How a thirty-year-old policy of deregulation is slowly killing America’s airline system—and taking down Cincinnati, Memphis, and St. Louis with it.
The process was messy and far from flawless. Striking the right balance required that Americans hash out what would today be called an “industrial policy,” and to do so in sometimes minute detail, such as setting the relative prices of shipping hogs verses hams from Dubuque to Chicago. But overall, government regulation of railroad pricing and routes worked better than letting a few financiers rule the system for their own private benefit. The country, after all, emerged as an industrial powerhouse during this period. Managing the structure and pricing of railroads was particularly essential to maintaining the competitiveness of small-scale entrepreneurs and of midsize manufacturing cities like Cincinnati or St. Louis. It wasn’t that the government picked winners or losers; rather, it prevented the machinations of railroad financiers from doing so.
Starting in 1938, the U.S. adopted much the same approach to the newly forming airline industry. Through the creation of the Civil Aeronautics Board, the government allowed the industry to become highly concentrated. Underpinning the legislation was a belief in a “public right of transit,” the idea that citizens were entitled to a reliable aviation system designed to meet their business and safety needs—and the knowledge that unregulated competition would be unable to provide it.
As intended, the CAB nurtured the healthy maturation of a fledgling industry, forestalling ruinous competition and protecting airlines against bankruptcy. At the same time, airline fares fell dramatically, thanks largely to high levels of technological innovation, such as the introduction of the DC-8 and other mass-market jets. By the 1970s, the long-distance passenger train was dead, and jet travel had already helped to create a mass market for tourist destinations such as Disney World and the Caribbean. By 1977, 63 percent of Americans over eighteen had taken a trip on an airplane, up from 33 percent in 1962.
So why did Ted Kennedy and the Carter administration decide, over the strong objections of the airline unions and incumbent management at the time, that it was time to blow up government’s regulation of airlines? One reason was that the old regulatory regime had become highly litigious and rule bound. Kahn used to complain that his desk at the CAB was piled with papers demanding answers to trivial questions, such as “How many travel agents may a tour operator give free passage to inspect an all-inclusive tour? And must those agents then visit and inspect every one of the accommodations in the package?”
At the same time, many pointed to the example of Southwest Airlines, which got its start in 1971 by flying only within Texas, thereby escaping regulation by the CAB. Southwest’s success with discount fares particularly resonated with liberals at a time when inflation was liberalism’s greatest liability, and when the ascendant consumer movement made low prices a liberal imperative.
There were also ideological currents at work on the left that are little remembered today. Ralph Nader, for example, was popularizing the 1960s’ “New Left” notion that the New Deal regulatory state had been captured by incumbent industries, leading to what he called “corporate socialism.” Under the CAB, no new major airlines had emerged since the 1930s. Protected from competition, both airline management and unions had become overpaid and sclerotic at the expense of “the consumer,” Nader argued—and never mind if workers in those industries and their unions were stalwart members of the Democratic coalition.
The Carter administration accepted this analysis and used it to justify deregulating not just airlines, but soon the railroad, trucking, and natural gas industries, while also taking the first steps toward rolling back banking regulation as well. That most managements in these industries resisted deregulation at the time only confirmed many liberals in their belief that deregulation was needed, and they told themselves that any trend toward monopoly would be checked by rigorous antitrust enforcement.
At first, the program—which was, naturally, embraced by many free market economists and the incoming Reagan administration—seemed to pay off. To be sure, many communities instantly lost air service, and the industry rapidly restructured into the hub-and-spoke system that still exists today, leading to the elimination of many direct flights. But the early years of the new regime also saw a burst of competition and price cutting in the airline industry.
What both policymakers and the public generally missed, however, was that any positive effects that occurred would be temporary, and that many of them would have occurred without deregulation. The price of energy, for example, cratered in the mid-1980s, making it possible to cut fares and even expand service on many short hauls. But that wasn’t an effect of deregulation; it was the result of a temporary world oil glut. Indeed, after adjusting for changes in energy prices, a 1990 study by the Economic Policy Institute concluded that airline fares fell more rapidly in the ten years before 1978 than they did during the subsequent decade.
A study published in the Journal of the Transportation Research Forum in 2007 confirms that the pattern continued. Except for a period after 9/11, when airlines deeply discounted fares to attract panicked customers, real air prices have fallen more slowly since the elimination of the CAB than before. This contrast becomes even starker if one considers the continuous decline in service quality, with more overbooked planes flying to fewer places, long waits in hub airports, the lost ability to make last-minute changes in itineraries without paying exorbitant fares, and the slow strangulation of heartland cities that don’t happen to be hubs. Moreover, most if not all of the post-deregulation price declines have been due to factors that cannot be repeated, such as the busting of airline unions, the termination of pension plans, the delayed replacement of aging aircraft, the elimination of complimentary meals and checked baggage, and, finally, the diminution of seat sizes and legroom to a point approaching the limits of human endurance. (Eliminating seats altogether, however, remains an option.)
Going forward, all industry forecasts call for further consolidation and continually rising fares and fees, accompanied by declining service on all but the most heavily trafficked routes. From time to time, short-term fare wars may break out on particular routes, particularly if foolish investors bring a start-up airline to town. Periodic dips in energy prices may bring a temporary reprieve. But over time, experience has shown that nearly all start-ups are eventually crushed by incumbent carriers, which in turn, despite their increasing consolidation, heavy public subsidies, and reductions in vital service to major cities, remain unable to earn even their cost of capital over time. Nobody wins except a few fast-trading financiers flying in private jets.
This result would hardly surprise Charles Francis Adams, Louis Brandeis, and many other great Americans who struggled in the late nineteenth and early twentieth centuries with how to harness the emergence of railroads, telephones, electrical power, and other networked industries to public purposes. They’d recognize the familiar boom-and-bust cycle of new entrants that occurred in the early period of airline deregulation and the subsequent trend toward consolidation, deteriorating service, and increasing price discrimination. What else would anyone who knows economic history expect of a natural monopoly that lacks the benefits of government regulation?
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