Airline Deregulation Act

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President Jimmy Carter signs the Airline Deregulation Act.

The Airline Deregulation Act (or ADA) is a United States federal law signed into law on October 24, 1978. The main purpose of the act was to remove government control from commercial aviation and expose the passenger airline industry to market forces.

History of airline regulation and the CAB

Since 1937, the federal Civil Aeronautics Board (CAB) had regulated all domestic air transport as a public utility, setting fares, routes, and schedules. The CAB promoted air travel, for instance by generally attempting to hold fares down in the short-haul market, to be subsidized by higher fares in the long-haul market. The CAB also was obliged to ensure that the airlines had a reasonable rate of return.

It also earned a reputation for bureaucratic complacency; airlines were subject to lengthy delays when applying for new routes or fare changes, which were not often approved. World Airways applied to begin a low-fare New York City to Los Angeles route in 1967; the CAB studied the request for over six years only to dismiss it because the record was "stale." Continental Airlines began service between Denver and San Diego after eight years only because a United States Court of Appeals ordered the CAB to approve the application.

This rigid system encountered tremendous pressure in the 1970s. The 1973 energy crisis and stagflation radically changed the economic environment, as did technological advances such as the jumbo jet. Most of the major airlines, whose profits were virtually guaranteed, favored the rigid system. But passengers forced to pay escalating fares did not, nor communities which subsidized air service at ever-dearer rates. Congress became concerned that air transport in the long run might follow the nation's railroads into trouble; in 1970 the Penn Central Railroad had collapsed in what was then the largest bankruptcy in history, resulting in a huge taxpayer bailout in 1976.

Leading economists had argued for several decades that this sort of regulation led to inefficiency and higher costs. In 1970-71 the Council of Economic Advisors in the Richard Nixon Administration, along with the Antitrust Division of the Department of Justice and other agencies, proposed legislation which would diminish price collusion and entry barriers in rail and truck transportation. While this initiative was in process, in the follow-on Gerald Ford Administration, the United States Senate Judiciary Committee, which had jurisdiction over the antitrust laws, a part of competition law, began 1975 hearings on airline deregulation. Senator Ted Kennedy took the lead in these hearings. This committee was deemed a more friendly forum than what likely would have been the more appropriate venue, the Aviation Subcommittee of the Commerce Committee. The Gerald Ford Administration supported the Senate Judiciary Committee initiative.

In 1977, President Jimmy Carter appointed Alfred E. Kahn, a professor of economics at Cornell University, to be chair of the CAB. A concerted push for the legislation had developed, drawing on leading economists, leading 'think tanks' in Washington, a civil society coalition advocating the reform (patterned on a coalition earlier developed for the truck-and-rail-reform efforts), the head of the regulatory agency, Senate leadership, the Carter Administration, and even some in the airline industry. This coalition swiftly gained legislative results in 1978.

Dan Mckinnon would be the last Chairman of the CAB and would oversee its final closure on January 1, 1985.

Legislative terms

Senator Howard Cannon of Nevada introduced S. 2493 on February 6, 1978. It passed and was signed by Carter, becoming Pub.L. 95-504 on October 24, 1978.

The stated goals of the Act included

• the maintenance of safety as the highest priority in air commerce;
• placing maximum reliance on competition in providing air transportation services;
• the encouragement of air service at major urban areas through secondary or satellite airports;
• the avoidance of unreasonable industry concentration which would tend to allow one or more air carriers to unreasonably increase prices, reduce services, or exclude competition; and
• the encouragement of entry into air transportation markets by new air carriers, the encouragement of entry into additional markets by existing air carriers, and the continued strengthening of small air carriers.

The Act intended for various restrictions on airline operations to be removed over four years, with complete elimination of restrictions on domestic routes and new services by December 31, 1981, and the end of all domestic fare regulation by January 1, 1983. In practice, changes came rather more rapidly.

Among its many terms, the Act:

• gradually eliminated the CAB's authority to set fares;
• required the CAB to expedite processing of various requests;
• liberalized standards for the establishment of new airlines;
• allowed airlines to take over service on routes underutilized by competitors or on which the competitor received a local service subsidy;
• authorized international carriers to offer domestic service;
• placed the evidentiary burden on the CAB for blocking a route as inconsistent with "public convenience";
• prohibited the CAB from introducing new regulation of charter trips;
• terminated certain subsidies for carrying mail effective January 1, 1986 and Essential Air Service subsidies effective 10 years from enactment;
• terminated existing mutual aid agreements between air carriers;
• authorized the CAB to grant antitrust immunity to carriers;
• directed the Federal Aviation Administration (FAA) to develop safety standards for commuter airlines;
• authorized intrastate carriers to enter into through service and joint fare agreements with interstate air carriers;
• required air carriers, in hiring employees, to give preference to terminated or furloughed employees of another carrier for 10 years after enactment;
• gradually transferred remaining regulatory authority to the U.S. Department of Transportation (DOT), and dissolved the CAB itself.

Safety inspections and air traffic control remained in the hands of the FAA, and the act also required the Secretary of Transportation to report to Congress concerning air safety and any implications deregulation would have in that matter.

Effects

A 1996 Government Accounting Office report found that the average fare per passenger mile was about 9% lower in 1994 than in 1979. Between 1976 and 1990 the paid fare had declined approximately 30% in inflation-adjusted terms. Passenger loads have risen, partly because airlines can now transfer larger aircraft to longer, busier routes and replace them with smaller ones on shorter, lower-traffic routes.

However, these benefits of deregulation have not been distributed evenly throughout the national air transportation network. Costs have fallen more dramatically on heavily trafficked, longer-distance routes than on shorter, lighter ones.

Exposure to competition led to heavy losses and conflicts with labor unions at a number of carriers. Between 1978 and mid-2001, nine major carriers (including Eastern, Midway, Braniff, Pan Am, Continental, America West Airlines, and TWA) and more than 100 smaller airlines went bankrupt or were liquidated—including most of the dozens of new airlines founded in deregulation's aftermath.

For the most part, smaller markets did not suffer the erosion of service predicted by some opponents of deregulation. However, until the advent of low-cost carriers, point-to-point air transport declined in favor of a more pronounced hub-and-spoke system. The larger hubs were served with larger aircraft, the spokes with smaller. While more efficient for serving smaller markets, this system has enabled some airlines to drive out competition from their "fortress hubs." The growth of low-cost carriers such as Southwest Airlines has brought more point-to-point service back into the United States air transport system, and contributed to the development of a wider range of aircraft types that are better adaptable to markets of varying sizes.

References

• Barnum, John W. "What Prompted Airline Deregulation 20 Years Ago?," Presentation to the Aeronautical Law Committee of the Business Law Section of the International Bar Association, September 15, 1998.
• Derthick and Quirk, The Politics of Deregulation, Brookings Institution, 1985.
• Kahn, Alfred E. "Airline deregulation" in Concise Encyclopedia of Economics.
• Robyn, Dorothy, Braking the Special Interests, University of Chicago Press, 1987
• Rose, Seely and Barrett, The Best Transportation System in the World, University of Ohio Press, 2006, a part of an Historical Series on Business Enterprise, edited by Blackford and Kerr.