The document discusses the deregulation of the airline industry in the United States. It provides background on the history of airline regulation and the role of the Civil Aeronautics Board. Deregulation began in 1978 with the Airline Deregulation Act and aimed to lower prices and reduce barriers to entry. While deregulation succeeded in lowering airfares, the airline industry has struggled financially since losing over $60 billion collectively. Airlines must invest more moderately, improve labor relations to enhance customer service, and raise prices to achieve financial sustainability.

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.