The Nature of Regulated Transportation

Since early in their history airlines had been considered by government to be, to some degree, instruments of national policy. Airlines were used:

9 To carry the mail

9 To facilitate commerce between the cities and states

• To establish a fast and efficient passenger transportation system

• To function in the national defense system in times of emergency

9 To carry the flag internationally

To carry out these functions, the airlines had to be financially stable, they had to be depend­able in the long run and reliable at all times. Government regulation of the airlines facil­itated these ends well, and they were among the primary reasons that the federal government began controlling entry, rate, and route allocation in 1938 under the Civil Aeronautics Act. The nascent airline business was a fragile concept at the time and it was by no means certain that unlimited competition would not bring down the whole endeavor. Widespread public acceptance of air travel had not yet occurred. Deficiencies in equipment, weather forecasting, and air traf­fic control contributed to well-publicized airline crashes; flying was still an adventure. The air­lines needed to be stabilized, protected against absolute competition, and developed into an acceptable and safe form of transportation in order to accomplish these government goals.

Thus, for nearly 40 years, entry into the airline business had been controlled by the Civil Aeronautics Board. Under this system no major new entrants had ever been permitted, although the CAB did authorize a limited number local service providers for a subsidized service on less dense routes and to provide feeder lines for the trunk carriers. The number of trunk lines had decreased from 16 in 1938 to 10 in 1978. That year the 5 largest airlines accounted for two – thirds of all domestic revenue and the exclusive 10 trunk carriers accounted for 90% of all air traffic. There were 8 regional service carriers and 10 supplemental carriers.

Under the CAB system routes were sup­posed to be awarded among the existing carriers based on the perceived needs of the communities and cities requiring service, and on the equitable allocation of routes to the existing airlines desir­ing and capable of delivering such service. In fact, the performance of the CAB fails to indicate that it fulfilled even this task, as confirmed by Senate hearings in 1974 and 1975, as the CAB enforced a de facto moratorium on new route awards after 1969, effectively stagnating the system.1 Fares and rates were established mainly as a function of the airlines’ cost of doing busi­ness, which cost was set using an assumption of a 55% load factor for all airlines. This produced a system not particularly designed or administered to be cost efficient, but it was stable. Not one airline in 40 years had been allowed to go into bankruptcy.

Competition in the airline industry had been regulated, but competition had not been elimi­nated. The more efficient the airline, the better its operating ratio and the more money there was at the bottom-line. Northwest was the most efficient airline with a breakeven load factor of 43%. This compared with United, whose breakeven load factor was 59%. The average of all airlines’ load factors at the time was between 50% and 55%.

The effect of airline economic regulation was to create both a financial ceiling and floor for the companies, guaranteeing that neither prof­its nor losses were excessive. While the support of the CAB limiting airline loss was comfort­ing to management, the ceiling limiting innova­tion and profit was frustrating, particularly to the types of men who rose to run the airlines. The technological advance in aircraft and engine design kept airlines busy trying to stay ahead of one another in order to have the most appealing fleet available for the limited passenger market, most of which were business travelers.

Aesthetics and quality of service were high on the list of concerns, since these were two of the few discretionary operating decisions avail­able to management. Marketing schemes were also highly competitive, the effort being lim­ited to the best way to sell essentially the same product that every other airline sold. Each new innovation thought up by an airline, no matter how minor, was pushed as the reason to fly that airline. For instance, the introduction in 1965 of in-flight movies by TWA was highly advertised; it resulted in six to eight more passengers per flight. Delta had a piano in its upstairs bar on the domestic 747, accessible from below by a circu­lar staircase. Southwest dressed its stewardesses in hot pants. National Airlines fielded a sugges­tive advertising program, with TV clips featuring stewardesses inviting passengers to “fly me” to

Miami. Their 727s featured a painted likeness of a beautiful stewardess on the side of the plane with “Fly Me” painted just to the side. Airline management continually strove to bring some quality of uniqueness to their commodity-like operations.

Until the 1960s and early 1970s, leader­ship of the major airlines had remained mostly in the hands of the young men who took over in 1934 after the Black investigation of the so-called “spoils conference” scandal. There was a same­ness about those early airline leaders since they had all been tempered by the same conditions affecting airline growth and essentially all had been both pilots and CEOs. Newcomers like Rob­ert Crandall at American and Richard Ferris at United were natural competitors and often went head to head on issues like market share, com­puter reservation system development, and travel agent loyalty. While these new leaders brought a new entrepreneurial spirit to the airline business, they did so in different ways. Crandall preferred to compete within the established regulatory framework, while Ferris, who came from the hotel industry, was open-minded about deregula­tion. For the most part, however, airline manage­ment was firmly opposed to airline deregulation.