Factors That Influenced the Deregulation of the Airlines

Charter Operations

As we saw in Chapter 18, the market for cheaper air travel had been recognized since shortly after World War II, when charter operators began to fly using war surplus DC-3s. Charter operators were definitely second class citizens in the airline world and in the view of the CAB. They not only got no respect from the scheduled airline world but they were hindered at every turn by regula­tions designed to insulate from competition the trunk air carriers who had been accepted into the system by the CAB in 1938.

Charterers could not sell individual tickets, nor could they fly published schedules. They were essentially relegated to selling the entire aircraft capacity to large, established groups by advance sales. The CAB monitored these opera­tions carefully; ever watchful lest charter opera­tions encroach on the CAB-controlled scheduled airlines’ established routes. But the charter opera­tors showed that a profit could be made with low fares, sometimes as much as 50 percent lower than CAB-mandated fares, so long as the aircraft flew filled with passengers.

The CAB then allowed the trunk lines for the first time to include a cheaper class of airfare in the same aircraft with standard fares; these were the first “coach fares” and this was the cre­ation of separate seating and amenities for sec­ond class passengers on the same flight. Still, the CAB retained its stranglehold on the economics of commercial aviation.

Intrastate Air Carrier Operations and Scholarly Publications

One of the first economic studies to question the advisability of the airline system run by the CAB was published in 1962.2 The conclusion of this study was that there was nothing inher­ently monopolistic about the airline business and there was no need for any government limita­tion or control over entry into it or exit from it. Shortly thereafter, in 1965, a Yale law student by the name of Michael Levine wrote a law review article about the largely unregulated intra­state airline business in California. In comparing the intrastate airline fares with those mandated by the CAB, he concluded that CAB policies “fostered unnecessarily high fares, encouraged uneconomic practices, and limited the variety of service available to the public.” He found that intrastate fares were about half as high as interstate airline fares, yet the intrastate carriers were making a profit and they were flying more passengers.

In 1970, Alfred Kahn, a professor of eco­nomics at Cornell University, produced a two – volume work, The Economics of Regulation, which basically postulated that the heavy hand of government regulation was inimical to the public interest, and that competition would natu­rally produce the best product for the best price for the public.

By 1971, a new intrastate carrier, Southwest Airlines, answering not to the CAB but only to the Texas Public Service Commission, began ser­vice between the three largest cities in the very large state of Texas, setting its fares far below those mandated by the CAB. It, too, proved suc­cessful charging lower fares and flying with full airplanes.

The conclusion was becoming inescapable that government regulation of air carriers was largely preventing low-fare air travel and restrict­ing travel.