Airline Deregulation

The Airline Deregulation Act (ADA) of 1978 initiated an era of fundamental change in the U.S. airline industry. The ADA attempted to address the economic inefficiencies of regulated air carriers by opening the airline marketplace to competition among both established and predicted new entrants. Prior to the passage of the ADA, the U.S. government used regulation as a tool both for protecting the airlines' economic interests and for overseeing the traveling public's safe, reliable access to service. The U.S. airline industry's response to the opportunities presented by government deregulation under the ADA has spawned a wide array of initiatives that have changed the basic nature of this industry's customer-supplier relationship. The consequences of these actions have affected both the structures and the operating philosophies of airlines globally.

The early days of the U.S. airline industry—generally considered as the time period between the end of World War I and the onset of the global depression of the 1930s—contained a mixture of government support schemes and competitive marketplace efforts. Most air carriers survived only through air mail contracts granted by the government on behalf of the U.S. Post Office. In the 1930s, though, the modern U.S. airline industry began to grow and take shape: Fledgling aircraft manufacturers and air transport companies began to develop the technologies and infrastructure needed to transform air travel from a novelty to an economic necessity.

However, during this decade the world was in the midst of a major economic depression, which many people blamed on the previous decade's lack of [Page 60]governmental control over national and international economic activities. Accordingly, the U.S. government under Franklin D. Roosevelt's New Deal policies established governmental agencies whose enforcement agendas combined protection of the public's welfare with the promotion of economic growth. In this context, the government established regulatory structures that encouraged the airlines' economic development while protecting them from unrestrained competition in national and international markets.

In 1938, the Civil Aeronautics Act created the Civil Aeronautics Board (CAB) as the regulatory body mandated to oversee the sometimes conflicting interests of growth within the nascent U.S. airline industry and safe, reliable service for the traveling public. To accomplish these goals, airline regulation in the United States followed the pattern of regulation employed for the most heavily used form of interstate transportation in the early 20th century—the railroads. This pattern dictated that regulation should encompass both route restrictions and price controls as effective means for ensuring industry profitability and guaranteed levels of service. However, the pricing and route protections afforded by government regulation, in turn, shielded this industry from external competition, creating barriers to entry that encouraged market-sharing collusion among the established participants in the industry. The result was the development of regulated oligopolies that, over time, limited supply and thus increased prices for the traveling public.

The rapid growth of aeronautical technology in the first decade after the onset of regulation—a product of the gradual economic recovery from the depression coupled with the global military rearmament occasioned by World War II—soon highlighted the practical consequences of the CAB's dual “growth and service” mandate. After the conclusion of wartime hostilities in 1945, the commercial airline industry had access to technologically advanced aircraft and highly trained air personnel—resources that, in an unregulated market, could have fostered increased service and customer-friendly competition at reduced prices. What arose instead, though, were problematic economic distortions driven by the CAB's regulatory mandates for the commercial airline system. On the one hand, as early as the 1950s critics of government regulation noted that when surplus aircraft and trained air crews became available for newly formed charter air companies, the CAB generally restricted these companies'scope of operations to protect the economic interests of the established carriers. This protective regulatory behavior suggests the working of the socalled capture thesis of regulation, whereby regulatory agencies and their legislative oversight committees are captured or co-opted by agents of the regulated industry to ensure the continuation of their regulated oligopoly. Yet during this same time period government regulation also provided substantial consumer benefits such as subsidized air service to smaller communities—service that otherwise would have been economically unfeasible for individual air carriers.

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