Airline Deregulation In The Usa: The Law's History

Airline deregulation in the United States was signed into law by President Jimmy Carter on October 24, 1978, as the Airline Deregulation Act. This law removed federal control over fares, routes, and market entry of new airlines, allowing airlines to set their own prices and routes. The act also phased out the Civil Aeronautics Board (CAB), which had regulated aviation since 1938. The Airline Deregulation Act was a significant event that transformed the commercial airline industry and the passenger experience, leading to increased competition, lower fares, and more accessible air travel for the general public.

The Civil Aeronautics Board (CAB) was phased out

The Airline Deregulation Act of 1978 removed many of the controls previously held by the CAB. Before deregulation, airlines had to seek regulatory approval from the CAB to serve any given route. This allowed incumbent operators to raise barriers to competition. The Airline Deregulation Act dismantled this system and gave airlines the freedom to choose their own routes, fares, and schedules.

The CAB Sunset Act gradually phased out the CAB, with its regulatory powers being transferred to the United States Department of Transportation (DOT). Dan McKinnon was the last chairman of the CAB, overseeing its final closure on January 1, 1985.

The phasing out of the CAB was part of a broader shift from political control to market control in the airline industry. This shift allowed airlines to innovate in routes and pricing, leading to increased competition and lower prices for consumers.

Airlines could set their own fares and routes

In 1978, the Airline Deregulation Act became law in the United States, allowing airlines to set their own fares and routes. This was a significant shift from the previous regulatory regime, where the federal Civil Aeronautics Board (CAB) controlled entry, exit, and the pricing of airline services.

Under the CAB, airlines were limited to competing on food, cabin crew quality, and frequency, which resulted in high prices and low load factors (the percentage of seats filled). The CAB also made it difficult for new airlines to enter the market, maintaining a rigid system that favoured major airlines.

With airline deregulation, however, airlines were free to innovate in terms of routes and pricing. They quickly adopted a hub-and-spoke system, where several smaller routes ("spokes") connect to a single larger route ("hub"), allowing for more efficient consolidation of passenger travel and increased capacity utilisation. This system was particularly beneficial for legacy airlines, while the new generation of low-cost carriers (LCCs) that emerged in the 1970s and 1980s continued to use the old point-to-point transit model.

The impact of airline deregulation was significant. Airfares, when adjusted for inflation, have fallen by about 25% since 1991, and passengers have saved billions of dollars annually due to increased competition and lower prices. The total number of annual passengers has more than doubled since 1978, and travellers now enjoy more convenient travel options with greater flight frequency and more non-stop flights.

However, there have also been challenges. The legacy airlines, with their hub-and-spoke systems, faced higher fixed costs due to the need for larger terminals and investments in technology. Additionally, the industry has struggled with profitability, especially during economic downturns, as consumers gravitate towards lower-cost carriers. There have also been concerns about the quality of airline service, with issues such as flight delays, lost luggage, and decreased availability of last-minute seats.

Despite these challenges, airline deregulation has overall had a positive impact, increasing competition, reducing prices, and making air travel more accessible to the general public.

The Airline Deregulation Act was signed into law by President Jimmy Carter

Prior to the Act, the federal government, through the Civil Aeronautics Board (CAB), tightly controlled various aspects of the airline industry, including fares, routes, and market entry. The CAB's regulatory powers dated back to the Civil Aeronautics Act of 1938 and were further bolstered by the Federal Aviation Act of 1958, which established the Federal Aviation Administration (FAA) to oversee aviation safety.

However, by the 1970s, the economic and industry landscape had changed dramatically. The oil crisis, stagflation, and technological advancements, such as the introduction of jumbo jets, put immense pressure on the rigid regulatory system. Additionally, passengers were burdened with escalating fares, and communities were faced with subsidizing air service at ever-higher rates.

The Carter administration, along with economists and think tanks, advocated for deregulation, arguing that the industry and consumers would benefit from new entrants, abolished price controls, and reduced control over routes. These efforts gained legislative momentum in 1975, with Senator Ted Kennedy leading hearings on airline deregulation in the Senate Judiciary Committee.

The Airline Deregulation Act of 1978 phased out the CAB, transferring its remaining regulatory powers to the Department of Transportation (DOT). This act immediately lifted restrictions on fares and route access, allowing airlines to set their own prices and fly where they wanted. It also encouraged the establishment of new airlines and the expansion of existing smaller airlines, leading to increased competition and lower fares.

The Act's impact was significant and far-reaching. It democratized air travel, making it more accessible to the general public. Airfares, when adjusted for inflation, have declined since then, and the number of passengers flying annually has more than doubled. Additionally, the Act spurred innovations in routing and pricing strategies, with airlines adopting the hub-and-spoke system to increase efficiency and capacity utilization.

However, the Act also had its challenges and drawbacks. Established airlines faced intense competition, leading to financial struggles and even bankruptcy for some. The industry as a whole grappled with profitability, particularly during economic downturns, and labor unions clashed with airlines over wage cuts and benefit reductions.

Despite these challenges, the Airline Deregulation Act of 1978, signed into law by President Jimmy Carter, marked a pivotal moment in the history of U.S. aviation. It revolutionized the industry, increased competition, and made air travel more accessible and affordable for millions of Americans.

The hub-and-spoke system was adopted by airlines

The hub-and-spoke system is a network used by airlines to route their plane traffic efficiently. A hub is a central airport that flights are routed through, and the spokes are the routes that planes take out of the hub airport to various destinations. This system allows airlines to offer more flights to passengers and increase passenger loads, as flights from different spoke cities can connect through the hub airport. It also enables airlines to serve fewer routes and utilise fewer aircraft, as flights from different spoke cities can connect through the hub airport.

The hub-and-spoke system became the norm for most major airlines after airline deregulation. Previously, under the direct-route or point-to-point system, airlines were required by the federal government to fly directly between two small markets, often resulting in half-empty flights and financial losses. The new system allowed airlines to save money and provide passengers with better routes to their destinations.

However, the hub-and-spoke system also has its drawbacks. It increases airport and air traffic congestion and eliminates many convenient non-stop flights. Additionally, if one airline dominates a hub, the lack of competition can lead to higher fares.

Despite these concerns, the hub-and-spoke system has been widely adopted by airlines in the US and has contributed to the development of a wider range of aircraft types that can better adapt to markets of varying sizes.

The creation of new airlines was spurred

The act's stated goals included encouraging the entry of new air carriers into the market and the expansion of existing carriers into new markets. It achieved this by standardising the establishment of new airlines and allowing airlines to take over underutilised routes. The act also allowed American-owned international carriers to offer domestic services.

The removal of these barriers to entry resulted in the creation of dozens of new airlines, including PeoplExpress, Presidential, and New York Air. It also prompted many smaller airlines to expand, such as Air Florida, Frontier, and Ozark.

The deregulation of the airline industry was driven by concerns about high barriers to entry for new airlines, slow government response to competition, and monopolistic practices by legacy airlines, which kept fares high. The act aimed to increase competition, lower fares, and make air travel more accessible to the general public.

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