning air safety
Air safety
Air safety is a term encompassing the theory, investigation and categorization of flight failures, and the prevention of such failures through regulation, education and training. It can also be applied in the context of campaigns that inform the public as to the safety of air travel.-United...

 and any implications deregulation would have in that matter.

Effects

A 1996 Government Accountability Office
Government Accountability Office
The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government.-History:...

 report found that the average fare per passenger mile was about 9% lower in 1994 than in 1979. Between 1976 and 1990 the paid fare had declined approximately 30% in inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

-adjusted terms. Passenger loads have risen, partly because airlines can now transfer larger aircraft to longer, busier routes and replace them with smaller ones on shorter, lower-traffic routes.

However, these trends have not been distributed evenly throughout the national air transportation network. Costs have fallen more dramatically on higher-traffic, longer-distance routes than on shorter ones.

Exposure to competition led to heavy losses and conflicts with labor union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...

s for a number of carriers. Between 1978 and mid-2001, nine major carriers (including Eastern
Eastern Air Lines
Eastern Air Lines was a major United States airline that existed from 1926 to 1991. Before its dissolution it was headquartered at Miami International Airport in unincorporated Miami-Dade County, Florida.-History:...

, Midway, Braniff
Braniff International Airways
Braniff International Airways was an American airline that operated from 1928 until 1982, primarily in the midwestern and southwestern U.S., South America, Panama, and in its later years also Asia and Europe...

, Pan Am
Pan American World Airways
Pan American World Airways, commonly known as Pan Am, was the principal and largest international air carrier in the United States from 1927 until its collapse on December 4, 1991...

, Continental
Continental Airlines
Continental Airlines was a major American airline now merged with United Airlines. On May 3, 2010, Continental Airlines, Inc. and UAL, Inc. announced a merger via a stock swap, and on October 1, 2010, the merger closed and UAL changed its name to United Continental Holdings, Inc...

, America West Airlines
America West Airlines
America West Airlines corporate offices were in Tempe, Arizona and the main hub was at Phoenix Sky Harbor International Airport. The airline became part of the US Airways Group after a merger in 2005....

, and TWA
Trans World Airlines
Trans World Airlines was an American airline that existed from 1925 until it was bought out by and merged with American Airlines in 2001. It was a major domestic airline in the United States and the main U.S.-based competitor of Pan American World Airways on intercontinental routes from 1946...

) and more than 100 smaller airlines went bankrupt or were liquidated—including most of the dozens of new airlines founded in deregulation's aftermath.

For the most part, smaller markets did not suffer the erosion of service predicted by some opponents of deregulation. However, until the advent of low-cost carrier
Low-cost carrier
A low-cost carrier or low-cost airline is an airline that generally has lower fares and fewer comforts...

s, point-to-point air transport declined in favor of a more pronounced hub-and-spoke system
Spoke-hub distribution paradigm
The hub-and-spoke distribution paradigm is a system of connections arranged like a chariot wheel, in which all traffic moves along spokes connected to the hub at the center...

. The larger hubs were served with larger aircraft, the spokes with smaller. While more efficient for serving smaller markets, this system has enabled some airlines to drive out competition from their "fortress hubs." The growth of low-cost carriers such as Southwest Airlines
Southwest Airlines
Southwest Airlines Co. is an American low-cost airline based in Dallas, Texas. Southwest is the largest airline in the United States, based upon domestic passengers carried,...

 has brought more point-to-point service back into the United States air transport system, and contributed to the development of a wider range of aircraft types that are better adaptable to markets of varying sizes.

In 2011, Supreme Court Justice Stephen Breyer
Stephen Breyer
Stephen Gerald Breyer is an Associate Justice of the U.S. Supreme Court. Appointed by President Bill Clinton in 1994, and known for his pragmatic approach to constitutional law, Breyer is generally associated with the more liberal side of the Court....

 (who worked with Senator Ted Kennedy
Ted Kennedy
Edward Moore "Ted" Kennedy was a United States Senator from Massachusetts and a member of the Democratic Party. Serving almost 47 years, he was the second most senior member of the Senate when he died and is the fourth-longest-serving senator in United States history...

 on airline deregulation in the 1970s) wrote:


What does the industry's history tell us? Was this effort worthwhile? Certainly it shows that every major reform brings about new, sometimes unforeseen, problems. No one foresaw the industry's spectacular growth, with the number of air passengers increasing from 207.5 million in 1974 to 721.1 million last year. As a result, no one foresaw the extent to which new bottlenecks would develop: a flight-choked Northeast corridor, overcrowded airports, delays, and terrorist risks consequently making air travel increasingly difficult. Nor did anyone foresee the extent to which change might unfairly harm workers in the industry. Still, fares have come down. Airline revenue per passenger mile has declined from an inflation-adjusted 33.3 cents in 1974, to 13 cents in the first half of 2010. In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: $1,442. Today one can fly that same route for $268. That is why the number of travelers has gone way up.

So we sit in crowded planes, munch potato chips, flare up when the loudspeaker announces yet another flight delay. But how many now will vote to go back to the "good old days" of paying high, regulated prices for better service? Even among business travelers, who wants to pay "full fare for the briefcase?"

Further reading

  • Barnum, John W. "What Prompted Airline Deregulation 20 Years Ago?," Presentation to the Aeronautical Law Committee of the Business Law Section of the International Bar Association
    International Bar Association
    The International Bar Association is an international association of lawyers and lawyers' associations. The IBA's stated purpose is to promote an exchange of information between legal associations worldwide, support the independence of the judiciary and the right of lawyers to practice their...

    , September 15, 1998.
  • Breyer, Stephen
    Stephen Breyer
    Stephen Gerald Breyer is an Associate Justice of the U.S. Supreme Court. Appointed by President Bill Clinton in 1994, and known for his pragmatic approach to constitutional law, Breyer is generally associated with the more liberal side of the Court....

     Airline Deregulation, Revisited, Business Week
  • Derthick and Quirk, The Politics of Deregulation, Brookings Institution, 1985.
  • Kahn, Alfred E. "Airline deregulation" in Concise Encyclopedia of Economics.
  • Robyn, Dorothy, Braking the Special Interests, University of Chicago Press, 1987
  • Rose, Seely and Barrett, The Best Transportation System in the World, University of Ohio Press, 2006, a part of an Historical Series on Business Enterprise, edited by Blackford and Kerr.
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