1. The Benefits Versus the
Detriments
Nathan DeRosa

2.  Have the positive effects of airline deregulation
outweighed the negative effects?
 The role of government in economic affairs is
continuously debated
◦ Trade-offs between freer markets and government
intervention

3.  The federal government contracted with private
carriers to supplement military airmail carriage
starting in 1918 (Borenstein and Rose, 2007)
 Airlines started emerging in the 1920s
 Airlines became increasingly regulated during the
Great Depression
◦ 1938: Civil Aeronautics Board (CAB) was established
marking the official beginning of airline regulation
(Borenstein and Rose, 2007)

4.  High Barriers to entry into the marketplace
◦ Carriers established after the CAB had the most difficulty
entering the market
 Competition was largely absent
◦ Competition was based less on price and more on non-
price determinants (e.g. legroom, seat quality, in-flight
amenities, flight frequencies)
◦ Carriers needed approval from the CAB to expand
 Price controls were put into place to ensure
profitability and kept prices high (Borenstein and
Rose, 2011)

5.  Major carriers like American, Delta, and United
competed in the interstate market
 Smaller, local carriers like Pacific Southwest and
Texas International flew in the intrastate market
(Borenstein and Rose, 2007)
◦ Competed based on price, charged lower fares, and
turned higher profits than the major carriers
◦ Not subject to federal regulation
◦ Provided a glimpse of a deregulated airline market

6.  Regulated airlines turned lackluster profits
(Borenstein and Rose, 2011)
 High prices prompted consumer groups to support
deregulation
 High oil prices and stagflation in the 1970s further
pushed opinion towards deregulation (Eisner,
2008)
 The appointment of pro-deregulation officials such
as Alfred Kahn paved the way starting with
discount price experimentation (Winston, 1998)

7.  In 1978, the Airline
Deregulation Act was signed
into law
 Gradually lifted CAB price,
route, entry, and exit controls
 The CAB disbanded in 1985
marking the official end of
deregulation (Borenstein and
Rose, 2007)
 The Federal Aviation
Administration (FAA) would
continue to regulate safety as
it had done since 1958

8.  Overall lowered prices
◦ Fares are approximately 40% lower than prior to
deregulation even when adjusted for inflation (Borenstein,
2011)

9.  Barriers to entry and exit were lowered
◦ Many existing airlines either have went bankrupt,
liquidated, or merged with other airlines while many new
airlines entered the market

10.  Labor saw a 10% decline
in earnings following
deregulation (Card, 1996)
 Aggressive cost-cutting
measures amid financial
losses and bankruptcies
have had a toll on labor-
management relations
and customer service
(Gittell et al., 2004)

11.  Lowered prices and
barriers to entry were
expected to lead to traffic
growth and higher load
factors
 Airport congestion was
not seen as a predictable
outcome
◦ Traffic growth outpaces
infrastructure development
(Savage, 1996)

12.  Since deregulation, the airlines collectively lost $60
billion (Borenstein, 2011)

13.  Financial performance is tied to
the performance of the national
economy
 Propensity to over invest during
economic booms which then
lead to drastic cuts in capacity,
scheduling, and the workforce
during economic downturns
 Reluctance to raise fares
 Exogenous demand shocks
such as 9/11 (Borenstein, 2011)
 Exogenous cost drivers like jet
fuel (Borenstein, 2011)

14.  Rise of the hub-and-spoke
system (Borenstein and Rose,
2011)
◦ Centralizing operations in one
or more select cities
 Establishment of airline
alliances (Borenstein and
Rose, 2011)
◦ Brought about codesharing—an
agreement where two or more
airlines share the same flight
 Resulted in concentrations of
market power in select cities
(Borenstein and Rose, 2011)

15.  Deregulation was successful in lowering prices
and barriers to entry and exit
 The Airline Industry has nonetheless suffered
financially. To ensure financial sustainability,
airlines must:
◦ Invest more moderately
◦ Work on improving relationships with labor
 Labor productivity is tied to customer service quality more
than cost-cutting measures (Gittell et al., 2004)
◦ Raise their price premiums (Borenstein and Rose, 2007)
 Raising quality and fares to cover operational costs

16.  Borenstein, Severin (2011). On the Persistent Financial Losses of U.S. Airlines: A
Preliminary Explanation. National Bureau of Economic Research, 1-17.
 Borenstein, Severin and Nancy L. Rose. How Airline Markets Work…Or Do They?
Regulatory Reform in the Airline Industry. National Bureau of Economic
Research. 1-82.
 Card, David (1996). Deregulation and Labor Earnings in the Airline Industry. National
Bureau of Economic Research. 1-58.
 Eisner, Marc Allen (2008). Markets in the Shadow of the State: An Appraisal of
Deregulation and Implications for Future Research. Tobin Project Conference. 1-28.
 Gittell, Jody Hoffer et al. (2004). Mutual Gains or Zero Sum? Labor Relations and
Firm Performance in the Airline Industry. Industrial and Labor Relations Review.
Vol. 57, No. 2. 163-80.
 Savage, Ian (1999). Aviation Deregulation and Safety in the United States: The
Evidence After Twenty Years. Taking Stock of Air Liberalization. 93-114.
 Winston, Clifford (1998). U.S. Industry Adjustment to Economic Deregulation. Journal
of Economic Perspectives. Vol. 12, No. 3. 89-110.