40th Anniversary of the Airline Deregulation Act-Part I seven perspectives

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40th Anniversary of the Airline Deregulation Act

Retrospectives from 7 different perspectives

 

 

It has been 40 years since bipartisan legislation, the Airline Deregulation Act of 1978, was signed by President Carter. This legislation transformed the highly regulated airline industry. The impetus for this market change came from Dr. Alfred Kahn. In the interim, a lot has happened:

Immediate market expansion

New entrants

The emergence of Lower Cost Airlines

Lower fares

Increased reliance on hubs

Bankruptcies of incumbents and LCCs- some permanent

Several exogenous events impacting the airline economics—OPEC prices, PATCO, global viral outbreaks, September 11

And many other factors

To put the 40th Anniversary in perspective, the following commentators have shared with us their opinions on the ADA’s impacts:

  • Howard Putnam, a CEO from THE LCC during this transition
  • Edwin Colodny, the CEO of Allegheny then US Airways, now a part of American Airlines
  • Mark Dunkerley, the recently retired CEO of Hawaiian Airlines
  • Dorothy Robyn, whose opinions about aviation have been a major influence on aviation policy
  • Ed Bolen, CEO and President of NBAA, preciously President of GAMA and before that Counsel to Sen. Nancy Kassebaum—from a GA/BA perspective
  • Tom Devine, ACI-NA General Counsel, formerly FAA attorney—from an airport perspective
  • Joe Del Balzo, JDA Aviation Technology Associates, started at FAA in 1958; so he served with the FAA for 20 years before Deregulation through the initial challenges and then to more normal times.

  1. HOWARD PUTNAM

 

 

 

 

 

with his son who is an Airline Captain

 

Airline Deregulation after 40 years?  What is my opinion and experience?

I give it a B+ rating.  More competition, more service, lower fares, better management and creativity.  Negatives:  Many companies went out of business and investors lost. Service levels lower? Matter of opinion and class of service you fly.

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My first airline job was a baggage handler for Capital Airlines at Midway Airport, Chicago in 1955.  At that time only 18-20% of the US population had ever flown (as I recall).

In 2018 it is estimated 82% of the US population has flown.  What caused that explosion in air travel?  Technology, larger and safer aircraft, the jet age……” deregulation”, lower fares, more low cost low fare airlines and more investment and competition. And better managements who are creative.  Free enterprise at work.  Failures happen in free enterprise.

In 1971, Edward Carlson, CEO and Chairman of United Airlines, which owned Western International Hotels, said:  “This industry being regulated, will never provide an adequate return for our investors.  They would be better off if we dissolved the company and put the proceeds in the credit union at a 7-8% return.  Our costs are too high, we can’t control pricing or where we can fly and expand our business without government approval.  We need to start a subsidiary airline with no frills and call it “Spartan Airways.”

In July, 1978, I was recruited to be the 2nd CEO of Southwest Airlines.

Last I checked over 70 airlines, big. regional and commuter had gone out of business since 1979.  That is o.k.  Their vision didn’t work.  They couldn’t adapt to deregulation.

Today, every large domestic airline…except Southwest and Jet Blue have been thru chapter 11 bankruptcy to cleanse their cost structure, management, debts, etc.

They have used creative ways to develop ancillary revenues: bag fees, seating fees, etc.  Demand continues to increase.

Deregulation has given the consumer “choices” and created competition.  Dr. Alfred Kahn, called me when I was CEO of Southwest about 1981 and asked what I thought.   I said: “Dr. Kahn, you have laid the framework for a good and needed aviation industry to become key to world commerce and expanded leisure travel.  Thank you.”

 

 

 

 

 


 

  1. Edwin Colodny

 

 

 

 

 

The drumbeat for more competition in the scheduled passenger airline industry led to the appointment in the mid- ‘70s of two Chair persons of the Civil Aeronautics Board—John Robson, then Alfred “Fred” Kahn. Under their leadership the CAB started to liberalize the historic policy of “limited competition” in the industry. This was followed by the game-changing legislation deregulating the airlines. Allegheny opposed deregulation, concerned that the large airlines would eat our lunch. United, our largest domestic carrier at that time, was the only carrier supporter—probably because the CAB would not grant it more route authority. Having lost the deregulation battle, we quickly changed our strategy to make it work for us.   We changed our name to USAir, and built a highly successful hub and spoke system in Pittsburgh, capitalizing on our fleet of smaller narrow body jets and our commuter airline network feeding traffic from many smaller cities. This was accomplished by re-structuring the balance sheet, reducing debt and issuing equity, and maintaining discipline on growth. “Just because the lid came off the cookie jar is no reason to get a bellyache” was my oft repeated warning. USAir generated healthy profits for many years. As many had predicted, the industry started consolidating in the 1980’s, including our mergers with PSA and PIEDMONT.

Deregulation was intended to benefit the consumer. In the 40 years since 1978 it is clear that consumers have, by and large, benefited from lower prices due to increased competition, fleet modernization, and a high level of safety. I do not recall any concern with employee welfare or shareholder returns in the debate over deregulation. Employees and shareholders have certainly been less benefited. This is not a business to be operated by robots. In my opinion, the long term survivors will be those who provide job satisfaction and security for the employees, and meaningful returns for the investors. And perhaps those who increase seat pitch by an inch!

 

 

 

 

 


 

 

  1. Mark Dunkerly

 

 

 

 

 

 

Is the Airline Deregulation Act meeting Dr. Kahn’s vision?

 

At one level, the answer must be ‘yes’.  The competition unleashed by the Airline Deregulation Act has resulted in the real cost of traveling by air declining by almost 50% since 1979.  In its wake, two generations of Americans have taken to the air in ways their forebears could never have imagined.  Entire communities have come to rely on post-Deregulation affordable air transportation to sustain their economic and social wellbeing while in a quest to gain competitive advantage, airlines have innovated, introducing lie flat seats, low cost carrier models and much in between.  But the huge advances of the last 40 years are being undermined by a combination of neglect and myopia.

The two main culprits are the failure across the land to provide infrastructure, airports, runways and terminals in the large metropolitan areas, and the insidious creep of regulation that started over a decade ago.  The paucity of infrastructure growth where population density is highest is creating barriers to entry benefitting the established carriers at the cost of those seeking to disrupt the status quo.  The creep of new regulations not related to safety limits the scope for disruption and raises the cost of entry for those seeking to bring something new to the consumer.  Sadly, I believe the ‘high tide’ of the extraordinary benefits that Dr. Kahn’s vision bequeathed us has passed and while the we should still marvel at how much better off we are today than would have been the case had the regulatory regime of 40 years ago continued, we must also reckon that with each passing year those advances are a little less than they were the year before.

 

 

 

 

 

 

 


  1. Dorothy Robyn

 

 

 

 

 

 

 

Airline Deregulation at 40: The Enduring Legacy of Alfred Kahn

The 1978 Airline Deregulation Act—enacted by a coalition of liberal politicians and free-market conservatives over the opposition of U.S. airlines and trade unions—is seen by economists as one of the most positive policy reforms of the last century.  Under regulation, planes flew half empty and fares were high.  Deregulation democratized air travel.  Domestic fares today are 20-30 percent lower in real terms than in 1978, and growth in airline travel has far outpaced overall U.S. economic growth.

Predictably, the quality of the service has gone down, in large part because planes now operate 80 full on average.  And the airline industry has become a popular media target.  Some “consumer” groups and Democratic politicians who supported airline deregulation later recanted.

But, overall, airlines are giving passengers what they consistently show a preference for: lower fares at the expense of service.  It is only a slight exaggeration to say that the back of plane is brought to you by deregulation.  Passengers who want the comforts of air travel pre-1978 can fly business class for about what they would have paid for coach absent deregulation.

Airline deregulation had powerful indirect effects as well.  It positioned U.S. airlines to be more competitive on international routes.  Capitalizing on that advantage, in the late 1970s the U.S. government began negotiating away bilateral restrictions on where and how often international carriers can fly, resulting in lower fares and vastly expanded global air service.  Airline deregulation also paved the way for the regulatory decontrol of other network industries, including trucking, freight railroads, interstate bus travel, natural gas, interstate banking, energy and telecommunications.  Economic deregulation of network industries is now the norm worldwide—an historic trend that began with the success of airline deregulation in the United States.

If one were to fault deregulation, it would be for not going far enough.  In March 1978, seven months before Congress passed the ADA, CAB Chair Alfred Kahn spoke to senior staff at the FAA.  He cautioned them that deregulation would unleash enormous demand for air travel, and he urged the FAA to free up additional infrastructure supply so as to limit flight delays.  Specifically, Kahn urged the FAA to abandon its policy calling for airports to calculate landing fees based on aircraft weight in favor congestion pricing of runways.

The FAA did not act on Kahn’s recommendation—which he later expanded to include efficient pricing of airways and privatization of air traffic control governance a la Nav Canada.  As a result, flight delays have remained a major problem—one that imposes some $30 billion a year in costs on passengers and airlines.  If the ADA marked the high point of Congress’ approach to aviation policy, the recent death of legislation to privatize air traffic control marked the low point.

A final note on Fred Kahn, the “father” of airline deregulation.  A charismatic Cornell professor who literally wrote the book on the economics of regulation, Fred was quick to share credit for the ADA, citing the role of his Republican predecessor, John Robson, as well as contributions of Mike Levine, Mary Schuman, Stephen Breyer, Will Ris, and others.

But Fred’s contribution was singular, as I was reminded some years ago when I met with a couple of economists in the Antitrust Division of DOJ to talk about an aviation issue.  During a lull in the meeting, I mentioned an interesting factoid I had only recently learned—that the job Fred Kahn had really wanted in the Carter Administration was Chair of the Federal Communications Commission.  (Fred was an expert on telecom, having chaired the New York State Public Utilities Commission, whereas he felt he didn’t know a lot about the airline industry; he once referred to aircraft as “marginal costs with wings.”)

This bit of history was news to the DOJ economists, and one of them quickly responded, “Wow!  Imagine how competitive the telecom industry would be if Fred Kahn had chaired the FCC back then!”  After a brief pause, the other DOJ economist said, “Yea, but just think how expensive it would be to fly.”

 

 

 

 

 

 


 

  1. Ed Bolen

 

 

 

 

 

The Civil Aeronautics Act was signed into law in 1938.  The Airline Deregulation Act was signed into law in 1978.  With the past eighty years of aviation history neatly divided into two 40-year segments of pre and post economic regulation, it is certainly interesting to compare and contrast the two eras.

The primary thought leader for the economic deregulation of the Airlines, Alfred Kahn, was an economist.  So, by definition, he understood trade-offs.  In the field of economics, it’s about guns or butter—not guns and butter.

Viewed through this prism, I have no doubt Alfred Kahn would find the economic deregulation of the airlines a success.  Yes, numerous cities have been left with little or no scheduled service.  Planes are crowded and it can take days to recover from a cancelled flight.  And, as Supreme Court Justice Stephen Breyer wrote in 2011, no one foresaw “..the extent to which change might unfairly harm workers in the industry.”  Still, the fares have come down and the number of passengers has increased.  As a result, I believe Alfred Kahn and the other proponents of airline deregulation, would certainly consider the post economic period the better of the two halves.

 

 

 

 

 

 

 


  1. Tom Devine

 

 

 

 

 

 

The Airline Deregulation Act of 1978 has certainly provided benefits to consumers in many areas, as airlines and others often point out, but the promise of deregulation has not been fully realized, and many communities have been left behind.

 

Dr. Kahn assumed we could rely on market forces to supplant government regulation, but industry concentration is now higher than it was prior to deregulation, due to waves of industry consolidation in the past decade.  It is also likely that Dr. Kahn did not anticipate the advent and widespread use of ancillary airline fees (totaling more than $20 billion in 2017) that distort market signals.  Moreover, the paucity of viable new entrants and the dominant carriers’ reaction even to small-scale challenges from other carriers has meant that the market has not always been effective in curbing anti-competitive behavior of dominant airlines.  A distorted or constrained marketplace does not realize the benefits of true competition.

 

Competition also depends on access by airline competitors to necessary airport facilities, such as runways and terminals.  Preserving and enhancing competition was a key goal of Congress in 1990, when it restored, in a limited form, airports’ right to impose per-passenger fees to raise money for necessary airport capital improvements.  This was critical, because, while dominant hub carriers, for instance, were willing to finance improvements to benefit themselves, they were naturally reluctant to fund facilities that would enable competitors to gain access to the airport.  The PFC statute helped solve this dilemma and enhanced competition by explicitly (1) providing that airline agreements could not govern the imposition or use of PFCs and (2) precluding the leasing of PFC-funded gates on a long-term, exclusive use basis.

 

Unfortunately, the PFC was initially capped at $3 per passenger in 1990 and has only been raised once, 18 years ago, to $4.50.  The erosion of PFC purchasing power over the years–coupled with the fact that many airports’ PFC capacity is fully committed to pay off projects already constructed–thwarts airports’ ability today to fund the necessary infrastructure to provide for competitive entry.

 

While the ADA provided some mechanisms for addressing communities and consumers that have been disenfranchised, such as the Essential Air Service program, their effectiveness has proven to be limited.  Reduction in air service is the biggest concern of many of our non-hub, small hub, and medium hub airports throughout the country.  While airports are working diligently to take the self-help steps they can to induce, attract and retain air service, the tools and resources available to them are quite limited.

 

It is in everyone’s interests — airports, airlines, consumers, communities, businesses and the government, alike — to come up with creative and effective ways to ensure that small and medium-sized communities throughout the country have access to, and connectivity with, the national air transportation system and that there is effective competition throughout the system.  Airports currently produce $1.4 Trillion in economic activity.  Expanding access to the national network of vibrant aviation activity to underserved markets and ensuring true competition throughout the system will allow the economic and social benefits of Deregulation to be realized by all.

 

 

 

 

 

 


 

  1. Joe Del Balzo

 

 

 

The ADA did not explicitly amend the FAA’s jurisdiction. However, as a consequence of releasing market forces, the safety organization’s workload increased as the new economic regime stimulated more flying, with new entrant airlines, to new points, with more aircraft and with increased airport and airway congestion. All of these increases in demand, the FAA staff did not increase. The pace of applications for Part 121 and 135 certificates stressed the FAA field offices to the extent that the Administrator consolidated the relevant offices. Air Carrier District Offices and General Aviation District Offices were merged into Flight Standards District Offices (FSDOs). The increased staffing of FSDOs allowed for increased aviation safety inspectors to surveil all of these aviation activities.

 

The reduced CAB (subsequently DOT Air Carrier Division) review subtly increased the granularity of the safety review of applicant airlines by the safety inspectors. Added scrutiny as to the applicant’s senior staff resumes was now standard procedure. The examination of all of the airlines’ manuals and procedures did not diminish, but the volume of requests increased.

With the wave of airline bankruptcies, the FAA was expected to up its level of surveillance. The thesis was that a financially strapped company might take shortcuts around the FAR requirements.

Adding points, at which an airline, old or new, intends to operate, occasionally would necessitate an inspector to check whether the pilots were familiar with the peculiarities of the added airport. It was also standard procedure to assess whether the air carrier had adequate MX and ground-handling available at the station.

The ATC system felt the impact of Deregulation. The added operations were felt in towers and sectors, particularly to and from airports with the greatest demands. The controllers at LGA, JFK, EWR, ORD, DCA, ATL, MIA, MEM, SDF, DEN, PHX, LAX, SFO and SEA, for example, had to deal with increased flights, particularly at peak hours. In response thereto, the FAA had to impose High Density Rules and that limited competition.

Perhaps, more impactfully, airlines were free to change schedules in response to market changes. Historically a Tower or TRACON could staff facilities based on historical demand. Now, if a carrier perceived that RDU or CVG warranted more flights, it would offer more flights on minimum notice causing the FAA managers considerable difficulties in providing the needed number of ATCers.

The growth of flights has not diminished and Congress has not added to the ASI positions. The traditional method of regulating, a hands on/intense paper records approach, was no longer feasible. FAA Senior management has transitioned to a data-driven regimen called Safety Management Systems. With fewer positions, SMS focuses the attention of the first line staff on specific airline risks before they become an immediate problem. The agency has adopted a proactive, preventative strategy to meet the requirements of the market-driven nature of the airlines.

ATC is in the midst of transitioning to NextGen as a means of being more responsive to the vagaries of all aviation demands. Prescribed routes are no longer the only lines for flying; satellite-based navigation facilitates the pilots’ choices of where-and-when they chose to operate. The FAA is not there yet, but their strategy will further enhance all aircraft’s ability to fly.

Airports have been another challenge to the FAA post 1978. Added capacity is a prerequisite to more flights. Adding runways is at best a 5, many times 10, year exercise. The FAA does not and cannot lead this process; local communities, for good policy and legal reasons, MUST initiate a request new infrastructure. Congress decides how much capital is available under AIP and then the FAA prioritizes the spending based on substantive standards. As noted by one of the experts noted above, this is one area which has constrained the complete fulfillment of Deregulation, but the dearth of dollars and the disappointing level of local initiative are not the FAA’s responsibility.

Deregulation has tested the ability of the safety organization to respond to market demand on a real time basis. FAA management has developed strategies to meet those requirements!!!

The FAA has admirably responded to Dr. Kahn’s vision of unfettered airline markets, but the shortfall of expectations has been beyond the safety organization’s control.


 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

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1 Comment on "40th Anniversary of the Airline Deregulation Act-Part I seven perspectives"

  1. Great retrospective. Thanks.

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