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Executive Summary #1173es on Regulation

April 22, 1998

April 22, 1998 | Executive Summary on Regulation

BG1173es:20TH Anniversary of Airline Deregulation: Cause forCelebration, Not Re-regulation

Despite years of falling prices, increased travel options, and vigorous industry competition, some federal policymakers appear to be ready to abandon America's incredibly successful 20-year experiment in airline competition. On April 6, 1998, the U.S. Department of Transportation (DOT) released its "Proposed Statement of Enforcement Policy on Unfair Exclusionary Conduct by Airlines" to remedy alleged anti-competitive practices within the industry. Specifically, the DOT's proposed enforcement policy targets efforts by major carriers to offer consumers significant discounts to compete with smaller carriers or new entrants in the market. If such fare wars hurt the smaller companies or drive them from the market, DOT will take action against the larger carriers.

The DOT claims that these steps will "ensure that free market principles and competition continue to thrive in commercial aviation," and says that its proposed enforcement policy "does not attempt to regulate the market in any way." The reality, however, is far different. "No matter how they cut it, this policy puts government bureaucrats in the business of setting fares and determining the level of service in the market," argues Carol Hallett, president of the Air Transport Association of America. In the words of James L. Gattuso, vice president for public policy and management at the Competitive Enterprise Institute, "The message is, don't compete too hard; don't lower your prices too much." In short, the DOT's proposed enforcement policy is tantamount to reintroducing federal bureaucracy and regulation into the airline marketplace; it will have a chilling effect on industry competition by discouraging fare wars that offer consumers significant savings.

Surprisingly, these threats of airline re-regulation have been met with casual acceptance or, worse, general approval on Capitol Hill. In an attempt to counter calls for re-regulation, some legislators even suggest that increased subsidization of small carriers or new industry entrants is the best way to bring more competition to the industry and ensure price competition and lower fares. These new calls for the re-regulation or increased subsidization of the aviation industry are not justified. Despite the ebbs and flows of the volatile airline market, consumers clearly have benefited significantly since the market was deregulated in the late 1970s.

Deregulation by the Numbers: A Quick Summary of Airline Deregulation Benefits

Fact: Airline ticket prices are almost 40 percent lower today than they were in 1978.

Fact: The average fare per passenger mile was about 9 percent lower in 1994 than in 1979 at small community airports, 11 percent lower at medium-sized airports, and 8 percent lower at large community airports.

Fact: From 1939 to 1978, there were an average 6 fatal accidents per year. After deregulation (from 1978 to 1997), the average was only 3.5 fatal accidents per year. Fatal accidents per million aircraft miles flown have averaged 0.0009 since deregulation. In the 40 years before deregulation, they averaged 0.0135.

Fact: The U.S. General Accounting Office (GAO) found no statistically significant difference in air safety trends for airports serving small, medium-sized, and large communities. For each airport group, the accident rate was lower in 1994 than in 1987.

Fact: The overall number of airline departures has risen from just over 5 million in 1978, when airlines were deregulated, to 8.2 million in 1997--a 63 percent increase over the past two decades.

Fact: According to the GAO, in May 1995, small community airports as a group had 50 percent more scheduled commercial departures than in May 1978; medium-sized community airports had 57 percent more departures; and large community airports had 68 percent more departures.

Fact: Air carriers flew roughly 2.5 billion miles in 1978, but they logged more than twice that amount last year, flying approximately 5.7 billion miles in 1997.

Fact: Airlines served approximately 250 million passengers in 1978 and roughly 600 million (almost two-and-a-half times as much ) in 1997.

New regulations or subsidies will not alleviate the problems that DOT or some Members of Congress fear will arise. Indeed, reintroducing bureaucratic regulation into the airline market will only ensure a return to the stagnant, cartel-like markets that existed before liberalization. There are better solutions to many of the problems the DOT addresses in its enforcement policy that do not require the re-regulation of airline routes and rates.

The following five recommendations, if adopted, would do far more to improve airline competition than could ever be done under the DOT's regulatory approach:

  1. Privatize airports to expand airport capacity and improve infrastructure;

  2. Allow market-based pricing at airports for takeoff times, slots, and gates;

  3. Privatize the air traffic control system to reduce congestion and improve safety;

  4. Cut airline fees and taxes; and

  5. Encourage increased foreign competition for the domestic marketplace.

Adam D. Thierer is former Alex C. Walker Fellow in Economic Policy at The Heritage Foundation

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