The Fare Skies: Air Transportation and Middle America
Morrison, Steven A., Winston, Clifford, Brookings Review
When Congress and the Civil Aeronautics Board deregulated the nation's airlines in a series of steps during the late 1970s, policymakers expected travelers' fares to fall, but were apprehensive that small communities would lose airline service as deregulation reshaped the air travel market. Congress was sufficiently concerned that it set up the Essential Air Service Program to provide subsidies to carriers to ensure at least two flights a day for 150 small communities.
Every serious study of airline deregulation in the intervening years has found that travelers have indeed benefited enormously. As we documented in our 1995 Brookings book, The Evolution Airline Industry, airfares, adjusted inflation, fell 33 percent between 1976 - just before the CAB instigated regulatory reforms - and 1993. Deregulation was directly responsible for at least 60 percent of the decline - responsible, that is, for a 20 percent drop in fares. And travelers have benefited not only from low fares, but from better service, particularly increased flight frequency.
Still, policymakers have kept a vigilant eye on air carriers and registered their concern whenever it appeared that some travelers were being treated unfairly. Today, there is a growing sense, spurred by the anecdotes of many travelers, that America's smaller cities are indeed being shortchanged by deregulation. Flights between smaller cities, it is charged, have higher fares than flights of comparable distances between large cities. Some members of Congress have publicly questioned the fairness and even the wisdom of deregulation. It is a matter that bears looking into.
Fares and Route Classifications
The Federal Aviation Administration categorizes U.S. airports as large hubs, small hubs, and nonhubs (generally speaking, the categories simply suggest the relative size of the cities where the airports are located, but see figure 1 for the technical basis of these classifications). We use the FAA's categories to classify airline routes into a hub class based on the airports involved. Thus, a flight between a large hub and a small hub would be classified as a large hub route and a small hub route. An examination of fare and service patterns for all hub types from 1977 (the year before formal deregulation in 1978) through 1996 shows how deregulation has affected different sized cities and airports. (As in previous work, we measure the difference between actual deregulated fares and what fares would have been under regulation; we estimate regulated fares by adjusting - as explained in the notes to figure 1 - the fare formula used by the CAB during the final few years of regulation.) In 1996, travelers paid, on average, 28 percent less for trips than they would have if airlines had remained regulated. The gains are not confined to travelers between large cities. Indeed, travelers on all routes paid lower fares [ILLUSTRATION FOR FIGURE 1 OMITTED]. Deregulated fares were 29 percent lower for trips involving a large hub, 32 percent lower for trips involving a medium hub, and 17 percent lower for trips involving a small hub. Even nonhubs saw a small decline in fares.
Sources of Fare Differences
Although all travelers are now enjoying lower fares, on average, as a result of deregulation, it is clear that travelers at large and medium hub airports have benefited more than those at small and nonhub airports. There are two possible explanations for the difference. One is a lack of competition. The other is costs. Policy options would arise if government policymakers could do something that would either enhance competition or lower airline costs - or both - and therefore increase the benefits from deregulation, especially for travelers at small and nonhub airports.
Before deregulation introduced competition to the airline industry, regulators monitored all routes and seldom authorized entry by would-be competitors. With the advent of deregulation, both incumbent airlines, such as American and United, and the many new airlines, such as People Express and Southwest Airlines, that sprang up in the new competitive market were free to enter all routes. …