ills to deregulate airline service were submitted to Congress by both the Ford Administration and Senator Kennedy. In April 1975, hearings began on these bills before the Senate Aviation Subcommittee chaired by Nevada Democrat Howard Cannon. Support for the airline deregulation bill came from many quarters and from both sides of the aisle. Republican President Ford supported it, as did Senator Orrin Hatch (R-UT) and Senator Strom Thurmond (R-SC). Democrats from Kennedy (D-MA) to presidential candidate Jimmy Carter supported it.
But the airline industry as a group was strongly against it. The most vehement opponents of deregulation were the weaker and less financially strong airlines, like Eastern, American, and TWA. Under regulation they had protection of their most profitable routes, and they feared deregulation would unleash competitive vultures to take away their only lifeline to sustainability. Most local service providers opposed deregulation because they feared that the trunk lines would take over their most dense and profitable routes.
Democratic Congressman Elliott Levitas (D-GA), using procedural tricks and Congressional rules, stalled the bill in Congress specifically for Delta Airlines, whose principal office was in
Atlanta, for a period of time. He added to the bill the provision for terminating the authority of the CAB, thereby ending its existence, which many believed would kill the legislation. It didn’t.
The airline industry remained solidly opposed to deregulation until the hearings in the spring of 1977, when for the first time United Airlines split from the carrier group. United CEO Richard Ferris came from the hotel industry, not the airlines, and some said that his conversion to the need for deregulation was the result of a failure to understand the workings of air transportation. But there were other supporters, including the intrastate carriers, particularly Southwest, which with deregulation could break forth from the confines of Texas to challenge the airline industry country-wide. Hughes Airwest and Frontier Airlines were two local service providers who favored deregulation. Then there were the commuters, who wanted to be free of the CAB-imposed limitation of 30-seat aircraft; they supported the bill.
Labor groups were opposed to the proposed law, fearing new airlines would hire nonunion labor, thereby reducing wages and threatening job security and favorable work rules. Commercial banks and insurance companies, which provided capital and loans to the air carrier
industry and aircraft manufacturers, opposed the law. These companies lived according to well-established amortization and annuity tables that predicted future performance based on past experience. Nobody could say with any reasonable certainty exactly what would happen under a deregulated airline industry.
Missing in all of the debate was any articulation of a national public policy for air transportation in the United States. Most industrialized countries had integrated public transportation systems that included rail, highway, and air. These foreign transportation systems were primarily owned and operated by their governments at taxpayer expense as a function of national pride and necessity.
In the United States, there was no coherent national transportation policy. With the exception of the air transportation and maritime infrastructure and the national highway system, the United States relied on private enterprise and local municipalities to furnish its transportation services needs.
The closest thing to a national air transportation policy that existed in the United States was the Civil Aeronautics Act of 1938, as administered by the CAB. But this statute was enacted primarily to protect the airlines from destructive competition and to promote safety and popular acceptance of air travel. As national policy, it was probably time for a change, but very little was heard in the Kennedy hearings about national policy; rather, the subject focused on anecdotal evidence of overpricing, inefficiencies, lack of capacity, and governmental mismanagement.
Carter had been elected president in 1976, and by early 1977 he began appointing people to head various affected agencies who shared his views on deregulation. To the ICC he appointed deregulator George Stafford as Chairman. To the CAB he appointed Alfred Kahn, the author of Economics of Regulation, to replace Robson. Carter went at deregulation across the board, pushing bills to deregulate the railroads, motor carriers, moving companies, and the gas industry.
Even before passage of the Airline Deregulation Act, Kahn attacked regulation of the airlines in order to create, in his words, “something as close to total deregulation as the (existing) law will permit, to be achieved as quickly as possible.” He told his staff that they “were going to get the airline eggs so scrambled that no one was ever going to be able to unscramble them.”2
Carter continued to push the airline deregulation bill. In April 1978, the Senate passed the bill 83 to 9. In the House of Representatives, Carter enlisted the powerful Speaker of the House, Tip O’Neill, to corral votes from undecided Representatives. By 1978, the relaxed administration of the CAB initiated by Robson and Kahn showed (1) a decline in fares for the first time since 1966, (2) an expansion of air traffic at a rate faster than in the preceding 10 years, and (3) the highest carrier profitability in 10 years. All this had been achieved even while the rate of inflation steadily rose.
Based on these results observed during the spring and summer of 1978, and on the growing support of leaders of both political parties, opposition to the deregulation of the airlines virtually vanished. The deregulation bills passed both Houses.
On October 28, 1978, Carter signed the Act into law. The Airline Deregulation Act (ADA) amends the Federal Aviation Act of 1958, stating as its purpose “to encourage, develop, and attain an air transportation system which relies on competitive market forces to determine the quality, variety, and price of air services.” The Act completely changed the economic foundation for the domestic airline industry and provided for its full implementation over the course of a four-year period. It provided, among other things:
1. For the phase-out of the CAB and its authority over domestic routes and fares,
2. For the phase-out of existing economic regulations formerly constituting barriers to competition,
3. Safeguards for the protection of air carrier service to small communities,
4. For the facilitation of entry of air carriers into new markets, and
5. For certain protection of airline employees who may be adversely affected by the results of the Act.
CAB route authority was scheduled to end on December 31, 1981, and rate authority was set to terminate on December 31, 1983. The CAB itself was mandated to cease to exist as of the close of business on December 31, 1984.
This policy of fixing specific termination dates, laddered out into the near future, was to allow the airlines time to develop responses to the changes caused by the Act. The specific provisions for airline guidance during the CAB phase-out period included the following changes: 1
Because of the speed that the Board began to confer new authority, within a year of the passage of the Act certificated lines were able to serve virtually any route they wished. New entries were also granted during this time, although not as quickly as route authority.
The Board arranged a series of meetings throughout the country to address the needs of small communities to facilitate the transition of service mandated by the local service subsidy program and the new essential air service program mandated by the ADA.
Although the Act was designed to offer temporary federal payments to airline employees adversely affected by the Act (see 7 above), this provision of the Act was never implemented. This was due to the inability of the government to make any objective determination as to the cause of job losses or dislocations among airline employees, given the simultaneous onset of the Act, fast-rising fuel prices, and the resulting recession that began in the early 1980s.
Transition from a regulated to an unregulated economic airline environment proved difficult in two particular areas: fares and mergers. Prior law of the Supreme Court had exempted the airlines from compliance with the antitrust laws (the Sherman Antitrust Act and the Clayton Act) that governed other commercial enterprises in the United States. Instead, antitrust oversight and enforcement of the airlines had been conferred on the CAB. This authority had been consistently exercised for over 40 years in the airline industry.
The liberalization of CAB practices that began in the 1970s continued during the phaseout of CAB authority in the early 1980s. There were charges of price-fixing among the airlines as they raised fares and rates almost in lockstep due to the doubling of jet fuel prices between 1979 and 1980. Mergers were approved during this time that most certainly would not have been approved under prior CAB practice.
Upon the demise of CAB authority, airlines became subject to the same antitrust laws as all other commercial business with enforcement jurisdiction initially residing in the Department of Transportation.3
With deregulation in place, there was no longer any requirement to secure from the CAB certificates of convenience and necessity before commencing service on a route. No longer were there artificial barriers to entry into the previously exclusive airline carrier club, nor was there any requirement to secure approval from the CAB for rate increases.
When deregulation became law, all of the pent-up competitive instincts of airline bosses were suddenly unleashed. Like adolescents let loose on a first unsupervised journey away from home, excesses might have been expected. The choices of how to proceed were practically unlimited. Unbridled optimism coupled with a fear of being left behind in the race to gain position on their competitors spurred frenzied activity of all sorts, and not a few miscalculations.