The Evolution of Competition Since Deregulation
Steven A. Morrison
After forty years of tight regulation by the federal government, the airline industry was deregulated in 1978. Such a dramatic change in an industry's economic environment is bound to have significant effects, and the airline industry is no exception. Airlines provide an interesting example of how an industry evolves when freed from government regulation. After nearly two decades of deregulation, this evolution is still not complete, although the form to which the industry is evolving is becoming clear.
This evolution has not been without controversy. Each zig and zag of the industry renews the debate about the wisdom of deregulation and the future of the industry. The industry has this high profile because many people are fascinated with aviation. Others devote attention to airlines because airline deregulation was the first of many regulatory reforms (e.g., railroads, trucking, telecommunications, banking) in the late 1970s and 1980s. As the oldest deregulated industry, analysts look to airlines for insight into other industries. Although the airline industry is a complex one, it is amenable to study because of the wealth of data--a. legacy of regulation--the government continues to collect.
This study chronicles and explains the evolution of the domestic passenger airline industry since it was deregulated in 1978.1 The next two sections provide a brief history of the government's involvement in the industry and the deregulation movement. The following section describes the technology of the industry and introduces some terminology that will be useful. After a discussion of the demand for air transportation, there is a discussion of what airline deregulation was supposed to accomplish and what it has accomplished. Finally, current trouble spots and policy options are identified.
The aviation age began in 1903 at Kitty Hawk, North Carolina, when Wilbur and Orville Wright performed the first power-driven, heavier-than- air, controlled flight. It was just eleven years later, in 1914, that scheduled commercial passenger service began. For $5 the St. Petersburg--Tampa Airboat Line carried passengers eighteen miles between Tampa and St. Petersburg, Florida. Significant growth in the industry would wait until after World War I, and then it was mail rather than passenger transportation that developed.
The first regular airmail service began in 1918, operated by the Post Office. By 1927, the Post Office had contracted out all airmail service