The Public Policy/Airline Deregulation Considered

...Cost increases from labor contracts or other sources were typically passed on by the CAB in the form of higherfares...

...The twelve largest carriers lost 43,000 jobs (14 percent of their work force) between the third quarter of 1979 and the third quarter of 1982...

...In a deregulated environment, however, there is no reason for one type of route to be more profitable than any other, and so many carriers have found themselves with more wide-body capacity than they can profitably use...

...Yet the new job opportunities with both the newly formed carriers and the carriers previously confined by regulation to intrastate markets must be taken into account as well...

...In addition to more departures, flight times were typically scheduled at times more in line with traveler preferences...

...THE PUBLIC POLICY AIRLINE DEREGULATION CONSIDERED In the wake of the bankruptcies of Braniff and Continental Airlines, as well as the continuing financial perils of such carriers as Eastern and Republic, critics of airline deregulation have become increasingly vocal in their calls for reregulation...

...Before deregulation, the CAB's standard industry fare level was based on distance...

...Rather than award a new route to the carrier best positioned to serve it, for example, the CAB would sometimes award monopoly routes to financially ailing carriers in an attempt to maintain industry stability...

...Such a statement may seem startling at first glance, since most fares are higher now than they were in 1976 or 1977...

...In cases of extreme financial distress, the CAB would arrange for the failing carrier to merge with a financially stronger one...

...For roughly four decades the CAB exercised tight control over the basic features of airline service: who could provide the service, where the service could be provided, and what price could be charged...

...To repeat, employment has fallen sharply among the major carriers since 1979...

...But the issue is how current fares compare with those that would have prevailed under continued CAB regulation...

...The third legacy was the patchwork route networks of most carriers, resulting from the CAB's eclectic means of awarding routes...

...If the airplane cannot be used productively during "off-peak" hours, then the cost per flight will be higher in that market...

...But simply because they occurred following deregulation does not mean that deregulation is necessarily at fault...

...During the last three years, the airlines have amassed losses totalling over one billion dollars...

...While many jobs have been lost among the major carriers (largely because of Braniff), a significant number of new jobs have been created among the smaller carriers and newly formed airlines...

...These set fares featured a considerable margin over costs, and the actual fare paid averaged less than the formula, even before deregulation...

...But the Act also authorized a subsidy program to guarantee "Essential Air Service" to communities receiving service from certificated carriers prior to deregulation...

...airlines serving some routes for which their equipment was poorly suited and lacking authority to serve other routes that fit well into their existing networks...

...CAB regulation contributed to this "excess capacity" problem: first, by setting fares to make long-haul, high-density routes potentially the most profitable...

...Foremost is that airline fares are lower, on average, than would likely have been the case under continued regulation...

...Once an airline is committed to making a flight, the marginal cost of serving an additional passenger (in an otherwise vacant seat) is very low...

...The Airline Deregulation Act was signed into law just over five years ago...

...While in the former market an aircraft may be fully utilized throughout the day flying back and forth, in the latter there may be only sufficient demand for a single flight in the morning and another at night, leaving the aircraft unutilized during the rest of the day...

...But during the period 1978-1982, the actual average fare paid fell to 73 percent of the formula fare...

...Most travelers apparently have found the added frequency and schedule convenience more than adequate compensation for the reduced comfort...

...The fact remains that the airlines have made substantial progress in overcoming 40 years of CAB regulation, and there is no evidence that re-regulation would solve any of the problems that remain...

...The second legacy was a pattern of labor contracts featuring both high wage-rates and restrictive work-rules...

...Under CAB regulation, airline managements had less incentive to bargain aggressively with labor than would have been the case in a deregulated market...

...Usually, the airlines do this by offering discount rates to price-conscious travelers on flights with excess capacity...

...Airlines bought wide-body aircraft because they were well suited to the most profitable routes and seemed indispensable in attracting travelers on long-haul routes...

...No doubt, these are difficult times...

...is co-author of Airline Deregulation: The Early Experience {Auburn House...

...Though the fact that these communities are now served by smaller commuter planes may be a blow to the ego of a local Chamber of Commerce, it is important to note that the typical pattern when a commuter replaces a jet carrier in a small community is that ridership increases...

...During the period 1970-1977, in fact, the actual average fare paid was 82 percent of the formula fare...

...Losses and layoffs of such magnitude are unprecedented among airlines...

...However, commuter airlines flying smaller, propeller-driven aircraft well suited to smaller markets have moved in to such an extent that total weekly aircraft departures in these communities in October 1982 were 26 percent higher than in October 1977...

...The major elements of airline economic regulation remained unchanged from that time until the move toward less regulation began, in 1976...

...Between October 1, 1977 and October 1, 1982, 145 communities lost service from a certificated carrier...

...CAB actions thus helped insulate managers from the consequences of their decisions...

...But what is rarely pointed out is that 1979 was a high point of airline employment...

...The model is somewhat complex, but the basic mechanism underlying the conclusion is not: lower fares of deregulation mean more travelers...

...It is true that the Deregulation Act made it easier for an airline previously regulated by the CAB (a "certificated" carrier) to pull out of a market it no longer wished to serve...

...Nevertheless, some trends have emerged over the past five years...

...Airline managers were brought up to expect that fundamental business decisions-what markets to enter and what price to charge for their product-would not be wholly theirs...

...Clearly, deregulation has not been a panacea for all the airline industry's many problems, but neither has it been the reason for the industry's present troubles...

...A frequent charge of deregulation critics is that the nation's small communities have suffered dramatic declines in service...

...But without deregulation even more jobs might have been lost...

...In addition to adjusting to deregulation, the airlines have also been subject to a deep and lingering recession, a dramatic increase in the price of jet fuel, and a reduction in air traffic-control capacity following the PATCO strike and the subsequent dismissal of the striking controllers...

...This 40-year legacy of CAB regulation left the airline industry with five important characteristics on the eve of deregulation...

...Future events may perhaps reverse these conclusions, and other aspects of deregulation may ultimately prove detrimental...

...More importantly, there is the legacy of 40 years of Civil Aeronautics Board (CAB) regulation...

...The fifth legacy was an oversupply of wide-body aircraft (B-747s, DC-10s, L1011s, and A-300s...

...Following deregulation, however, such discount fares helped push load factors to almost 60 percent-this despite the reduced demand for travel during the recession...

...With fares based only on distance, such factors as the number of passengers traveling the route weren't ever considered...

...Before deregulation, the average load factor (the percentage of seats filled) was only about 55 percent...

...But that would require a marked change in the trends of the past five years, and no such change is yet evident...

...Fares were designed to be more expensive for long-haul flights, another form of compensation for the less profitable short-haul flights...

...This question, of course, hinges on a comparison of fares with costs...

...and total airline employment is up despite recession and dramatically higher fuel prices...

...The first was a tradition of management unaccustomed to the rigors of a competitive marketplace...

...Similarly, long routes (which were believed to be more lucrative) were often awarded to short-haul carriers to compensate for losses on short routes...

...Between July 1977 and July 1982, employment among the major carriers had fallen by only about 10,000, roughly the number of all Braniff employees in 1977...

...In other words, since deregulation the airlines have charged lower fares in relation to costs than before...

...Even this limited management control was exercised in an environment where the CAB tended to shelter weak carriers from competition with strong ones...

...Airline passenger regulation had its formal origins in the United States with the creation of the Civil Aeronautics Authority (CAA) in 1938, which in 1940 was reorganized into the Civil Aeronautics Board...

...Even as late as 1982, the five largest carriers (American, Delta, Eastern, TWA, and United) had about 30 percent of their aircraft capacity tied down by wide-body aircraft...

...In a changing economic environment, it is difficult to separate the effects of these external events from those of deregulation...

...Airline management had discretion only over the time of day and frequency of flights, the type of aircraft, and amenities such as movies, drinks, airport lounges, and the like...

...Finally, there is the question of the large number who lost their jobs...

...The best that can be said is that thus far the results seem generally positive: fares are lower across a broad array of markets...

...Where has this left the small communities...

...For one thing, the airlines have been severely Clinton V. Oster, Jr...

...Indeed, the search for wide-body markets has contributed significantly to the transcontinental and northeast-to-Florida fare wars...

...The Boston-Chicago market, for example, involves many more passengers than the Memphis to Miami route...

...In any case, after five years it still may be too early to tell...

...second, by allowing airlines to compete only on the basis of service...

...affected by both the recession and the dramatic increases in the price of jet fuel following the Iranian revolution...

...Certificated carriers have used this new freedom to transfer their jet aircraft to markets for which they are better suited...

...What, then, can be said after five years of deregulation...

...At the beginning of deregulation, the airlines had either in service or on order more such specialized aircraft than necessary in a competitive environment...

...The winners appear to be airline travelers who are paying lower fares and choosing from a much broader array of fare and service options...

...agement had contributed to the difficulty...

...Although lower wages and less restrictive work-rules would mean greater profits even under regulation, a tough bargaining stance would bring an airline little competitive advantage over other carriers since lower costs could not be converted into lower prices...

...The fourth legacy of CAB regulation was a fare structure only partially related to the cost of providing service...

...The biggest losers will probably be those workers employed at major airlines when the Deregulation Act was passed: they are simply no longer in a position to obtain the favorable wage and work-rule settlements that prevailed during the halcyon years of CAB regulation...

...Two markets of the same distance, however, may not be equally profitable, even if the same type of aircraft is used...

...small communities as a group have not suffered service losses...

...This is a tentative conclusion based on a statistical model I have devised in an attempt to separate the effects of deregulation from those of recession, fuel price increases, and the PATCO strike...

...This formula was updated as necessary to reflect changing costs and so provides an excellent cost index...

...But as the new post-deregulation carriers like People Express have demonstrated, in a competitive environment lower costs can contribute to lower fares and a gain in market share...

...Recession, fuel price increases, and the air traffic control reduction following the PATCO strike all have had detrimental effects on employment for the major carriers...

...Now, many factors besides market density influence costs, and achieving high aircraft utilization is far more complex than this example suggests, but the point remains: the cost of air service depends on more than distance and type of plane...

...The coming of deregulation saw almost all U.S...

...Like most policy changes, deregulation has created both winners and losers...

...If an airline encountered difficulty, the CAB would come to its aid with favorable treatment in awarding routes or with outright subsidies, even if mistakes by manby Clinton V. Oster, Jr...

...And even with the Braniff bankruptcy, total airline employment for all scheduled carriers was higher in 1982 than in 1977 by about 17,000 workers...

...more travelers require more support jobs to accommodate them...