The Airline Deregulation Act is a 1978 United States federal law intended to remove government control over fares, routes and market entry (of new airlines) from commercial aviation. The Civil Aeronautics Board's powers of regulation were phased out, eventually allowing passengers to be exposed to market forces in the airline industry. The Act, however, did not remove or diminish the regulatory powers of the Federal Aviation Administration (FAA) over all aspects of air safety.
History of airline regulation and the CAB
Since 1938, the federal Civil Aeronautics Board (CAB) had regulated all domestic interstate air transport routes as a public utility, setting fares, routes, and schedules. Airlines that flew only intrastate routes, however, were not regulated by the CAB. Those airlines were regulated by the governments of the states in which they operated. The CAB promoted air travel, for instance by generally attempting to hold fares down in the short-haul market, to be subsidized by higher fares in the long-haul market. The CAB also was obliged to ensure that the airlines had a reasonable rate of return.
The CAB earned a reputation for bureaucratic complacency; airlines were subject to lengthy delays when applying for new routes or fare changes, which were not often approved. For example, World Airways applied to begin a low-fare New York City to Los Angeles route in 1967; the CAB studied the request for over six years only to dismiss it because the record was "stale." Continental Airlines began service between Denver and San Diego after eight years only because a United States Court of Appeals ordered the CAB to approve the application.
This rigid system encountered tremendous pressure in the 1970s. The 1973 oil crisis and stagflation radically changed the economic environment, and technological advances such as the jumbo jet did the same thing. Most of the major airlines, whose profits were virtually guaranteed, favored the rigid system, but passengers forced to pay escalating fares were against it and were joined by communities that subsidized air service at ever-higher rates. Congress became concerned that air transport in the long run might follow the nation's railroads into trouble. In 1970 the Penn Central Railroad had collapsed in what was then the largest bankruptcy in history, resulting in a huge taxpayer bailout (with the creation of Conrail) in 1976.
Leading economists had argued for several decades that this sort of regulation led to inefficiency and higher costs. The Carter administration argued that the industry and its customers would benefit from new entrants, the end of price regulation, and reduced control over routes and hub cities
In 1970 and 1971, the Council of Economic Advisers in the Richard Nixon administration, along with the Antitrust Division of the Department of Justice and other agencies, proposed legislation to diminish price collusion and entry barriers in rail and truck transportation. While this initiative was in process in the Gerald Ford administration, the United States Senate Judiciary Committee, which had jurisdiction over antitrust law, began hearings on airline deregulation in 1975. Senator Ted Kennedy took the lead in these hearings.
The committee was deemed a more friendly forum than what likely would have been the more appropriate venue, the Aviation Subcommittee of the Commerce Committee. The Gerald Ford administration supported the Judiciary Committee initiative.
In 1977, President Jimmy Carter appointed Alfred E. Kahn, a professor of economics at Cornell University, to be chair of the CAB. A concerted push for the legislation had developed, drawing on leading economists, leading think tanks in Washington, a civil society coalition advocating the reform (patterned on a coalition earlier developed for the truck-and-rail-reform efforts), the head of the regulatory agency, Senate leadership, the Carter administration, and even some in the airline industry. This coalition swiftly gained legislative results in 1978.
Dan McKinnon would be the last chairman of the CAB and would oversee its final closure on January 1, 1985.
Legislative terms
Senator Howard Cannon of Nevada introduced S. 2493 on February 6, 1978. The bill was passed and was signed by Carter on October 24, 1978.
The stated goals of the Act included the following:
- the maintenance of safety as the highest priority in air commerce;
- placing maximum reliance on competition in providing air transportation services;
- the encouragement of air service at major urban areas through secondary (nonprimary) or satellite airports;
- the avoidance of unreasonable industry concentration which would tend to allow one or more air carriers to unreasonably increase prices, reduce services, or exclude competition; and
- the encouragement of entry into air transportation markets by new air carriers, the encouragement of entry into additional markets by existing air carriers, and the continued strengthening of small air carriers.
The Act intended for various restrictions on airline operations to be removed over four years, with complete elimination of restrictions on domestic routes and new services by December 31, 1981, and the end of all domestic fare regulation by January 1, 1983. In practice, changes came rather more rapidly than that.
Among its many terms, the act did the following:
- the CAB's authority to set fares was gradually eliminated;
- the CAB was required to expedite processing of various requests;
- standards were liberalized for the establishment of new airlines;
- airlines were allowed to take over service on routes underutilized by competitors or on which the competitor received a local service subsidy;
- American-owned international carriers were allowed to offer domestic service;
- the evidentiary burden was placed on the CAB to block a route as inconsistent with "public convenience";
- the CAB was prohibited from introducing new regulation of charter trips;
- certain subsidies for carrying mail were terminated effective January 1, 1986 and Essential Air Service subsidies effective 10 years from enactment (however, as of 2009, the EAS is still in existence, serving 146 communities in the US);
- existing mutual aid agreements were terminated between air carriers;
- the CAB was allowed to grant antitrust immunity to carriers;
- the FAA was directed to develop safety standards for commuter airlines;
- intrastate carriers were allowed to enter into through service and joint fare agreements with interstate air carriers;
- air carriers, in hiring employees, were required to give preference to terminated or furloughed employees of another carrier for 10 years after enactment; and
- remaining regulatory authority were transferred to the United States Department of Transportation (DOT) and the CAB itself was dissolved in 1984.
Safety inspections and air traffic control remained in the hands of the FAA, and the act also required the Secretary of Transportation to report to Congress about air safety and any implications that deregulation would have in that matter.
The ADA (along with the Montreal Convention with regard to international flights) also has the effect of preempting state law with regard to claims against airlines for delays, discrimination, consumer protection violations and other allegations of passenger mistreatment.
Effects
A 1996 Government Accountability Office report found that the average fare per passenger mile was about nine percent lower in 1994 than in 1979. Between 1976 and 1990 the paid fare had declined approximately thirty percent in inflation-adjusted terms. Passenger loads have risen, partly because airlines can now transfer larger aircraft to longer, busier routes and replace them with smaller ones on shorter, lower-traffic routes.
However, these trends have not been distributed evenly throughout the national air transportation network. Costs have fallen more dramatically on higher-traffic, longer-distance routes than on shorter ones.
Exposure to competition led to heavy losses and conflicts with labor unions for a number of carriers. Between 1978 and mid-2001, nine major carriers (including Eastern, Midway, Braniff, Pan Am, Continental, America West Airlines, Northwest Airlines, and TWA) and more than 100 smaller airlines went bankrupt or were liquidated--including most of the dozens of new airlines founded in deregulation's aftermath .
For the most part, smaller markets did not suffer the erosion of service predicted by some opponents of deregulation. However, until the advent of low-cost carriers, point-to-point air transport declined in favor of a more pronounced hub-and-spoke system. A traveler starting from a non-hub airport (a spoke) would fly into the hub, then reach the final destination by flying from the hub to another airport, the spoke. While more efficient for serving smaller markets, this system has enabled some airlines to drive out competition from their "fortress hubs." The growth of low-cost carriers such as Southwest Airlines has brought more point-to-point service back into the United States air transport system, and contributed to the development of a wider range of aircraft types that are better adaptable to markets of varying sizes.
In 2011, Supreme Court Justice Stephen Breyer (who worked with Senator Kennedy on airline deregulation in the 1970s) wrote:
What does the industry's history tell us? Was this effort worthwhile? Certainly it shows that every major reform brings about new, sometimes unforeseen, problems. No one foresaw the industry's spectacular growth, with the number of air passengers increasing from 207.5 million in 1974 to 721.1 million last year. As a result, no one foresaw the extent to which new bottlenecks would develop: a flight-choked Northeast corridor, overcrowded airports, delays, and terrorist risks consequently making air travel increasingly difficult. Nor did anyone foresee the extent to which change might unfairly harm workers in the industry. Still, fares have come down. Airline revenue per passenger mile has declined from an inflation-adjusted 33.3 cents in 1974, to 13 cents in the first half of 2010. In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: $1,442. Today one can fly that same route for $268. That is why the number of travelers has gone way up. So we sit in crowded planes, munch potato chips, flare up when the loudspeaker announces yet another flight delay. But how many now will vote to go back to the "good old days" of paying high, regulated prices for better service? Even among business travelers, who wants to pay "full fare for the briefcase?"
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