Ups and Downs of Deregulation

Let us praise deregulation. Or should we?

On Oct. 24, airline deregulation celebrates its 10th anniversary.

Since the enactment of the Airline Deregulation Act of 1978, the air transportation industry in the United States has been profoundly altered.

The act allowed airlines to establish their own ticket prices, routes and schedules.

As a result, what has happened in the last 10 years might be surprising:

--Fares have dropped an average of 23%.

--The number of passengers has nearly doubled to more than 486 million a year.

--The percentage of adults who have traveled by air is 75%, more than double the 33% who had flown 10 years ago.

--Nearly 200 airlines have failed.

Still, the benefits of deregulation for passengers seem to outweigh the negatives.

Discount Fares Abound

According to the Department of Transportation, more than 90% of all travelers fly on discount fares.

However, full fare (and last-minute business) fliers are paying substantially more for their tickets than they did 10 years ago. Then a first-class, round-trip ticket between Los Angeles and New York City cost $572. Today that same ticket costs $1,650. Full-fare coach on the same route in 1978 cost $440. Today it costs $1,120.

Other routes/fares show similarly dramatic increases. Just last week, major airlines announced that air fares, already up 10% over last year, are on the rise again. The cheapest MaxSaver tickets will cost $20 more round trip.

“What deregulation did was open the door to a host of possibilities,” one airline president said. “Most of them are beneficial for the passenger. When airlines failed, it’s because deregulation also gave an opportunity for bad airline management to show how really poorly they could perform in an open and unregulated environment.”

Actually, airlines and passengers have sometimes been victims of a confluence of unfortunate events since 1978.

When deregulation started, most airlines already had dismal earnings due to upwardly spiraling labor, fuel and material costs. And those costs continued to rise.

The strike of air controllers in 1981 came as the number of airline flights was increasing rapidly. The Federal Aviation Administration never fully recovered from that strike (the controllers were fired by President Reagan).

Seven years later there are about 2,000 fewer fully qualified controllers. And of the 15,000 controllers now on the job, about 2,500 are eligible for retirement.

Then there’s the problem of aging air-traffic equipment, plus a sharp decline in the number of workers qualified to repair these complex systems.

Along with deregulation came the concept of airline hubs--airports in an airline’s route system that were the key to feeding passengers into most of the system.

Theoretically, airline hubs work, but you need to have enough planes and personnel to support them.

Initially, the problem was that when deregulation suddenly allowed airlines to fly any domestic routes they wanted, some airlines tried to fly to as many of them as they could without regard for number of planes, number of qualified pilots and the impact on the air-traffic control system.

Strange Scene

In October, 1978, there was a strange scene in front of the now-defunct Civil Aeronautics Board headquarters building in Washington.

A group of about 30 people armed with sleeping bags, beach chairs and thermos bottles camped in front of the building waiting to be first to apply to fly to 2,500 previously “dormant” routes.

And some carriers such as Braniff applied for a host of domestic and international routes. Braniff applied for 32 new routes and 16 new cities.

Soon these airlines made a painful discovery: They couldn’t support their new destinations. They had overextended themselves.

One by one these airlines either dropped the routes or, like Braniff, failed to keep them.

In some cases the airlines that survived did so only because they could lose money for a longer time than their competitors. While some of those airlines are still flying, their balance sheets are dismal proof of their misguided efforts.

Many blame the struggles--and the failures--on deregulation.

Of the new airlines started since 1978, only a few have survived. Very few--like Midway Airlines--have prospered.

Fare Wars Erupt

In cases where small, low-cost airlines have failed or were restructured, fares in markets where those airlines competed against larger carriers suddenly went up.

A good example is the Minneapolis/St. Paul market. Before Northwest acquired Republic Airlines, the two carriers slugged it out on many of the same routes.

Fare wars often erupted, and smart passengers could often get good bargains.

Since the acquisition Northwest dominates the market, and many air fares have risen.

According to a recent study by the U.S. General Accounting Office, TWA fares to and from St. Louis rose almost three times more than the U.S. average fare after TWA in 1986 bought Ozark Airlines, its main competitor in that market. (TWA now controls 83% of the passenger traffic in St. Louis.)

The GAO is studying fares at other airports where an airline dominates the market, including Detroit and Memphis (Northwest), and Pittsburgh and Syracuse (USAir).

Eight airlines control more than 94% of the U.S. market, leading to some valid fears about the impact of oligopoly pricing of air tickets.

And in an era of mergers, acquisitions and consolidations, the plight of even some of those airlines is very much in doubt.

Pan Am has announced that it wants to sell its Latin America routes (it sold off its Pacific routes to United a few years back).

And Texas Air, which has sustained huge losses in the last few years, recently signed an agreement with SAS, giving the Scandinavians the option of buying up to 10% of the corporation. Texas Air may also sell its Eastern shuttle operation.

Then there’s the problem of airport capacity. Not one new airport has been built in the United States since 1974. Many have been stretched to capacity, and ground delays and runway congestion is not uncommon.

There are about a million more flights in the United States than before deregulation and more than 500,000 Americans are up in the sky every day.

The result has been to call for Congress to re-regulate the airlines. Airlines, however, will fight any proposed legislation.

Some lobbyists are campaigning for even more deregulation. They argue that airline deregulation and low fares have increased travel safety by drawing passengers from cars to commercial airplanes.

A study by Clemson University claims that 1,700 lives are saved each year by passengers who choose to fly rather than drive to their destinations.

One question remains: If deregulation continues at its current pace, will the big airlines just get bigger?

“Not necessarily,” Stephen Wolf, chairman and president of United Airlines, said. “Deregulation has stimulated competition, and it has brought about very attractive pricing activity among airlines.