Really Opening Up the American Skies: It's Time to Allow Foreign Airlines to Compete in U.S. Domestic Markets

By Button, Kenneth | Regulation, Spring 2014 | Go to article overview

Really Opening Up the American Skies: It's Time to Allow Foreign Airlines to Compete in U.S. Domestic Markets


Button, Kenneth, Regulation


The U.S. airline industry is again under scrutiny. Since most economic controls over domestic commercial aviation ended in the late 1970s, traffic has grown by orders of magnitude, inflation-adjusted fares have fallen, computerization has revolutionized the way tickets are bought, frequent flier points have become a second currency, the range of routes available--provided we are willing to change planes--has expanded out of all recognition, and low cost carriers have come, and just as often gone. Most airlines no longer force us to pay for flying other peoples' bags or for food we often did not want, even in the rare cases when it was palatable. Certainly the nature of the service we get has also changed, with less legroom, "poorer" and less refreshment, charges for checked bags, lines to board aircraft, and (heaven forbid) a passenger likely to be seated beside you. Flying is now transportation and not an experience; it has become a product.

The underlying economic philosophy that brought about the 1970s reforms was that, while not perfect, competition was generally preferable to the longstanding government micromanagement of the airline industry. As Alfred Kahn, the chairman of the Civil Aviation Board at the time of reform, put it, the prevailing view had changed to, "Whenever competition is feasible it is, for all its imperfections, superior to regulation as a means of serving the public interest." That has remained the prevailing thinking, and it is unlikely to change significantly in the near future. Our concern here is, therefore, focused largely on whether competition could, with benefit to the traveling public, be taken further, and in particular whether market entry could, with advantage, be widened.

While the 1978 Airline Deregulation Act removed many of the legal barriers that limited the routes that individual carriers could serve and the fares they could set, it did nothing to open up the domestic market to international competition. Carriers still had to be "American citizens." Subsequent "Open Skies" initiatives, and particularly those involving the European Union, have provided a more liberal international framework for U.S. airlines (see "Toward Truly Open Skies," Fall 2002), but the domestic market remains protected from foreign competition. This regulatory thinking extends back to the Jones (Merchant Marine) Act of 1920, based on arguments that shipping between U.S. ports should be reserved for the U.S. fleet to ensure adequate capacity during times of national emergency (with the rather counterintuitive argument that it can be relaxed in times of emergency). This notion of restricting cabotage--the carriage of passenger, cargo, and mail between two points within a territory for compensation--was essentially extended to airlines when their strategic and economic importance was recognized following World War II. This situation has remained fundamentally the same ever since.

HOW THE 1978 AIRLINE DEREGULATION ACT IMPROVED AIR TRANSPORTATION

The deregulations of the U.S. air cargo market in 1977 and of scheduled passenger services in 1978 delivered considerable, almost immediate, net benefits to the American economy. The gains came in various forms, including lower real fares, more fare choices, more services, and more route options, with the result that the number of air travelers rose from 250 million in 1978 to 815 million in 2012, 736 million of them domestic. As for the effect at the micro level, a study by the American Air Transport Association in 1983 found that air fares in the new, deregulated environment had fallen by 67 percent compared to the levels the old regulated regime would have imposed. Looked at another way, over a full business cycle, the inflation-adjusted 1982 constant dollar-yield for airlines fell from 12.3 cents in 1978 to 7.9 cents in 1997, making airline ticket prices almost 40 percent lower over the cycle. Even those living in small communities that had been the subject of forced cross-subsidization under the pre-1978 regulatory regime benefitted. …

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