Despite years of falling prices, increased travel options, and vigorous industry competition, some federal policymakers appear to be on the brink of abandoning the incredibly successful 20-year experiment in airline competition following deregulation in the 1970s. On April 6, the U.S. Department of Transportation (DOT) released a "Proposed Statement of Enforcement Policy on Unfair Exclusionary Conduct by Airlines" to remedy alleged anti-competitive practices within the industry. This proposed enforcement policy specifically targets efforts by major carriers to offer consumers significant discounts in order to compete with smaller carriers or new entrants. If such fare wars hurt the smaller companies or drive them from the market, DOT will take action against the larger carriers.

The DOT claims that these steps will "ensure that free market principles and competition continue to thrive in commercial aviation," and says that its proposed enforcement policy "does not attempt to regulate the market in any way." ¹The reality, however, is far different. "No matter how they cut it, this policy puts government bureaucrats in the business of setting fares and determining the level of service in the market," argues Carol Hallett, president of the Air Transport Association of America. ²As James L. Gattuso, vice president for public policy and management at the Competitive Enterprise Institute (CEI), observes, "The message is, don't compete too hard; don't lower your prices too much." ³In short, the DOT's proposed enforcement policy is tantamount to reintroducing federal bureaucracy and regulation into the airline market, which would have a chilling effect on competition by discouraging fare wars that result in significant savings for consumers.

Surprisingly, threats of renewed DOT regulation of the airline industry have been met with casual acceptance or, worse, general approval on Capitol Hill. In an attempt to counter such calls for re-regulation, some legislators have even suggested that increased subsidization of small carriers or new industry entrants is the best way to bring more competition to the industry, thereby ensuring price competition and lower fares. Such calls for the re-regulation or increased subsidization of the aviation industry are unjustified. Despite the ebbs and flows of the volatile airline marketplace, consumers clearly have benefited significantly since the airline market was deregulated in the late 1970s.

New regulations or subsidies will not alleviate any of the perceived problems that the DOT or some Members of Congress fear may arise. Reintroducing bureaucratic regulation into the airline marketplace will only ensure a return to the stagnant, cartel-like markets that existed before liberalization. There are better solutions to many of the problems the DOT addresses in its enforcement policy: solutions that do not require the re-regulation of airline routes and rates.

The following five recommendations, if adopted, would do far more to improve airline competition than could ever be done under the DOT's regulatory approach:

1. Privatize airports to expand airport capacity and improve infrastructure;

2. Allow market-based pricing at airports for takeoff times, slots, and gates;

3. Privatize the air traffic control system to reduce congestion and improve safety;

4. Cut airline fees and taxes; and

5. Encourage increased foreign competition for the domestic marketplace.

This steady increase in air travel began placing serious strains on the ability of federal regulators to cope with the increasingly complex nature of air travel. Simultaneously, "beginning in 1969, changes in basic economic conditions and in aircraft technology triggered a sudden decline in the industry's performance," ¹²notes Richard H. K. Vietor, professor of Environmental Management at the Harvard School of Business Administration and author of Contrived Competition: Regulation and Deregulation in America. The onset of high inflation, low economic growth, falling productivity, rising labor costs, and higher fuel costs devastated the airlines, and "regulators, in their initial efforts to cope with these problems, only made matters worse." ¹³

The CAB encouraged the formation of cartels, disallowed new route requests, and restricted airline capacity. Decades of inefficient regulation began to take its toll on air carriers. The increasing inflexibility of federal regulation made it virtually impossible for carriers to respond to these problems. Flights were less full, industry profits were dropping, and consumer prices were higher.

By the mid-1970s, the CAB began to recognize its inherent inability to deal with the increasingly complex airline industry and the macroeconomic problems that were plaguing it. Remarkably, the CAB defied traditional regulatory practice and asked Congress to take away much of its rulemaking authority so that the airlines could operate freely in the marketplace, industry competition could be increased, and consumer prices thereby could be lowered.

Two CAB chairmen, John Robson (from 1975 to 1977) and Alfred E. Kahn (the late 1970s), embarked on a bold plan with two goals: radical reform of airline regulation and eventual abolition of almost all rules and the CAB itself. The CAB received support from congressional Democrats, led by Senator Edward Kennedy (D-MA), who sponsored legislation to liberalize the airline market in order to improve efficiency, encourage growth, and (most important) reduce prices. The Airline Deregulation Act of 1978 was passed by Congress and signed into law by President Jimmy Carter on October 24, 1978. In effect, this Act and the subsequent Civil Aeronautics Board Sunset Act of 1984 provided for the complete deregulation of the nation's airline market through the decontrol of prices, freedom of entry into and exit from the marketplace, complete freedom for mergers and alliances, elimination of service standards and requirements, and an end to route authorization.

Since 1978, the federal government's only important regulatory role in the airline market has been to establish and enforce safety standards through the Federal Aviation Administration. However, it is worth noting that the Airline Deregulation Act did not address two important facets of the airline industry in which government remains an important force: the air traffic control system and the ownership and maintenance of airports. A variety of government entities and officials remain in control of these important components of aviation infrastructure, and problems have arisen regarding both the technological obsolescence of the air traffic control system and the mismanagement of the nation's airports. This has created additional safety concerns regarding traffic congestion and has led to such serious problems as runway congestion, "slot" or gate allocation and availability, and occasional delays for travelers.

These reported declines are bolstered by the recent work of economists Jerry Ellig, senior research fellow at the Center for Market Processes at George Mason University, and Robert Crandall, senior fellow in the Economic Studies Program at the Brookings Institution. In their 1997 study Economic Deregulation and Customer Choice: Lessons for the Electric Industry, ¹⁴Ellig and Crandall found that real price reductions of roughly 13 percent occurred as early as two years after deregulation, that reductions of almost 30 percent were evident ten years after deregulation, and that the annual value of consumer benefits generated by deregulation equals $19.4 billion in 1993 dollars.

Prices have fallen at all airports
Airline deregulation might be considered a failure if fares at small and medium-sized airports had not declined as they did at large airports, but small and medium-sized airports have not been denied the benefits of lower prices and better service. An April 1996 General Accounting Office study found that "The average fare per passenger mile, adjusted for inflation, has fallen since deregulation about as much at airports serving small and medium-sized communities as it has at airports serving large communities." ¹⁵Furthermore, "The average fare per passenger mile was about 9 percent lower in 1994 than in 1979 at small-community airports, 11 percent lower at medium-sized airports, and 8 percent lower at large-community airports." ¹⁶

Air Travel Is Safer

Consumers obviously would not be happy if prices fell this much and safety also was reduced in the process. But the opposite has been true: Safety has improved as prices have fallen.

• Airline safety has improved since deregulation.Between 1939 and 1978, fatal airplane accidents averaged six per year. After deregulation, from 1978 to 1997, the average was only 3.5 fatal accidents per year. The safety record of America's airways is determined more accurately, however, by examining how many airline fatalities occur annually relative to the overall number of miles flown by the nation's air carriers. As Chart 3 illustrates, the overall safety record of America's airlines has continued to improve since deregulation: During the 20 years since deregulation, fatal accidents have averaged 0.0009 per million aircraft miles flown. During the 40 years before deregulation, on the other hand, fatal accidents averaged 0.0135 per million aircraft miles flown.

• Airline safety has improved for airports of all sizes. The GAO also found that "for each airport group [small, medium-sized, and large], the accident rate was lower in 1994 than in 1987. The GAO study did not find any statistically significant differences between the trends in air safety for airports serving small, medium-sized, and large communities." ¹⁷

• There are more departures for small, medium-sized, and large airports alike. "The quantity of air service, as measured by the number of both departures and available seats, has increased since deregulation for all three airport groups," according to the 1996 GAO study. ¹⁸"Specifically, in May 1995 small-community airports as a group had 50 percent more scheduled commercial departures than they did in May 1978; medium-sized community airports had 57 percent more departures, and large-community airports had 68 percent more departures." ¹⁹

• Airlines fly more miles. Airlines also are logging more miles than before deregulation. Whereas carriers flew roughly 2.5 billion miles in 1978, they logged more than double that number last year alone, flying approximately 5.7 billion miles in 1997. Furthermore, as Chart 5 illustrates, this trend increased much more rapidly after deregulation than it did before market liberalization.

• More Americans are flying than ever before. Airlines are logging more miles because more Americans are flying than ever before. Although approximately 250 million passengers were carried in 1978, roughly 600 million people (almost two-and-a-half times as many) traveled by air in 1997. As Chart 1 showed, this trend increased more rapidly after deregulation went into effect.

• Airlines are more timely than ever before. Although little historical data are available to gauge these results, anecdotal evidence indicates that flights are on time more frequently now than before deregulation. Development of the airlines' "hub and spoke" system has made many different routes available to consumers, allowing travelers to reach their destinations via tightly coordinated routes. Delays continue within the system, but they are due primarily to the sort of airport mismanagement that accompanies government ownership of this important infrastructure component.

• New types of services have become available. Many unforeseen consumer services and benefits sprang up following deregulation. For example, the travel agent industry expanded to assist consumers in booking air passage. This was facilitated by the development of sophisticated new computerized booking systems, which recently became directly accessible to consumers through the Internet. Not only has this development made it easier for millions of Americans to book air passage tailored to their specific needs, but it also has created new types of travel and vacation packages for consumers.

• Airlines have developed new marketing options to serve the newly empowered consumer more effectively. Frequent flyer miles, for example, are a widely utilized consumer option that provides substantial discounts once the minimum number of miles has been logged. Many air travelers are able to strike time-saving or money-saving bargains with travel agents or airline reservation attendants, who can bump travelers to earlier flights or issue them discounted or free tickets to later flights if they are willing to surrender their tickets on an overbooked flight. Such bartering options were rare before deregulation. Consumers also have benefited from the rise of innovative low-cost carriers and commuter airlines that offer extremely competitive rates or that serve short-haul or "puddle jumper" routes. Such carriers crop up periodically to satisfy demands for cheaper, more frequent flights between certain destinations.

• Frills and amenities may have declined slightly. Perhaps the only service quality variable that could be considered a deregulatory disappointment concerns the lack of airline frills and amenities. As the cliché goes, there is perhaps nothing worse than airline food. And outside of magazines for travelers to read or an occasional in-flight movie, airlines offer little for the consumer to do on the average flight. But this begs the question of whether such frills or amenities are a priority for most travelers. Clearly, most airline customers do not purchase tickets to receive a five-star dinner and the finest champagnes or wines. They are looking primarily for the quickest, cheapest path from one destination to another. Today's deregulated marketplace provides them with such options. Consumers looking for more expensive frills and amenities can get them on some airlines by flying first class.

These taxes have imposed a crushing burden on the airlines during the 1990s, both by lowering corporate profitability and by restricting industry expansion. According to Scott C. Gibson of the Washington, D.C.-based Economic Strategy Institute:

Since 1991, the cumulative effect of the increase in taxes has exceeded $12 billion, an increase of 48% on the $25 billion that would have been collected had taxes remained at the 1989 level. The bulk of this increase is directly passed on to consumers in the form of higher prices, but given the inability of the airlines to raise prices on the majority of airfares without negatively impacting demand, the tax increase essentially decreases airline revenues.... Had the tax burden not been increased in 1990, the airline industry would have lost approximately $2 billion rather that the $13 billion in losses that occurred from 1990 to 1994. ³⁵

This result has led John H. Dasburg, president of Northwest Airlines Corporation, to conclude that "The story of the airline industry in the 90's is a textbook example of the damage that ill-conceived tax policies can do to an industry." ³⁶Lowering this multibillion-dollar tax burden would do much to increase industry competition, encourage new entry, and improve service rivalry.

5. Encourage increased foreign competition in the U.S. market. Just as Americans benefit from free trade in other foreign goods and services, foreign competition in air service could bring them new service options and lower prices. But government regulations continue to restrict foreign competition for domestic airline routes. This policy limits industry competition and consumer choices. Americans have the uninhibited right to choose freely from among foreign makers of automobiles, electronic products, clothes, and countless other goods and services; airline travel should be accorded the same treatment.

Finally, it is important that policymakers on Capitol Hill reject inefficient and expensive attempts to encourage more industry competition through new or increased federal subsidies to rural areas or to new carriers. The federal government already operates the Essential Air Service (EAS), which distributes subsidies to roughly 100 rural communities, a quarter of which are based in Alaska. As Heritage Foundation Fellow Ronald D. Utt has noted with respect to the EAS:

Taxpayers should not have to subsidize those few travelers who chose air travel over unsubsidized alternatives. Individuals who wish to fly to and from remote locations should pay the full cost themselves. If they are to be subsidized, the subsidy should be paid by the local communities that allegedly benefit from the less costly service. In either case, if those who benefit from having regularly scheduled air service to these locations are not willing to bear the full costs themselves, the service should be discontinued. ³⁷

For many of the same reasons, it would be a mistake for Congress to begin subsidizing new entrants into the airline industry as a way to increase competition. Creating new forms of corporate welfare to encourage industry expansion not only will result in an expensive new federal spending program, but also will be tantamount to creating a massive new industrial policy for the aviation marketplace. Federal intervention of this magnitude will demand a sizable expansion both of the federal bureaucracy and of the overall tax burden borne by millions of Americans.

CONCLUSION

The deregulation of America's airline industry has been a great success by every statistical measure available. Americans today can fly from coast to coast more cheaply and frequently than ever before. Deregulation has converted airline travel from an upper-class luxury into a transportation option within the reach of millions of Americans.

It is therefore somewhat surprising, and quite regrettable, that the 20th anniversary of airline deregulation has occasioned calls for the re-regulation of prices and operations in the industry. Such a move is wholly unwarranted, given the record of deregulatory achievement over the past two decades. "In the end," summarizes Darryl Jenkins, "DOT's new policy would accomplish exactly what the Congress and the country left behind 20 years agoæa regulatory quagmire that eliminates consumers' choice and chills competition." ³⁸

Consumers, not regulators, are in the best position to make pro-competitive choices in this industry. Allowing Washington bureaucrats to reassume their positions as dictators of rates, routes, and quality would be worse than shortsighted: It would send the industry back to the regulatory Stone Age. As United Airlines Chairman Gerald Greenwald aptly concluded in a speech at the Economic Strategy Institute last November, "there is a huge and frightening cost in tinkering with the most efficient, innovative and competitive airline system in the world. We have everything to loseæand absolutely nothing to gain." ³⁹

Adam D. Thierer is former Alex C. Walker Fellow in Economic Policy at The Heritage Foundation.

Endnotes