Category AVIATION &ТНЕ ROLE OF GOVERNMENT

On April 5, 2000, the far-ranging Wendell H. Ford Aviation Investment and Reform Act for the 21st Century became law. This statute, designed to alleviate many of the intransigent problems faced by the aviation infrastructure arising from deregulation, increased funding for civil aviation in the United States by $10 billion over levels current at the time of its passage. The majority of the increased funding was earmarked for air­port construction and improvement and for radar modernization. The major components of the law, broken out into the general categories that are affected, are outlined in the box on page 315.

For the first time, as a result of AIR-21, large and medium hub airports are required to submit Competition Plans to the FAA as a condi­tion of receiving PFCs at those airports. These requirements are designed to assure a competi­tive environment for all airlines, including gate use monitoring, gate sublease oversight, and pro­cedures for assignment of gates.

When the Deregulation Act was passed in 1978, most airports had in place legally enforce­able gate and lease contacts with the airlines that reflected the economic realities of rules imposed by the CAB. Under these rules, as discussed above, airports were happy to have the airlines serving their airports, and the existing contracts reflected this disparity in negotiating position. As we have seen, the beneficial provisions in these contracts to incumbent airlines translated into anticompetitive barriers to new entrant carriers. With the anticompetition provisions in AIR-21, and with the expiration of these pre-deregulation contracts, all airlines, including new entrants, will have a more level playing field.

In the over 30-year period since deregulation, the existence of the air carrier industry has been characterized by a cyclical “feast or famine” roller coaster ride. Short periods of prosperity have always been followed by periods of stress and financial loss. Each one of these cycles has been precipitated by overriding economic and political conditions, punctuated by high fuel costs, all of which have been largely beyond the control of airline management.

The business model that existed during the period of CAB control beginning in the 1930s, the model the legacy airlines operated under when deregulation began, has been tested and has now been found to be unworkable in the new competitive environment of deregulation. This was not true during the early years of deregula­tion, when the incumbent airlines’ economies of scale (size, experience, computer reservation
systems, gate and slot ownership, and control of the hub and spoke system) did, in fact, inhibit the success of new entrant airlines.

The predominance of the legacy airlines dur­ing the years immediately following deregulation turned out to be a transitional phase in the pro­gression of the industry away from government control. But the challenges of a never-ending stream of new entrant airlines continued to apply pressure to the business model of these airlines, which were still constrained by high labor costs, high fixed costs, low fares, and ever-increasing debt incurred in an effort to continue to exist.

Southwest Airlines brought to the contest a new business model, one which during the more recent period of commercial aviation experience has provided an example to new entrant airlines, and has been instructive to the legacy carriers as well. The “Southwest Effect,” as its way of doing business and culture have been termed, has come to define how an airline can be run profitably in the deregulated world.11

Although Southwest is 82 percent unionized, its employees do not belong to the same unions as the legacy airlines, whose labor contracts are the product of adversarial negotiations of long standing. Southwest’s employee relations are

more personal and informal, and have produced a loyal workforce that views the airline’s success as its own. But perhaps most important is the fact that the various classes and crafts of workers are permitted under their labor contracts to perform cross-functional tasks. One of the sacred cows of railroad style union contracts is that employees are prohibited from performing work that belongs by contract to others’ crafts. A mechanic may not change a light bulb. A clerk may not use a broom. At Southwest, with the use of an incentivized pay structure, everyone pitches in to get the job

done in the quickest and most efficient way pos­sible. This results in much higher productivity. As an example, in 2000 the total labor expense at Southwest, measured per available seat mile, was 25 percent lower than at American and 58 percent lower than at USAir. This business model has produced the lowest operating expense in the industry, calculated on cost per available seat mile, 12.96 cents, compared with Delta Airlines’ 14.76 cents. But the gap is beginning to narrow.

The Southwest model has always used only one type of aircraft, the Boeing 737, which has

resulted in reduced maintenance costs and train­ing costs of pilots and mechanics. Southwest flies into secondary airports rather than primary air­ports where possible, which lowers airport land­ing fees and costs and, along with a non-standard general boarding procedure, results in a compara­tively low turn-around time. It has avoided hub and spoke costs and delays by employing a point – to-point networking system. This allows much higher equipment utilization.

The “no frills” airline group that has emulated many of the practices modeled by Southwest has come to be known as the “low-cost carriers” (LCCs). There have been many new entrants in this category into the domestic air carrier com­munity since deregulation in 1978, but at least 20 have failed, including People Express, ATA Air­lines, and MetroJet. Among the survivors of this group are AirTran, Allegiant Air, Frontier, Jet­Blue Airways, Spirit Airlines, and Virgin Amer­ica. Some of these airlines fly only domestically, and some both domestically and internationally.

Primary among this group is JetBlue, which was founded by a nucleus of former Southwest Airlines employees. While following the basic low – cost model of Southwest, JetBlue offered some dis­tinguishing amenities such as television monitors at every seat and satellite radio. It was kick-started in 1999 when the FA A awarded it 75 slots at its home base at JFK, and it began service in February 2000. As mentioned above, JetBlue was one of the few airlines that recorded a profit during 2001. JetBlue has not been as consistently profitable as Southwest, but it does maintain a certain cache among flyers and the airline community. It has also received high passenger satisfaction awards.

The other notable among the FCCs was AirTran, which operated Boeing 717 and 737 aircraft, headquartered in Orlando, Florida. In March 2012 the government approved the pur­chase of AirTran by Southwest and the merger process is under way. Since Southwest prides itself on operating only the Boeing 737, one of the initial problems with the merger was that AirTran flew both the Boeing 737 and the 717.

Fatest developments indicate that all of the AirTran 717s will be leased to Delta Airlines. Thus Southwest is intent on keeping its opera­tions limited to the Boeing 737.

A metroplex is a metropolitan area where mul­tiple airports are located. The Southern California metroplex, for example, contains more than a dozen general aviation airports as well as large commercial airports such as Los Angeles Interna­tional Airport (LAX). The FAA has undertaken studies to identify PBN improvements that can be completed within three years, followed by the design phase to implement these changes, at 5 metroplex locations: Washington, D. C., North Texas, Northern California, Southern California, Houston, Atlanta, and Charlotte. Work of vari­ous kinds to advance the program is ongoing at a number of other locations at the same time. (See Figure 36-2.) Some 21 metroplex areas have been designated in this program,2 adding 5 per year for studies and design work. These efforts include both airspace and airport surface improvements and coordination.

ф Expanded Satellite-Based Surveillance

« Operational radio stations

Service volume coverage areas

This Convention is concerned with unlawful acts other than those relating to the seizure of aircraft. The treaty defines a variety of acts deemed to constitute prohibited acts and makes those acts punishable by severe penalties. By a supplemen­tary Protocol in Montreal in 1988, the enumera­tion of prohibited acts was expanded to include specific acts committed at airports serving inter­national civil aviation.

Plastic Explosives Convention (Convention on the Marking of Plastic Explosives for the Purpose of Detection-1991)

The aim of this Convention is the prevention of unlawful acts involving the use of plastic explo­sives. Signatory nations are required to adopt measures to ensure the marking of plastic explo­sives that will assist in detecting such explosives. Specifically, the manufacture of plastic explo­sives is to be regulated to prevent the distribution of unmarked explosives, to provide for control of

the transfer of marked explosives, and for their destruction under time limitations. The Conven­tion contains specific descriptions of the con­cerned explosives, the detection agents to be used in marking them, and it creates an International Explosives Technical Commission to keep track of developments in the manufacture, marking, and detection of the explosives.

The Cape Town Convention on international Interests in Mobile Equipment and Related Aircraft Protocol-2001

This treaty relates to the financial transactions involving certain aircraft, airframes, engines, and helicopters and provides for a registration sys­tem that tracks ownership and security interests in such mobile equipment on an international basis. The FAA registry is concerned with United States aircraft and registry, while the Cape Town Convention and the International Registry it cre­ated effectively deal with the problems related to the international movement, sale, leasing, and recordation of such interests. The law created by these international instruments coexists with the law of the United States regarding these interests.

Beijing Convention-2010 (Convention on the Suppression of Unlawful Acts Relating to International Civil Aviation)

EASA became operational in 2003 under Euro­pean Parliament and Council authority. It is an independent EU body accountable to the Member States and the EU institutions. Its responsibil­ity is aviation safety and aviation’s impact on the environment. It reached full functionality in 2008 when the functions of the former JAA were incorporated into EASA.

While EASA has taken over the respon­sibilities previously performed by JAA, there are differences. EASA has regulatory authority from the European Commission, the Council, and the Parliament, while JAA’s operations were conducted under coordinated laws of the several Member States of the EU. EASA regulations have the direct force of law.

EASA’s main tasks include:

• Rule-making, that is, drafting safety legisla­tion for the European Commission

• Standardization programs and inspections to insure uniform implementation of EU avia­tion safety legislation in all Member States

• Type certification of aircraft, engines, and parts

* Data collection, analysis, and research to improve aviation safety

* Licensing of crews within the EU, certifica­tion of non-member States’ airlines, as well as playing a key role in the safety regulation of airports

* The agency is also developing close work­ing relationships with safety organizations in other countries (like the FAA) and with ICAO with the goal of harmonizing safety standards and procedures.

■ European Air Traffic Control

European air traffic control after World War II was similar to jurisdiction of everything else in Europe, a matter of the sovereign control of each separate government, with interaction between nations being dictated by treaty. The same impediments to unification seen elsewhere pre­vailed in attempts to create a system of air traffic control for the European continent. Movement of aircraft across borders involved air traffic control of both countries, with no central flow system.

Centralization of air traffic control was the beneficiary of advances made in other sectors of the growth of the EEC, which ultimately culmi­nated in the formation of the European Union. As advances were made in those other sectors, an infrastructure for air traffic control was also being built. Navaids were installed, routes were created, rules and regulations for flight and con­trol authority were established. The separate States relied on past treaties (Paris Treaty of 1919), the First Convention Relating to the Regu­lation of Aerial Navigation (signed by 27 States in 1919), the International Civil Aviation Confer­ence, and then NATO to coordinate military use of the airspace.

In 1958, seven States8 set up the Technical Working Group “Eurocontrol” composed of civil and military representatives. Basically filling a vacuum due to the absence of any orchestrated plan between the States of Europe, Eurocontrol grew, receiving authority to establish centers, facil­ities, data processing, establishing communica­tions networks between States and their governing authorities, and generally building other necessary infrastructure to handle air traffic management over and beyond the borders of Europe.

Harmonization and integration was facili­tated under the auspices of ECAC during the 1980s and by the creation of the Central Flow Management Unit (CFMU). That system under Eurocontrol became responsible for all traffic control flow management for the entire continent in 1996.

In 1999, the European Commission announced the creation of the “Single European Sky” (SES), requiring a developmental approach involving Eurocontrol interim cooperation and assistance and the preparation for the assumption of a primary role in the “Single European Sky” concept. Traffic handling was still very much a national, sovereign affair, and Eurocontrol opera­tion was separated among five regional flow management centers, all operated by their own national administrations.

SES is an ambitious initiative to reform the architecture of European air traffic control and to meet future capacity and safety needs.

In 2004, the Council and the European Parlia­ment endorsed the Single European Sky legisla­tion that will integrate all European air traffic control in the European Community. A package of four regulations is included in this enabling legislation.

1. The framework regulation: This sets out the overall objectives for the Single European Sky initiative—“to enhance current safety standards and overall efficiency for general air traffic in Europe, to optimize capacity meeting the requirements of all airspace users and to minimize delays.”

2. The airspace regulation: This concerns the use and organization of airspace, both for the civil and military requirements of Mem­ber States.

3. The service provision regulation: This mandates that common standards are to be applied for all navigation services provided.

4. The interoperability regulation: This looks to insure the integration of all systems from whatever source. The systems include eight areas: airspace management, air traffic flow management, air traffic services, communi­cations, navigation, surveillance, aeronauti­cal information services, and meteorological information.

This is a work in progress. The final prod­uct will include the standardization of air traffic systems across Europe, the common licensing of air traffic controllers, and the reconfiguration of European airspace into functional blocks irre­spective of national borders. The original concept of SES has been reformed (amended) in a com­munication known as Single European Sky II (2008), which more clearly defines the goals of SES to be based on four pillars:

1. Performance, to include reductions in delays and shortening of routes, creation of func­tional airspace blocks (FABS) designed to meet these performance objectives, slot allo­cation and deployment of the SESAR (like NextGen performance-based navigation).

2. Safety, to extend EASA authority to aero­dromes, air traffic management, and air nav­igation services.

3. New technologies, or the implementing of SESAR and its benefits.

4. Managing capacity on the ground to insure airports’ capacities comport to ATM capacity.

The intent is to perform an internal reform of Eurocontrol to align it with the government structures of Single European Sky. Assuming this can be done, Eurocontrol will proceed to implement these policies.

Officially termed “The Convention on the Reg­istration of Objects Launched into Outer Space,” the Registration Treaty requires launching states to maintain a register of launched objects, and to

4 n the sixth of May 1896 a steam engine provided with wings made a successful flight in the air over the Potomac River at Quan – tico, Virginia about sixty miles from Washing­ton, D. C. There was no man in the machine, yet it pursued its way steadily through the air, continually rising until its power gave out, when its propeller stopped and it descended so gently to the water that it was immediately ready for another flight.

The second flight was equally success­ful, and though the total distance was not great, barely exceeding one half mile, it succeeded in demonstrating to the world the practicability of mechanical flight by machines heavier than the air and driven by their own motive power.

The production of this machine was really the culminating point of the researches of the late Secretary of the Smithsonian Institution, Dr. Samuel Pierpoint Langley, and the Smithson­ian Institution very properly celebrates the sixth of May as “Langley Day.”

For many years before 1896 Professor Langley, being assured in his own mind of the practicability of mechanical flight had devoted
himself to scientific experiments with aero­planes, that is, with flat surfaces or planes driven edgeways through the air, at varying angles of incidence to the horizon. In his usage the aero­planes, while applicable to the wings of a fly­ing machine, was not applicable to the machine itself. The machine as a whole he called an aero­drome, from the Greek work aerodromos, “tra­versing the air.” In the terminology employed by him aerodromics is the art of traversing the air— the art of aerial locomotion; and an aerodrome was a machine for traversing the air.

The knowledge that so eminent a man as the Secretary of the Smithsonian Institution, believed in the possibility of mechanical flight and was carrying on scientific experiments to attain that end, proved a great stimulus and encouragement to many less eminent men who were working along the same lines under the discouragement and ridicule from the incredulous world… I was the only witness of this remarkable flight outside of the workmen employed. I may perhaps be pardoned for saying a few words about it. Profes­sor Langley had met with so many failures that, though hopeful, he was somewhat doubtful of the
result, and he invited me to witness the experi­ment on the condition that I was the only man he knew whom he could bear to be a witness of a failure.

I found a houseboat containing all his appa­ratus anchored in the little Bay of Quantico and, on the roof, his machine was arranged ready to be shot off by a huge catapult. It was a huge model, thirteen feet from tip to tip, . . . and six­teen feet from head to tail, the whole propelled by a wonderfully light steam engine of Professor Langley’s own design.

I had a boy row me out on the bay where I thought I could get a good snapshot of the machine when it leaped into the air, while Pro­fessor Langley, too nervous to be close to the scene of operations, retreated to the shore, and I saw him standing lonely on the end of a little pier with the wooded shore behind him.

Then the whirr of the propellers was heard and the catapult was released causing the machine to shoot out into the air almost hori­zontally. Then came the critical moment. Would it fall into the water? Would it strike against the trees that surrounded the bay? Or would it ascend and clear them? The queries were soon answered. For the huge bird-like machine gracefully soared from twenty to thirty feet above the tops of the trees, turning slightly as it rose, and made a beautiful flight of over half-a-mile, when the steam was exhausted the propellers stopped and it began to come down.

The descent was as fascinating as the ascent, and it glided gracefully to the surface of the water. The workmen employed hailed the suc­cess of the experiment with loud cheers, in which I joined. It was picked up and found to be practi­cally uninjured except for a wetting. The experi­ment was then repeated with even greater success than before.

The prophecy received its fulfillment but not until the beginning of the twentieth century. In 1898 the Board of Ordinance & Fortification, after carefully studying the flight of 1896, appropriated $50,000 to enable Langley to experiment with a full sized aerodrome carrying a man. This was not completed until 1903, and on August 8 of that year a quarter-sized model of it propelled by a gasoline engine made a beautiful public flight.

On September 7, 1903, the full-sized aero­drome, carrying Mr. F. W. Manley, as aviator, was tried on the Potomac, but when the cata­pult was released, the aerodrome sped along the track on the top of the houseboat attaining suf­ficient headway for normal flight; but at the end of the rails it was jerked violently down at the front, and plunged headlong into the river. It was subsequently discovered that the guy post that strengthened the front pair of wings had caught in the launching ways, and bent so much that those wings lost all support.

A second launching was attempted on the Potomac River near Washington, on December 8, 1903. This time the rear guy post was injured, crip­pling the rear wings, so that the aerodrome pitched up in front and plunged over backwards into the water. Fortunately the aviator, Mr. Manly, received no injury in either case.

It will thus be seen that Langley’s aero­drome was never successfully launched, so that it had no opportunity of showing what it could do in the air. The defect lay in the launching mecha­nism employed and not in the machine itself, which is recognized by all experts as a perfectly good flying machine, excellently constructed and made long before the appearance of other machines.

Langley’s efforts at aviation were received with public ridicule, and he found it impossible to obtain the necessary funds to try the experi­ment again. Professor Langley was of a very sen­sitive nature and the public ridicule with which his efforts were received had a good deal to do with the illness which caused his death. Not very long after the accident he received a paralytic stroke, and after partially recovering from this, another stroke ended his life in 1906. . . .

The second and last trial of Langley’s aerodrome occurred December 8, 1903, and on December 17 of that same year, the Wright brothers made their first flight in their gliding machine provided with a 16 HP engine and two screw propellers. Little or nothing was known of this flight by the general public. The Wright brothers removed their machine to Dayton, Ohio. During 1904 and 1905 numerous flights were made in Dayton, Ohio, culminating in a flight of eleven miles on September 26, 1905. These were all in secret. After this, field practice with them ceased for more than two years to enable them to preserve the secrecy which they had hitherto maintained.

A few statements concerning their success leaked out into the public press, but were gener­ally received with incredulity and unbelief.

A competent scientific investigator was sent from France to Dayton, Ohio to investi­gate the truth of the rumors that had appeared in the newspapers of success that had found their way into the press. He was unable to obtain any definite information concerning the trials that had been made, but by interviewing the neighboring farmers he was able to satisfy himself that flights had actually been made, and so reported to his principals in France, and it was from France that America received the first authentic news that the Wright brothers had actually flown.

Then M. Archdeacon stirred up the patri­otic spirit of the French, not to be beaten by America, and offered his prize… of FF3000 to be awarded to the first person who should sail or fly twenty-five meters, under certain conditions.

The whole art of aerial locomotion origi­nated in France. In 1783, the Montgolfiers produced the balloon, their hot air balloon, and in the same year M. Charles and the Brothers Roberts gave us the hydrogen balloon. After the lapse of 100 years, Nadar issued his cel­ebrated manifesto in which he advocated the heavier than air flying machine, rather than the balloon, and started the controversy between the lighter-than-air and the heavier-than-air camps, which has lasted to our day, and is not settled yet. . . .

On August 22, 1906, M. Santos-Dumont made a tentative flight in his new “aeromobile,” and on October 23, 1906 he ran this strange machine swiftly over the ground and glided boldly into the air, flying above the excited spec­tators at a speed of twenty-five miles an hour, and covering a distance of two hundred feet, thus gaining the Archdeacon Cup.

This was the first public flight in the world, made without any certain knowledge of the pre­vious secret flights made by the Wright brothers in America.

From this time the French have been fever­ishly active in the field of aviation. In October 1907 the Aerial Experiment Association was organized with the object of constructing a prac­tical aerodrome, driven through the air by its own motive power, and carrying a man. This was a mere experimental association, financed by my wife, and consisting of the late Lt. Selfridge, Mr. F. W. Baldwin, Mr. Glenn H. Curtiss, Mr. J. A. D. McCurdy and myself. On March 12, 1908, the Association succeeded in raising its first aerodrome, the Red Wing, into the air from the ice on Lake Keuka, near Hammondsport, N. Y. Mr. F. W. Baldwin was the aviator on this occasion, which constituted the first public flight of an aerodrome in America. The Wright broth­ers, of course, had previously flown, but nothing was known with certainty at that time concerning their achievements. Then in that same year, 1908, the Wright brothers for the first time appeared publicly in flight. Wilbur Wright in Europe, and Orville Wright in America, startled the world with their achievements, and proved themselves to be the master of their art. . . .

The Department of Transportation gave its approval to the Eastern takeover by Texas Air later that year. That Eastern was a basket case was known, but, like Frontier, it had not been appreciated just how bad the situation was. Phil Bakes had performed well for Lorenzo after the Continental takeover. Under Bakes, Continental had been turned around and was profitable again. Like Continental, the most pressing problem facing Eastern was labor costs. But the labor problems at Eastern could not be handled like they were at Continental four years before by simply filing under Chapter 11, then unilater­ally abrogating the labor contracts in place with the unions. Congress had passed legislation in 1984 that restricted the effect of the holding in Bildisco, so that the debtor in possession (the bankrupt airline) could no longer unilaterally cancel labor agreements.3

Bakes relocated to Miami and took over the helm at Eastern. The magnitude of Eastern’s problems dwarfed those encountered at Conti­nental. The culture was different, the personnel were hostile, and the history of labor relations was dismal. Eastern’s record of labor relations over the years was largely a chronicle of the intransigence of the International Association of Machinists, whose leader was the powerful Charlie Bryan. Without a solution to the labor problem, for starters, there did not appear to be any way to salvage the airline.

Judging by subsequent developments, it appears that Lorenzo also came to that conclusion early; there likely was no way to salvage Eastern. Even as Bakes worked to solve the company’s seemingly insurmountable problems, Lorenzo began the systematic dismantling of Eastern for the benefit of Texas Air and its viable holdings. Eastern’s computer reservation system had been appraised for an amount between $250 million and $450 million, an astonishing fact when it is realized that the entire purchase price for the company was $615 million. Lorenzo had financed the purchase in such a way that less than half of the purchase money came from Texas Air, the rest of the money came from Eastern itself, validating once again the old leveraged buyout strategy that had worked so well. The computer reservation system was sold to Texas Air for the insider bargain price of $100 million, but the terms were even better: Texas Air put up no money, but gave Eastern a promissory note for the purchase price, payable at the end of a

period of 25 years at a severely discounted rate of interest. Texas Air then leased back the system to Eastern for a fee of $ 10 million a month.

w As a businessman, Frank Lorenzo gives capitalism a bad name.»

William F. Buckley

Lorenzo next transferred Eastern’s newest airplanes to Continental, paying Eastern again by promissory note for part of the payment. Conti­nental then sold the airplanes for cash, and at a profit. Continental bought 11 Eastern Air Lines gates at Newark Airport for half price, again paid for by promissory note. The purchasing of fuel was outsourced to a subsidiary of Texas Air at a cost to Eastern of $1 million per month. Eastern paid Continental another $2 million per month for the training of non-employee pilots who, ironi­cally, would be used to replace Eastern’s pilots in case of a labor disruption.

Eastern’s service was also being curtailed for lack of cash flow, and was stopped com­pletely at New Orleans, Seattle, and San Diego. Then came the sell-off of the routes, begin­ning with Eastern’s shuttle, which was sold to Donald Trump. The expected machinist strike came in March 1989, which marked the absolute beginning of the end. Although Eastern imme­diately went into Chapter 11, the reorganization amounted to little more than the gradual selling off of all remaining assets in order to raise oper­ating cash. The bankruptcy court took control of the reorganization from Eastern in April 1990, appointing as Trustee Martin Shugrue, former Continental president. The court used the oppor­tunity to judicially note that Lorenzo’s stew­ardship of Eastern had been a catastrophe. The reorganization was turned into a liquidation of Eastern’s assets and, in 1991, the charade finally ended. Eastern Air Lines was no more. Creditors were left holding the bag to the tune of almost $3 billion, and even the lawyers were shorted their fees, a most uncommon occurrence.

m Pilots are a rare kind of human. They leave the ordinary surface of the world, to purify their soul in the sky, and they come down to earth, only after receiving the communion of the infinite.»

Jose Maria Velasco Ibarra, President of Ecuador

hen Congress passed the Airline Deregu­lation Act in 1978, there existed no empir­ical data, nor any experience, to reliably predict what would happen to the U. S. air carrier indus­try under economic deregulation. During the three years that Congress held hearings on the matter before the Act was actually passed, scores of proponents and opponents testified. The argu­ments made for deregulation were largely just that, arguments, and they were premised on anec­dotal data. Economic theory was given much cre­dence, but it was still just theory. The effect that economic deregulation would have on the airline industry and on the nation was simply unknown.

In the following chapters we will examine some of the specific, unexpected developments that deregulation produced and their impact on the promise of deregulation. But here, let us take an overall look at how the progression of deregu­lation has unfolded since the passage of the Act.

33 Airline Fares

A study conducted by the Government Account­ing Office (GAO) in the early 1970s concluded that airline fares under the CAB regulated system were anywhere from 22 percent to 50 percent
higher than they would be under a deregulated system. By 2010, domestic fares had actually declined more than 40 percent in inflation – adjusted dollars since 1978. Fares have declined the most in long-distance and heavily trafficked markets, and the least in shorter-distance and less – traveled markets. Figure 30-1 provides a com­parison of the cost of air travel versus the cost of other goods and services as of 2010.1

Historically, airline fares have been the standard used in the airline industry and by government to track travel costs and to set taxes on travel services, in order to determine how much it costs a passenger to go from Point A to Point B. Since 2008, a new development has arisen in the legacy airlines that calls into question this time-worn standard for evaluat­ing passenger travel cost. This new develop­ment, the addition of add-on fees by all carriers, requires airline fares to now be compared with the more realistic totality of “cost of travel,” which includes not only basic airfares but also all the other costs charged to the passenger by the airline while getting from Point A to Point B. This will be discussed below.

For many years after deregulation, most of the price benefit in reduced fares went to

leisure travelers, who were not required to fly on short notice, like the business traveler. Due to computer reservation systems and the yield management programs available to the incum­bent airlines, ticket prices were discounted most heavily for those who could purchase early, stay longer, and travel at non-peak times. The airlines were able to charge much higher fares for those who could not plan very far ahead and were oth­erwise constrained in their travel options.

In the early years of deregulation, the com­puter generated systems of yield management and other competitive pricing schemes resulted in an almost indecipherable pricing regimen, where the passenger in 20A, for example, may find that his fare is twice that of his seatmate in 20B, for no discernible reason. Business fares actually increased after deregulation, at one time by as much as 70 percent over similar fares charged during the CAB era.2

Recent evidence, however, discloses that businesses that were punished by the economic downturn beginning in 2000 began to resist such disparate pricing. Corporate travel offices were set up for the express purpose of econo­mizing on costs of air travel. By 2002, airlines began to reduce fares across the board, and an increased corporate use of the Internet caused some tempering of fare disparity. Fares still remain higher at “fortress hubs,” where one or two airlines have disproportionate market share, and at some small airports where there is little or no competition.

The DOT’s jurisdiction over mergers terminated effective December 31, 1988, and the DOJ then assumed sole responsibility for airline merger
review. The DOJ now has primary authority in air carrier cases to enforce all antitrust laws. Although there were few merger proposals after 1988 (see Figure 32-1), it was clear that the days of merger accommodation were over. The Justice Department approach to antitrust activity was going to be very different from that of the Department of Transportation.

In 1998, when Northwest, then the fourth – largest carrier in the United States, proposed to acquire a controlling interest in Continental, then the fifth-largest air carrier, the DOJ opposed the action. The challenge of the DOJ was based on the fact that the two carriers are each other’s most significant competitors (or only competitors) in nonstop service between cities where they main­tain their hubs. In its complaint filed in federal court against the carriers, the DOJ asserted that the proposal would cause higher ticket prices and diminished service for millions of passengers. This proposed merger did not occur.

In 2000-2001, United proposed to acquire US Airways. The DOJ opened an investigation into the merger and concluded that it would be highly anticompetitive for a number of rea­sons. These carriers were the only competitors between the District of Columbia area and a number of cities; they were the most significant nonstop carriers in numerous hub-to-hub mar­kets; only they connected several northeastern cities; and the merger would have lessened com­petition in several transatlantic markets. When the DOJ announced that it would sue to block the transaction, the airlines abandoned their merger plans.

Proposals that have been reviewed without adverse action by the DOJ include US Airways – America West (2005), Northwest-Delta (2008), and United-Continental (2010).