Travelers Benefit from Airline Deregulation

By Anderson, John H., Jr. | Consumers' Research Magazine, July 1996 | Go to article overview
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Travelers Benefit from Airline Deregulation

Anderson, John H., Jr., Consumers' Research Magazine

The Airline Deregulation Act of 1978 phased out the federal government's control over air fares and service, relying instead on competitive market forces to decide the price, quantity, and quality of domestic air service. Before 1978, the U.S. airline industry was tightly regulated. The federal government controlled what fares airlines could charge and what cities they could serve.

Legislatively mandated to promote the air transport system, the Civil Aeronautics Board believed that passengers traveling shorter distances--more typical of travel from small- and medium-sized communities--would not choose air travel if they had to pay the full cost of service. Thus, the Board set fares relatively lower in short-haul markets and higher in long-haul markets than would be warranted by costs. In effect, long-distance travel subsidized short-distance markets. In addition, the Board did not allow new airlines to form and compete against the established carriers.

Concerned that government regulation had caused fares to be too high in many heavily traveled markets, had made the airline industry inefficient, and had inhibited its growth, the Congress deregulated the industry. The Airline Deregulation Act of 1978 phased out the government's control over fares and service but did not change the government's role in regulating and overseeing air safety. Deregulation was expected to result in: 1) lower fares at large-community airports, from which many trips are long distance, and somewhat higher fares at small- and medium-sized community airports, 2) increased competition from new airlines entering the market, and 3) greater use of turboprop (propeller) aircraft by airlines in place of jets in smaller markets that could not economically support jet service.

In 1990, the General Accounting Office (GAO) found that overall fares had fallen not only at airports serving large communities, as was expected, but at airports serving small- and medium-sized communities as well. We noted, however, that despite the overall trend toward lower air fares, some small- and medium-size community airports had experienced substantial increases in fares following deregulation, especially in the Southeast. This report on changes in air fares, service, and safety since airline deregulation updates the 1990 analysis.

Air Fare Trends. As of the first six months of 1995, airfares overall continued to be below what they were in 1979 for airports serving small, medium, and large communities. Comparing full-year data for 1979 and 1994, the fares per passenger mile, adjusted for inflation, were about 9% lower for small-community airports, 11% lower for medium-community airports, and 8% lower for large-community airports.

Despite the general trend toward lower fares, however, fares at small- and medium-sized community airports have remained consistently higher than fares at airports serving large communities, largely because of the economics associated with traffic volume and trip distance. As the volume of traffic and average length of haul increase, the average cost per passenger mile decreases, allowing for lower fares. Airports serving small- and medium-sized communities tend to have fewer heavily traveled routes and shorter average distances, resulting in higher fares per passenger mile compared with those of large-community airports.

Nevertheless, fares have fallen since deregulation for most of the airports in our sample. Of the 112 airports that we reviewed, 73 have lower fares, while 33 have higher fares. Specifically, fares have declined at 36 of the 49 airports serving small communities, 19 of the 38 airports serving medium communities, and 18 of the 25 airports serving large communities.

The overall trend toward lower fares since deregulation has resulted in large part from increased competition, spurred in many cases by the entry of new airlines. The average number of large airlines serving the medium-sized-community airports in our sample, for example, increased by over 50% between 1978 and 1994, while the average number of commuter carriers serving these airports increased by about 40%.

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