Deregulation of US Airlines

Thirty years later, 165 major US airlines have collapsed, been forced to merge or are in Chapter 11 bankruptcy, the industry has lost billions and cannot make the required investment in new equipment that would stave off its greatest crisis ever -- sky-high fuel prices. Even in Australia since deregulation in 1990, the list of failures and mergers of major airlines is extensive.

Compass, Compass Mk II, Australian Airlines, Impulse Airlines and Ansett have all disappeared.

The debate on the success or otherwise of deregulation will rage as long as there are economists and universities. Each paper written by an expert builds a compelling case for its success or failure. With fuel prices soaring and the devastating effects of 9/11 still lingering, the prophets of failure -- including former chief of American Airlines Bob Crandall -- are having a field day.

In a June address to the Wings Club in New York, Crandall laid out his blueprint for the stabilisation of the US airline system, which not surprisingly involved a "dollop" of re-regulation. "I feel little need to argue that deregulation has worked poorly in the airline industry. Three decades of deregulation have demonstrated that airlines have special characteristics incompatible with a completely unregulated environment," he told members.

Crandall, as always, dished up the facts bluntly: US "airlines, once world leaders, are now laggards in every category, including fleet age, service quality and international reputation. "Fewer and fewer flights are on time. Airport congestion has become a staple of late-night comedy shows.

"Airline service, by any standard, has become unacceptable". For Crandall, none of this is a surprise. He was deregulation's fiercest opponent, typified by his comments to a Senate lawyer in 1977: "You f...... academic eggheads. You can't deregulate this industry. You're going to wreck it. You don't know a goddamn thing".

Deregulation's roots can be traced back to the industry's pleas for regulation. In circumstances similar to today, 16 major US airlines successfully lobbied Congress in 1938 to regulate the industry after countless failures with the notion that it could grow more robustly through stability.

The Civil Aeronautics Authority -- later the Civil Aeronautics Board -- was formed to regulate airlines as if they were public utilities, and issued certificates to provide air services between specific points and to approve fares and schedules.

By 1978, six of the original 16 major airlines had disappeared through arranged mergers such as United and Capital and no new major transcontinental airline had been allowed to start. The remaining 10 accounted for 90 per cent of the air carrier market. However, there was discontent over alleged price fixing, low industry load factors and most importantly CAB's lack of flexibility to encourage innovative fares.

In a classic case that underscored the problem, World Airways applied in 1967 to fly a scheduled service between New York and Los Angeles at discount prices. The CAB "examined the case" for six years and finally dismissed the application.

Even for airlines that were members of the so-called cozy club, CAB approval for a new route was extremely difficult to get, evidenced by Continental Airlines' attempts to operate from Denver to San Diego.

Incredibly, the airline had to wait eight years for approval and that was only after the US Courts of Appeals instructed the CAB to grant the authority. At the time, Congress was noting that small regional airlines such as Pacific Southwest and Southwest, which were controlled by the CAB because they flew within the boundaries of California and Texas, were charging much lower fares and flying full aircraft.

Congress also noted the dramatic effect of relaxed charter rules for airlines such as World and Trans International Airlines, which led to much lower fares. In 1976, president Jimmy Carter appointed Cornell University's Professor Kahn as chairman of the CAB. He was a vocal critic of the CAB, claiming it had caused excessive airfares and carrier inefficiency.

Deregulation was introduced in 1978 and, after 1982, airlines were free to enter any route. Exit regulations were eliminated and fare regulation was phased out. A heavily regulated industry had its flaws but at least it was profitable and not one major airline went bankrupt between 1938 and 1978. According to US Air Transport Association data, the profit margin between 1955 and 1977 was a modest 2.8 per cent.

One of the main benefits claimed for deregulation is that since 1978, fares are down and passenger numbers are up. But those trends are the same the world over, regardless of whether the markets are deregulated. Air fares have fallen against inflation and passenger numbers have risen in virtually every year since reliable records were kept in 1929.

According to Paul Dempsey, Tomlinson professor of global governance in air and space law at McGill University in Montreal, fares fell on average 2.5 per cent annually from 1950 to 1978. Between 1979 and 1993, the drop slowed to 1.7 per cent.

Dempsey -- a vocal critic of deregulation -- in a paper called "The Financial Performance of the Airline Industry Post-Deregulation" for the Houston Law Review, Summer 2008, points out that proponents of deregulation such as its chief architect Kahn seemed not to understand some critical dynamics of the industry, such as economies of scale of aircraft and airlines themselves.

In fact, fares globally have fallen at a similar rate to the US, while US passenger growth has slowed since deregulation. Australia once had the world's most highly regulated airline system, after the government moved in the late 1950s to stop constant airline failures.

Under the two-airline system, as it was called, Ansett and Trans Australian Airlines ordered the same aircraft (up to 1980), had them delivered on the same day, flew them at identical times and charged the same fares.

Yet between 1964, when the first domestic jets -- 727-100s -- were introduced, and 1991, when deregulation was introduced, the transcontinental return airfare from Perth to Sydney increased from $210 return to $575 return, while average weekly earnings increased from $57 a week to $1134. Chronically low profits are hobbling US airlines' bids to re-equip with more fuel-efficient aircraft that would provide real and sustained cost cuts. Of the 1275 firm orders for the 787 and A350, only 71 are for four US airlines -- just a paltry 5.56 per cent of the combined order books.

This is in stark contrast to the orders for the Boeing 767. When it first flew in 1981, US airlines accounted for 58 per cent of the order book. That inability to invest can be related directly to the profitability of the industry since 1978.

Discounting the effects of 9/11 in 2001 and 2002, the US industry recorded an average of -3.9 per cent in the four years up to and including 2006 -- before fuel costs skyrocketed. No studies have quantified the additional burden on US airlines of maintaining an ageing fleet -- now the oldest in the Western world -- and the additional fuel costs.