Airlines, Buses, Trains : Debate Still Rages Over Deregulation

Democratic Sen. Robert C. Byrd of West Virginia says he regrets only two of the votes he has cast during his long Senate career. The first was against the Civil Rights Act of 1964, the other was in favor of the 1978 deregulation of U.S. airlines.

“Once there was deregulation, they (the airlines) left,” he said during recent Senate hearings. “Now, if you want to go to West Virginia to attend a dinner, you have got to give two days to it. You cannot come back to Washington after dinner.”

But Matthew V. Scocozza, assistant secretary of transportation for policy and international affairs, cited a “tremendous increase in the amount of competition” because of deregulation and added that fares are down, while employment, the number of markets and the number of passengers are all up.

‘Lower Fares, Better Service’

And a study by Washington’s prestigious Brookings Institution concluded that airline deregulation saves Americans $6 billion a year “through lower fares and better service” and that airlines have improved their annual earnings by $2.5 billion.

As these divergent views show, deregulation has spawned a fierce debate, one that promises to intensify as the relatively young process unfolds. Indeed, a few calls for “re-regulation” can already be heard around the nation’s capital.

And although most attention has been focused on the airlines, with their myriad fares, failures and mergers, deregulation of surface transportation--buses and trains--has not been without its controversies.

Deregulation has affected, sometimes harshly, the lives of tens of thousands of people who work in transportation, especially in the airline industry. In almost all cases it has led to smaller pay raises than had previously been the case or, in some cases, to salary decreases.

Lower Wage Scales

For example, American Airlines, one of the nation’s most profitable post-deregulation carriers, has been putting newly hired workers on lower, market-rate wage scales. The number of employees on the lower wage scales has risen to 40%. And, in the last two years, American has cut its work force to 39,600 from 48,000.

Also, communities of hundreds of thousands of people and businesses no longer have the caliber of bus, rail or air service that they once had. Since bus deregulation in 1982, for example, 3,763 communities have lost bus service and 751 other cities have suffered a reduction of service, according to the Interstate Commerce Commission.

Right now, some Nebraska communities are fighting to preserve the last bit of intercity transportation service they have. Wayne Rowe, director of the motor transportation department of Nebraska’s Public Service Commission, said that since deregulation, “We’ve seen a 75% cut in bus service in Nebraska.”

And the cuts continue. Dallas-based Trailways Inc. has announced that as of April 1, 1987, it will discontinue all bus service in Nebraska. That will mean that communities like Imperial and Beatrice will be left with no intercity transportation--bus, rail or air.

Huge Rail Network

Before passenger railroads were deregulated with the creation of the National Railroad Passenger Corp. (Amtrak) in 1971, a huge network of passenger railroads served the country. Today, train service--though heavily subsidized by the federal government--has shrunk dramatically.

In 1929, the nation’s railroads, operating about 20,000 passenger trains, carried 77% of the passengers on the nation’s commercial public transportation systems. By the time of railroad deregulation, trains were carrying only 7% of the passengers. Today, the railroads’ share is 1%.

Critics of Amtrak complain about its subsidy, which totals $618.9 million for fiscal 1987. Amtrak officials insist that they are trying to make it on their own, but the railroad system shows little prospect of becoming self-sufficient.

Nowhere, however, has deregulation been felt more dramatically than in the airline industry, which has been totally reshaped in the last two or three years.

Fares 7% to 30% Lower

Scocozza said fares are 7% to 30% lower today than they would have been had the Civil Aeronautics Board--which regulated airlines--survived. He added that 76,000 more people are employed in the airline industry today than there were at the time of deregulation in 1978. That year, he said, “some 200 million people got on airplanes. In 1986, we expect 400 million to fly.”

True, fares are generally lower, but many small communities have lost all passenger airplane service and there are fewer amenities in the air, long delays, crowded airports and overbooked flights. What’s most serious, some observers say, is that the dramatic cost-cutting tactics by the airlines will inevitably lead to diminished safety standards.

Many non-stop flights have gone by the boards, too. In one of the more revolutionary aspects of deregulation, the airlines have established hub-and-spoke systems. Passengers are funneled into hubs where, in only a few minutes, they must scurry to change planes bound for their ultimate destinations.

Sound Business Strategy

Inconvenience for the passenger--but sound business strategy for the airlines. Carriers can serve more destinations with greater frequency and fewer aircraft with hub-and-spoke systems. And they can increase their market shares and retain more connecting passengers.

Before deregulation, the nation’s airlines flew many more point-to-point routes than they do today. There once was non-stop service, for instance, between Little Rock, Ark., and New York City, a service that no longer exists.

Deregulation was phased in slowly. Most of the Civil Aeronautics Board’s authority to regulate domestic air routes expired at the end of 1981; its authority to regulate domestic fares ended at the beginning of 1983.

Before the CAB’s demise on Jan. 1, 1985, it had always protected existing airlines from competition. The agency determined how many airlines could operate, what routes they would serve and how much they could charge. Airlines could not add or drop routes or change fares without CAB approval.

Applications Took Months

Usually, applications for such changes took many months, sometimes years, to be approved or disapproved. Higher expenses--the costs of labor, fuel and interest--were traditionally passed on to the consumer in the form of higher fares.

The agency also had the last word on new entrants into the field. In fact, when the CAB was created in 1938 the airline industry consisted of 16 trunk carriers--airlines engaged primarily in providing scheduled service between major cities. This figure had shrunk through mergers to 10 by 1974. But between 1938 and 1978 the CAB did not approve the creation of a single new trunk line, although 79 applications had been filed.

(The term “trunk line” is no longer used in the industry. Airlines now are classified as “major,” “national” or “regional.” If current mergers are completed, there will be nine “major” airlines, which are those with $1 billion or more in annual revenue.)

The situation changed, at least for a while, after deregulation in 1978. It became easy to get into the business. A couple of airplanes were all that was needed--and they could be leased.

Number of Carriers Grew

Consequently, the number of carriers certified climbed from 36 to 234. But many of them had difficulty with financing and never got off the ground; the number actually flying rose to only 123. The established carriers matched the new entrants, low fare for low fare, and the casualty rate was dramatically high.

Today, 96 are left, according to the Washington consulting firm Airline Economics. And if the trend continues, if many more airlines merge or go bust, those remaining will hold unusual power. Some fear the emergence of a cartel-like industry that will eventually dictate prices and prevent new airlines from forming.

Rep. Gene Taylor (R-Mo.), who, like Byrd, laments his vote in favor of deregulation, predicts that the resulting consolidation in the airline industry will create an onerous oligopoly. “Once it falls into the hands of about six carriers, we’ll be paying $1,000 to travel from St. Louis to Los Angeles,” he said.

Even now, he complained, if one travels off the beaten path, the price can be high. Taylor said his constituents in the Springfield area routinely round up two or three people and drive the 125 miles to either Tulsa or Kansas City to save money by flying out of the large, heavily used airports.

Service Deteriorated

At the same time, service has deteriorated. “The big carriers moved out and the weed-eaters moved in,” Taylor complained. “That’s what we’re relegated to.”

But not everyone thinks that low fares will disappear even if the nation’s airline system ends up having only half a dozen major players.

“Six major systems are not the same as one, and I expect competition to continue,” said Alfred Kahn, a Cornell University professor known as the “father of deregulation” because he was chairman of the Civil Aeronautics Board when deregulation became law. “The existence of large numbers of discretionary travelers who have to be appealed to on the one side, and of seats that would otherwise go out empty on the other, suggests we would continue to have bargain fares available.”

The ability of airlines to pick and choose the cities they serve has had mixed results.

Improved Service for Some

According to Avmark Inc., an aviation management and marketing service, commercial air service was available at the time of deregulation at 523 non-hub cities. Since then, 108 of the cities have been given improved service; 19 have more seats but fewer flights; 96 have more flights but with smaller planes and fewer total seats; 150 have fewer flights and fewer seats, and 150 have lost all service.

Certainly people living in any of the cities where airlines maintain hubs (there are 43 of them) are getting greatly improved service with non-stop flights to a large number of locations.

Avmark President Morton Beyer recalls that when President Jimmy Carter signed the deregulation bill, both Carter and Kahn predicted that the airline industry would become a “peaceable kingdom.” Instead, Beyer said recently, the industry “has become an ugly jungle where the big and powerful carriers prey relentlessly on their weaker, smaller competitors. The confusion and uncertainty are overwhelming and the casualty rate from bankruptcies, mergers, acquisitions and outright collapse is appalling.”

But for some air travelers, the disadvantages of deregulation are yet to be felt.

Government Subsidies

For the first decade of deregulation, Congress decreed that the government would subsidize service to smaller cities that might otherwise lose it. But, according to a report on deregulation last year by the General Accounting Office, most small communities benefiting from the subsidies “are not progressing toward self-supporting air service and have lost passengers since deregulation.” The so-called Essential Air Service Subsidy Program assures service to eligible communities through 1988.

According to Scocozza of the Transportation Department, the federal government had to dole out about $26 million for the airline subsidies in 1986. Despite the expense, however, he said he believes that Congress may limit the subsidies when they expire rather than do away with them entirely. Subsidies to airlines serving such remote places as Alaska, Samoa or some parts of Montana, where the nearest airport might be 400 miles away, are justified, he said.

But he pointed to the $300,000 annual subsidy to an airline serving Jackson, Mich., as excessive. “Paying $300,000 a year to fly people from Jackson, Mich., to Chicago, when they are only 57 miles from Detroit and could drive, doesn’t make sense.”

Intense Competition

As airline deregulation progressed, the intense competition it created pitted traditional and new carriers in furious battles. And they relied on price cutting, the oldest marketing device in history, to attract passengers. Trouble is, though, that when there is less competition, fares sometimes rise. Today, for instance, there are numerous short routes throughout the country that cost more than a trip between New York and California.

Long Hauls Cheaper

Largely as a result of deregulation, it is cheaper to fly on long hauls, where there is greater competition than on shorter routes. For example, United Airlines’ regular coach fare for trips of between 50 and 100 miles is $110. That comes to between $1.10 and $2.20 a mile. On flights over 2,750 miles, however, the regular coach fare is $570--less than 21 cents a mile.

Some airlines have done well under deregulation; others have fallen by the wayside. Indeed, the industry remains in turmoil. A number of carriers are still teetering on the edge of bankruptcy and, in general, the airlines are not earning significant profits.

Drastic Discounting

In the last few weeks, People Express, which started it all with its drastic discounting and no-frills service, was so close to bankruptcy that it had to sell out to the Texas Air holding company. And there have been numerous bankruptcies, including Frontier and Imperial airlines and Arrow Airways, this year alone.

The year’s list of consolidations is long--and growing: Texas Air, which already owns Continental Airlines and New York Air, is also acquiring Eastern Airlines; Trans World Airlines bought out Ozark Airlines; Northwest Airlines and Republic have merged, as have Western and Delta airlines.

“Oligopoly is not necessarily benevolent,” said Leonard L. Griggs, director of Lambert International Airport in St. Louis and an archfoe of deregulation. “I do not view the demise of Frontier . . . as stimulating the American economy. Being gobbled up by somebody is not good.”

He noted that there is a virtual airline monopoly now in St. Louis. Of 93 gates at Lambert, 55, more than half, are owned by Trans World and its new Ozark subsidiary.

Merits of Deregulation

So the jury is still out on the merits of airline deregulation.

“It is still not possible to render a final verdict on whether, on net balance, deregulation is producing a domestic air transport system better or worse than what previously existed,” concluded a study on airline deregulation by the Eno Foundation for Transportation of Westport, Conn.

People Express actually patterned itself after bus transportation, and the low-fare airline began cutting into that industry’s business in 1981.

Then came the deregulation of the bus industry in 1982, allowing bus lines to more easily switch routes, change fares and discontinue service. It brought with it a flood of new entrants into the business that pecked away at the business of the larger lines like Greyhound and Trailways.

Before deregulation, there were about 2,000 bus companies in the United States. Since then about 1,500 new companies have been formed.

Fewer Greyhound Riders

Airline deregulation “unquestionably has cut into bus service across the country,” said Norman Sherlock, president of the American Bus Assn., a national trade group with 3,000 members. He added that air deregulation is “part of the reason Greyhound has shrunk its system and is talking about going out of business entirely.”

Phoenix-based Greyhound boasted ridership of 64 million in the mid-1960s. By 1980 the figure had dropped to 54 million. Last year, just 33 million passengers rode Greyhound buses.

In response, Greyhound has tightened its belt, dropping routes and shrinking its work force from 14,200 employees last year to 10,800 last June. It once ran 4,000 buses a day; now that figure is down to 3,000. Also, last February, Greyhound began turning over 124 of its terminals to local owners, from whom the bus company will lease space. This “complete overhaul” of the company is expected to save it $17 million to $20 million annually.

Cutbacks at Trailways

Trailways has about 20% to 25% of the bus-riding public and spokesman Roger Rydell said airline deregulation mainly “affected us in our major paired cities of high-traffic destinations, such as New York to Boston and Chicago to Los Angeles.”

Since bus deregulation took place, he said, “we have 1,000 new bus companies, mostly ‘mom and pop’ operations. Anybody can run over any highway they want.”

Trailways Cut Service

Rydell said Trailways last spring cut back its service between Boston and New York from eight round trips a day to one because the company was “bleeding up there,” competing with subsidized trains and with small commuter airlines.

In the Pacific Northwest, Trailways has reduced service “pretty dramatically,” shifting business to regional carriers, Rydell said. The “regionals” have advantages of lower overhead because they are not supporting a nationwide system--with the advertising costs that that requires--and they have fewer union pressures, he said.

Review by Congress

Meanwhile, congressional concern about the wave of airline mergers is expected to result in Congress’ taking another look at airline deregulation when it convenes next year. Some industry observers think that such a review could trigger a broad, in-depth look at how deregulation has affected the railroad, bus and airline industries.

“If the Congress . . . suspects that there is price leadership or price control in the industry,” George James, president of Airline Economics, said, “they will move to legislate it away. The larger carriers in the industry are well aware of this and will seek to avoid consolidation that might invite re-regulation.”

And it’s just possible that the thought of re-regulation is crossing Sen. Byrd’s mind.

There was a time when he could catch an 8:54 p.m. direct jet flight from Charleston, W.Va., to Washington after an evening appearance in the West Virginia capital. Now, though, the last non-stop is at 4:20 p.m., so the senator either must stay the night or drive the 342 miles back to Washington.