Deregulation Act of 1978 Before

Deregulation Act of 1978 Before 1978, the Civil Aeronautics Board (CAB) regulated airlines out of concern that intense competition would cause airlines to set fares too low to generate the profits needed to reinvest in new equipment and other capital (Meyer and Menzies, 1999). It was feared that this behavior would, in turn, lead to the degradation of safety and service, leading to either an erosion of service in some markets or dominance by one or two surviving carriers.

Regulation met that no new trunk airlines were certified after CAB was formed in 1938, and vigorous competition among the regulated carriers was expressly prohibited. Airlines were essentially told how to run every aspect of their business, where they could fly, how much they could charge, what aircraft they could use and how they could configure their seating. Constrained by regulation, the airlines couldn't react to changing market demands.

The Airline Deregulation Act of 1978 phased out the federal government's control over airfares and services, relying instead on competitive market forces to determine the price, the quantity, and the quality of domestic air service. Although the aftermath of deregulation hasn't all been without issues, the net result for consumers is positive. Free market pricing has made it more affordable for consumers to fly. Several factors drove pricing inefficiencies prior to deregulation.

The Civil Aeronautics Board regulated the airline industry like a utility - setting prices designed to give airlines a set rate of return on their investment and deciding who could compete with whom (Consumers benefit from airline deregulation). Further, the board introduced a price discrimination policy for short-haul and long-haul flights that did not appropriately reflect true costs. The Board believed that passengers traveling shorter distances would not choose air travel if they had to pay the full cost of service.

Therefore, the Board set fares relatively lower in short-haul markets and higher in long-haul markets than would be warranted by costs. Of course, this discouraged long-haul service. A detailed analysis of seventeen years of data shows that air fares have fallen by thirty-three percent since 1976, about twenty-two percent lower than they would have been under regulation (Consumers benefit from airline deregulation).

This savings is worth $12.4 billion annually, but if considering the indirect benefits of more frequent flights and few trips that require changing airlines, the benefits to passengers from deregulation amount to just over $18 billion a year. Another major accomplishment of deregulation has been the improvement in airline productivity through better capacity planning strategies that the decontrol of prices and routes allowed and the increase in competition demanded (Kahn, Airline deregulation).

For example, decontrol of prices allowed airlines to fill their planes by offering large numbers of heavily discounted fares for seats that would otherwise go unused. Further, decontrol of routes permitted them to plan their operations according to market demand. The move to hub-and-spoke operations after deregulation has increased efficiency in a number of ways. It has allowed better allocation of equipment to markets such as the use of small props and jet props for short hauls and large jets for dense, long-haul routs.

Overall, deregulation has also allowed the use of larger and more efficient planes, and the offer of a wider variety of destinations in the circuity of routes. Because airlines are able to run daily roundtrip flights from their hubs, they keep planes in the air for more hours each day and are able to fill more seats (Deregulation and its consequences). And, intense competition has forced carriers to operate their flights as efficiently as they can.

Carriers have added more seats on their planes; the average went up from 136.9 in 1977 to 153.1 in 1988 Unfortunately, lower prices and more efficient capacity planning strategies have come at the expense of quality of service. Although subjective, it is generally agreed that quality of airline service has gotten worse for the majority of travelers under deregulation. Planes were sixteen percent more crowded in 2000 than in 1977 and coach seats have been packed closer together (Airlines, 2002). Travelers now endure an undeniable increase in congestion, delays, and discomfort.

However, availability of service for small towns and rural communities has improved (Kahn, Airline deregulation). They have, on average, a thirty-five to forty percent increase in the number of scheduled departures and hub-and-spoke operations have made an increased number of destinations available to them.

Airlines have cut frills during our current economic downturn, but the success of no-frills, low-cost airlines such as Southwest Airlines which do not offer many traditional amenities indicates that a substantial proportion of passengers are more swayed by price than comfort (Airline Deregulaton Act) .By far the most important aspect of customer service, safety, has increased under deregulation. Accident rates during the twelve-year period from 1979 to 1990 were twenty to forty-five percent below their average levels in the six or twelve years before deregulation (Kahn, Airline deregulation).

Moreover, by displacing a certain amount of automobile travel, the low airfares made possible by deregulation have saved many more lives than the total number lost annually in air crashes. Surprisingly, consumers enjoy lower prices and greater access to services with fewer carriers. Deregulation did lead to some new low-fare carriers such as the highly successful Southwest Airlines and JetBlue Airways, but as of 2002, give major airlines controlled seventy-three percent of the market (Airlines, 2002).

This is due to the failure of older, high cost airlines that could not change from inefficient, high cost models to efficient, low cost models (Airline Deregulation Act). Exposure to competition led to heavy losses and conflicts with labor unions at a number of carriers. Between 1978 and mid-2001 nine major carriers, Eastern, Midway, Braniff, Pan Am, Continental, America West Airlines, and TWA) and over 100 smaller airlines had gone bankrupt or been liquidated.

Mergers and acquisitions among the survivors have created a small club of "mega-carriers" and oligopolistic conditions in many markets. But, this condition is more likely to be attributable to pre-deregulation restrictions that linger to this day (Airline deregulation: Barriers to entry continue to limit competition in several key domestic markets, 1996). The Federal government limits takeoff and landing slots at major airports such as Chicago, New York and Washington and the established carriers hold nearly all of the slots.

Further, the established airlines benefit from long-term, exclusive-use gate leases and are not subject to perimiter rules at New York's LaGuardia and Washington's Ronal Reagan because their hubs are located close enough to these airports so that they are not limited by perimeter rules. All These barriers impede the entry of newer airlines into key markets in the East and.