Airline Deregulation Act of 1978
In the field of aviation and transport, airline regulations had been a cause for debate considering the nature of its policies and restrictions. In the past, airlines were seen as regulated utilities, putting them in harsh conditions that prevents them from practicing flexible competition and providing service that would not hamper their service to their clients. Requests for reform and approval were either rejected or refuted by advisory boards that would stop all reform, believing it would be detrimental to the industry. The United States aviation sector had longed felt this sentiment from the 1930s up to the late 1970s as the Civil Aeronautics Board had restricted their service to their consumers and provide flexible competition with their fellow aviation companies. However, with the signing of the Airline Deregulation Act of 1978, the aviation industry had enabled flexible market competition between companies and ensure that fares, routes and programs for clients are affordable and reasonable, enabling them to influence the airline industry’s needs and goals.
According to Wensveen (2012) the Airline Deregulation Act of 1978 was created to tackle issues pertaining to domestic air transportation, specifically removing government influence on discussing fares, routes, new entry of new airline companies, and passenger input in the airline industry. The act removes full government influence in deregulating international service such as airline management. The US Congress had established, under the ADA, a Declaration of Policy that would be applicable domestic air transportation. The main theme of the act was to influence competition between airline companies and introduce balance in the airline market. The act stated that there should be a maximum reliance on competition to achieve efficiency, low prices, and high quality of service to also attain the required air transportation system for the consumer. According to the act:
“Competitive market forces and actual and potential competition were to encourage efficient and well managed carriers to earn adequate profits and to attract capital”.
The Act also serves as a comprehensive and accurate system to ensure that airline schemes and services are arranged for both interstate and overseas services for small areas and isolated areas where the US federal government could intervene . Kaps (1997) added that the act was also done to devise the process on how economic control of the government would be removed from the airline industry. While this was so, the 1978 act did not mandate the total deregulation of the industry despite the orders of President Jimmy Carter. The act mostly redesigned the current regulatory structure that would allow government influence to be removed from regulatory controls, as well as provide a transition stage to ensure that the airline industry could take over if needed. The act also handled the removal of entry and pricing barriers on 1983. It was also through the act that had removed the Civil Aeronautics Board, but it continued to operate until December 1984. The act also served as a guarantee for the small communities to retain their air services considering that some of them are in locations unreachable by land transport, especially those located in far-flung regions. It also serve as a guarantee that these communities would have their air services for the next 10 years once the act is passed. The United States Department of Transportation and the Federal Aviation Administration (1999) also added that the ADA was also enforced to order airport managements to respond amicably with request to aircraft carrier’s trying to access the airport market. In association in adding additional support for competition and the reduced government influence, the act prohibited state or political subdivision from applying laws or regulations that would influence decisions on rates, routes, and services. The US government is also tasked under the act to carry out programs that would enable competition to prosper under the Act’s guidelines over the marketplace; thereby allowing new carrier entry into the market and foster competitive airline industry in the country. If there is by any chance denial from the airport operator in permitting carriers to enter into their market, there could be implications into the air carrier’s routes as well as its services which would be a violation to the Act’s objectives .
The act was created due to several concerns raised by policy-makers and the airline companies with the issues lingering in the industry. The first issue the act had to support is the issue of deregulation and its consequences to the industry once it is done. Many were concerned over deregulation’s effects over aviation safety. Upon the announcement of the drafts of the act, many were concerned to the clause that states “pre-eminence of safety”. There is also a concern with regards to the abrupt elimination of regulations, seeing it as a drastic measure that would only cause complications for the airline sector. Eventually, the Congress had decided to make the act a slow transition type of act or a sunset provision. Some policymakers also saw the deregulation as a hazard to airline employees considering they entered the industry which influenced their careers under a regulatory system that offered job security. Without this regulatory system under the CAB and the government, employees are at risk of losing their positions .
Prior to the act, the airline industry had to face the Civil Aeronautics Board to determine as to how airline companies could offer their services, promote travel fees, identify travel routes, requirements for new airline competitors and even aircraft fares. According to Robson () while it was considered a board that would aid the public in achieving quality service in the field of commercial aviation, it was also founded as a result of a 1938 comment by an airline owner regarding “protection from destructive competition”. According to the Federal Aviation Administration (2009) the CAB had three main functions: awarding or creating new routes for aircraft carriers, limiting new carriers from entering the market, and regulating the fares for routes for passengers. It is noted throughout history that most of the policies of the US pertaining to commercial travel dates back to Walter Folger Brown under the presidency of Herbert Hoover. In his case, Brown had changed the mailing payment scheme to ensure the creation of commercial aircrafts fit for public use. With the years showing the need for a regulatory process to ensure the total management of the aircraft/aviation industry, the CAB became the foundation in which the process could be adhered to by the airlines, protecting them from competition despite the impact it has for the consumers and from their fellow competitors. Many would cite that the CAB had lavish and elaborate hearings to cater to every single complaint on prices, route openings, and the like. Some even compared these CAB meetings to a “kabuki dance” which was often scripted in the end. Most of the time, requests in opening or diversifying new commercial routes were denied or restricted. Considerably, the CAB’s hearings became very expensive for the government to continue, taking a long time for its hearings to conclude in a particular case such as the Continental Airlines’ appeal to fly from San Diego and Denver vice versa. As time progressed, the government began to see that the CAB’s judicial process were becoming contradictory with the economic decisions the CAB was enforcing to the aviation industry, removing the incentives airline executives could use to serve the people without asking for too much fees.
With the need for deregulation and improvement of the commercial aviation policies becoming known to the government, President Jimmy Carter had rose up to the challenge and appointed former professor and economist Alfred Khan to reaccess the functions of the CAB and detail the requirements needed to boost deregulation. Deregulation of the aviation industry was also accelerated by the events happening around the globe such as the 1977 Skytrain service, which subsequently was known as one of the first carriers offering low-cost domestic fares and flights. As a response to Laker’s offerings, the CAB had ordered for easing some limitations seen in chartered flights to ensure competition is sustained for the other carriers. In the case of the big airline carriers, American Airlines had immediately launched their “SuperSaver” ticket promo under the support of the CAB. With Carter’s influence and the subsequent deregulation and competition domestically and globally, large scale deregulation became plausible. In November 1977, the Congress immediately devised a policy that would deregulate air cargo and remove government influence on the aircraft carriers and market. The resulting act became the Airline Deregulation Act of 1978 authored by Senators Edward Kennedy and Howard Cannon. The Act was officially signed on October 24, 1978 or the day known as “Red-Letter” day for the aviation industry. Sadly, there were still people who opposed the bill, especially those coming from the airline industry who feared deregulation’s consequences to their business, trade, and benefits. Nonetheless, the public had seen the benefits of the act and aided the policymakers to pass the act entirely.
The impact of the ADA of 1978 to the aircraft industry was instantaneous. Subsidies were offered to major airline carriers for any immediate damage the Act could create and offer unemployment benefits for employees if they find themselves without a job after the enforcement of the act . Aside from this, Morrison (1986) added that the Act had led to a $6 billion worth of annual improvements for travelers due to flight frequency increase. There is also a $2.5 billion worth of increase in the aviation industry’s overall profit in the 1970s. While the industry had failed to repeat this performance in the 1980s due to the recession and the fuel prices, experts believe that it would have been extra difficult for the aviation industry to settle within the period if the regulation process was still active. Travelers and even the airline carriers themselves had also benefited from the flexibility of prices and services offered, improving productivity and service. Carriers were now able to use their labor and equipment efficiently in areas that would require quality service to the passengers and to the companies themselves. Airline deregulation, according to Mak (2004), also fostered the development of hub-and-spoke systems that now thrives for the aviation industry. Under the system, travelers would need to take flights (spokes) from smaller airports or regional airports and flight to the major airports (hubs) before they could connect into their actual flight destinations. The system greatly offered cities a huge opportunity to be reached by people as some of them do not have direct flights or areas that could serve as hubs for travelers. If passengers do not prefer the hub-spokes system, they could select direct service which would only constitute one flight which would take the person straight to their destination. In this end, carriers would not be experiencing high operating costs if they have rerouting and consolidating traffic enabled systems in their fleet, maintaining quality service and affordable airfare rates for its passengers.
Deregulation also ensured the entrance of many new carriers to the industry, allowing further competition to transpire between major and minor aircraft carriers from the enforcement of the law up to the 1990s. In individual routes, more competition incurs given that deregulation opens opportunities for other carriers to open routes to these locations. Routes have also increased and became longer for some carriers, although some would retain routes with less than 500 miles. In this case, it had allowed carriers to add more fleets to their companies and open up additional seats for passengers on a flight. In longer flights, passengers are given the liberty to prefer their travel services while on the plane, giving many workers jobs and additional services to offer for the rest of the trip. In most cases, airline companies open up jobs for people upon creating routes or hubs in the area to also provide service for their consumers.
Air fare had also been affected by deregulation, considering that deregulation reduces airline expenditures on maintain their flights and their crew and opens more possibilities for promos to occur. Fares now range from discounted or promo deals that have specific restrictions to higher and more expensive fares that has no travel restrictions. With the entrance of the internet and high speed computers, airlines are now given the chance to practice price discrimination or yield management that would allow them to monitor airline prices for routes and also open to the customer the available seats with the same price and the experiences of former customers. Yield management and price discrimination from airline deregulation serves as a huge benefit for travelers because it allows them to understand the costs of long and short flights and how flights are easily booked up to the last minute. Fare differentials and promos also foster improved service and efficiency, allowing customers to relax and enjoy their flights. If by any chance, according to Alfred Khan who is now considered the father of airline deregulation, regulatory processes and prices are still retained, it is likely that discounted tickets and promos would become scarce .
Finally, the Act had prospered more services for the public, especially for those in the smaller communities. In the past, the CAB would restrict aircrafts from landing in specific airports, especially those in small and midsized communities. However, by the entrance of the airline deregulation clause, it opened competition back to these areas, enhancing service and available aircrafts that could aid the area. Since 1978, the flights from small communities and the availability of spokes or regional airports or terminals had increased to 50%. In 1996, there is a reported 87 small and medium sized markets that now experience smaller fares and better services for their consumers and for the carriers. Many routes which were deemed unprofitable also gained benefits thanks to deregulation as it opened investment for the local terminals and opened the region to new carriers and businesses. Some even began to create a specialized sector for these smaller communities like Embraer and Bombardier, enabling new types of jets to be accessible to smaller communities and cater to their needs upon travelling to their hub airports.
However, there were still opponents to the deregulation, which also provided a challenge for the aviation sector. Opponents have continuously promoted that the deregulation act would foster the beginning of severe losses in both service and labor force given that deregulation would now allow carriers to identify the locations they wish to serve and the labor force required to assist in their operations. While labor would severely find itself challenged by deregulation, experts see no visible loss on services for small communities that is said to be affected by deregulation. Another interesting argument pertaining to deregulation is the fare and service charge now offered to the public. Opponents believe that since the deregulated airline industry no longer is actively competitive, the social welfare maximizing level of competition would no longer be achieved . At present, there is also a threat of the US federal government influencing the aviation industry despite the deregulation act. Proposals such as Senate Bill 1013 and House Resolution HR. 3312 both propose the creation of government-led institutions or services that would influence the aviation market. S.1013 proposes the creation of a subsidy program that would finance a courier service for small and medium communities. H.R 3312 proposes the creation of a commission that would review aircraft pricing and fares. There is also the Senate bill 1331, which would re-organize take-off and landing schemes in heavily congested airports such as O’Hare and JFK. Some even propose the creation of policies that would remove additional competition from influencing the aviation industry .
In a personal note, the ADA of 1978 was a reform the airline industry needed considering that the CAB had restricted most of the programs and services offered by the airline industry today. It would have been plausible that airline fees would reach into expensive levels that would make air travel unaffordable for many citizens. There is also the possibility that many passengers would only have a few choices of airline companies to choose from as there would be restrained competition. While the creation of the CAB was for the benefit of the passengers and the carriers wanting a fair competition, their schemes in ensuring mobility and fair competition was very restrictive, earning the ire of many Americans. Given that the country had long been using a regulatory process such as the use of the CAB in identifying the policies needed for the aviation industry, it is undeniable that it would not be able to sustain the needs of the growing nation seeing the benefits of aviation and open a market for businessmen to offer services to the people. Today, it is likely that the lack of an ADA would have crippled the tourism industry and many isolated nations in the United States as airline services are restricted on the account that it has to be approved by the government.
Federal Aviation Administration. (2009). Pilot's Handbook of Aeronautical Knowledge. Washington, D.C.: Government Printing Office.
Kaps, R. (1997). Air Transport Labor Relations. Carbondale: Southern Illinois University.
Mak, J. (2004). Tourism and the economy: Understanding the economics of tourism. Honolulu: University of Hawaii Press.
Morrison, S. (1986). The economic effects of airline deregulation. Washington, D.C: Brookings Institution Press.
Robson, J. (1998). Airline deregulation: Twenty years of success and counting. Regulation, 17-22.
US Department of Transportation; Federal Aviation Administration. (1999). Airport business practices and their impact on airline competition. Darby: DIANE Publishing.
Wensveen, J. (2012). Air Transportation: A Management Perspective. Surrey: Ashgate Publishing.