The Progression of Deregulation

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.