William J. McGee argues that airline deregulation in the United States has not delivered on its promised benefits of lower fares, increased safety, and more competition, but instead has led to industry consolidation, regional inequality, and degradation of passenger rights. McGee proposes a suite of policy recommendations to address these issues, including measures to expand geographic networks, increase airport access, encourage new entrants, simplify pricing, and improve passenger rights, labor, and safety standards.
There was a time not that long ago when using the “r-word”—as in “regulation”—was taboo in many airline circles. The Airline Deregulation Act of 1978—which removed the Civil Aeronautics Board from overseeing “routes, rates, and service” by setting schedules and fares—ended four decades of CAB authority. Over the last 46 years, proponents of deregulation have touted its supposed delivery of low prices, a growing number of Americans flying, and better safety. Not only are those claims not verifiable, but the airline industry today is characterized by limited competition, opaque and deceptive fees for passengers, consolidation to four main airlines, regional inequality with many cities losing access to air travel, and the degradation of passenger rights and safety standards.
The very first sentence of the Airline Deregulation Act spoke to safety and then made promises about “placing maximum reliance on competition” and “the avoidance of unreasonable industry concentration” and “the encouragement of entry…by new air carriers.”
None of this has happened. In March, I detailed in ProMarket how the United States’ airline industry has never been more consolidated, with the fewest scheduled passenger carriers ever (12); a 14 year gap (2007-2021) with no new-entrants at all; and an oligopoly at the top with the Big Four (American, Delta, Southwest, and United) controlling 80% of the market.
So, together with Ganesh Sitaraman of the Vanderbilt Policy Accelerator, I co-authored a recent white paper with a detailed suite of recommendations and policy options to address the systemic problems with the airline industry.
Our proposals do not recommend a return to the rules of airline regulation that were in place prior to deregulation, such as full government control of prices and flight capacity. Instead, we propose changes to encourage competition in the airline industry. But first, we must understand some of the positive developments that took place in the era of regulation and what benefits were lost when the industry was deregulated.
Disputing the Myths of Deregulation
The airlines and other proponents of deregulation continually repeat a supposed trinity of benefits that air travelers have enjoyed since 1978: 1)more Americans started flying
2)airfares began falling so that flying was no longer for the rich
3)air travel became safer
The only problem is that crediting deregulation for all three of these assertions is false. Because all three trendlines:
1) began 20 years before deregulation;
2) were more pronounced before rather than after 1978; and
3) were driven by technological advancements that had nothing to do with deregulation.
Yet these myths persist, not in small measure because the airline industry constantly repeats the “deregulation has lowered fares and been a success” mantra. In reality, deregulation has produced 45 mergers and 212 bankruptcies—and counting. Meanwhile, airlines pocket big profits in the up cycles, and taxpayers bail them out on the downside.
Let’s examine these assertions in further detail:
Americans flying more? The introduction of the first successful commercial jet aircraft in 1958 ushered in the “Jet Age” of safer, more reliable, more efficient, more economical, and more comfortable aircraft, leading to lower costs, higher passenger loads, and lower airfares. Then the introduction of the first widebodies in 1970 dramatically increased passenger capacity yet again, and led to even lower costs and fares.
Consider this chart from industry lobbyists Airlines for America that details historical surveys asking Americans if they had ever taken an airline flight; in 1971, 49% of Americans said they had flown. In the next eight years this figure grew 16 percentage points to 65% by 1979, the first full year of deregulation. Yet it would take more than twice that time in the deregulated era—until 1997, 18 years later—for that number to increase another 16 points to 81%.
Next we examine the question of whether airfares are falling. The same trend from above holds true for ticket prices. Consider this chart with data from Airlines for America. It shows that fares fell much further and faster in the 19 years from 1960 to 1979 than they did in the subsequent 19 years from 1979 to 1998.
In fact, falling airfares after 1978 were largely due to a plethora of technological improvements in aviation in the late 1970s-early 1980s that were unrelated to deregulation, but which drove down operating costs, making lower fares feasible.
Does deregulation create greater safety? There is no question that commercial aviation is the safest form of travel, and U.S. airline’s fatal accidents have fallen dramatically; the last 20 years are the safest in aviation history. However, a Boeing statistical summary of annual fatal accident rates in the jet age (1959-2021) for U.S. and Canadian airlines shows the greatest improvements came more than 60 years ago, when such rates plummeted between 1959 and 1963, falling from more than 40 fatal accidents per million departures to approximately 2 per million.
Since deregulation, the accident rate has continued to improve, but deregulation has eroded the safety net as U.S. airlines continue to skimp on costs by outsourcing aircraft maintenance overseas and weakening pilot standards, posing new threats. During the regulated era, when the Civil Aeronautics Board set airfares based on costs, there was absolutely no incentive for airlines to cut corners on safety.
Proposing Fresh Ideas
So what do we mean by “a new approach to regulating” airlines? Our paper contains quite a few recommendations that require fresh thinking. Here are a few highlights:
Expanding Geographic Networks. One of the worst outcomes from deregulation and the resultant rise of major carrier hub-and-spoke networks is the regional inequality that has banished millions of Americans from easy, quick, and affordable access to the promise of global airline networks. Smaller and rural communities are hardest hit, so that Dubuque, Iowa and Toledo, Ohio have no scheduled service and Cheyenne, Wyoming must pay airlines for access. The airlines claim these smaller markets are more expensive to serve and under deregulation they would rather focus on more lucrative routes.
However, even U.S. cities as large as Cincinnati, Cleveland, and St. Louis have suffered severe economic and societal harm from airline mergers that shut down hubs. In fact, Ohio lost four hubs from four different major carriers in four different cities—Cincinnati/Delta, Cleveland/Continental, Columbus/America West, Dayton/US Airways—and today has no hubs at all. Or consider Pittsburgh, where US Airways built up a large hub in the early 1990s and gradually downsized it before the operation was shut down in 2004; the carrier continually reduced its presence in PIT in subsequent years, before US Airways eventually merged with American Airlines in 2013. At its peak, Pittsburgh handled 21 million passengers daily in 1995, which dwindled to 8 million by 2010. Nonstop flights fell from 119 destinations in 1995 to just 36 airports by 2012. Even worse for Pittsburgh, the workforce was decimated from a high of 12,000 to only 1,800 by 2014.
What we’re seeking is what the regulated era largely delivered from 1938 to 1978: network connectivity for all Americans spread out among many different airlines, but priced so that all communities are served and larger communities are served more frequently, as they were under regulation.. The pricing would be aggregated based on network costs, as the U.S. Postal Service does, so that smaller and rural communities would not pay penalties for network connectivity.
We propose two possible systems to ensure continuous and reasonably priced service across the country and guarantee reasonable profits for airlines to serve those routes:
1. A “Draft Pick” system whereby the largest carriers would be mandated to choose which smaller cities to serve at regulated, affordable rates. This lottery would allow the largest airlines to have a choice in serving all eligible domestic markets, as deemed by the Department of Transportation (DOT). It also would give the majors flexibility in serving these routes via their hubs.
2. A “Regional Conference” system in which Congress would designate a single large carrier to serve all communities within a given region from their larger markets. Fares on such regional flights would be regulated to prevent monopolistic exploitation. This model would create a utility-like service for lower-volume flights but would retain competition on routes with higher volumes.
Increase Airport Access. We also recommend bringing meaningful competition to airports and reducing fortress hub concentration by capping each carrier’s percentage at domestic airports. Deregulation spurred the growth of such hubs, which are geographically situated to the benefit of each individual airline’s needs, not the larger concerns of national connectivity. Subsequently these hubs squelch competition, prevent new entrants from accessing such airports, and raise fares as well. This has led to situations such as Charlotte, where American Airlines operates 88% of all flights, or Dallas-Fort Worth, where AA operates 84%. We further suggest limiting sub-leasing of takeoff and landing slots and call for the Federal Aviation Administration (FAA) to align gates and other precious airport resources so that smaller and low cost airlines can gain real access.
Encourage New Entrants. Not only is the airline industry concentrated, but concentrated asset managers like Vanguard, BlackRock, and State Street own a large fraction of shares of all of the airlines. This changes the airlines’ incentives to compete with one another vigorously on price, leading to less competition and higher fares. While this is arguably already a violation of antitrust law today, we recommend the straightforward prohibition on investors from having more than 1% ownership in two or more U.S. airlines, following model legislation we released in 2022. This would free up capital for new-entrants in an extremely capital-intensive industry.
Simplified and Transparent Pricing. Our paper calls on Congress to simplify and make fair one of the most complex pricing models of any consumer-facing industry. This would entail reducing hundreds of fare classes on any given flight down to three, with minimum uniform standards. Furthermore, fares and fees should be made fully transparent regardless of the booking channel because currently, consumers may see different prices depending on XYZ
Finally, we propose improvements on issues related to passenger rights, labor, and safety. These include eliminating foreign outsourcing of aircraft maintenance; ending abusive frequent flyer program rules; funding real air traffic control modernization; establishing minimum standards for aircraft seat sizes; protecting infants inflight; and empowering state attorneys general with authority to enforce existing state regulations over U.S. airlines for the first time since 1978.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
