By Colin Gornall
Overview

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Many policies do little to change the entire economy like that of regulation or deregulation of an entire industry. The congress has the power to regulate commerce, both interstate and foreign (Wells 58). Congress had early on begun to regulate transportation in other industries such as the railroad. During the era of the Great Depression Congress came to the conclusion that the only way to save the airline industry from total collapse would be to regulate it. However, by the 1970s congress again reevaluated airline regulation and came to pass the Airline Deregulation Act of 1978. The economic repercussions of this decision provide solid data to evaluate the benefits and costs of a free market.




Rational of Regulation, 1926


The airline industry, during the 1900s, was seen as an important mode of transportation that could help the nation grow both commercially and socially. There were three major reasons for regulations; industry stabilization, improvements in safety, and reduction of cash subsidies (Wells 58). Because of the potential that the airlines could have on the economy the industry needed to be stable. Stability was in question, prior to regulation the industry was because of “low bids and disastrous price wars”, which led to many bankruptcies (Wells 59). The instability of the industry also dissuaded investment, making financial stability almost impossible. Safety, another reason for regulation, was seen as a problem during the infancy of the industry. Under regulation, and a stable industry, companies would not be “financially weak and unable to afford the necessary safety precaution devices” (Wells 59). Reducing subsidies, another goal of regulation, sought to reduce the input of government funds by creating an industry that was profitable. To better control the industry many postulated that regulation would be able to solve all of these problems.


Rational of Deregulation, 1978


external image cartoon_airline_industry_crisis.jpgDeregulation at the time a prominent idea because the politics of the time favored less government intervention, however there were economic arguments to support the position as well. Alfred Kahn, an economics professor at Cornell, was in favor of deregulation and cited five distinct reasons. 1) Regulation had caused artificially high fares. 2) Under regulation resources were not being efficiently allocated. 3) Regulation promoted inefficiencies. 4) Regulation limited the options offered to consumers both in price and services. 5) Carrier capacity was underutilized under regulation. Kahn argued that all of these problems could be solved by the free market(Dempsey 12). The data to support these assertions has been collected and evaluated to accurately study and understand the effects that deregulation can have on a market, not just that of the airline industry.




Results of Deregulation


The results of deregulation do not exactly follow suit with the aforementioned intended consequences. After deregulation the number of effective competitors initially decreased but over time showed an increase which resulted in more competition and greater supply. The greater supply offers more options to customers as each airline began to specialize in certain routes(Morrison 8). The sharp downturn in late 1988 is attributed to over ten mergers and a move towards re consolidation of the industry. (Refer to Figure 2-1)
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(Morrison 9)



Another key motive of deregulation was a decrease in prices. After the deregulation act prices continued to decrease, however this correlation does not imply causation. To accurately compare whether or not deregulation had a positive effect on prices, the prices with regulation have to be conjectured. By comparing the two, both projected yield and actual yield, prices per mile have averaged about 22 percent lower under deregulation, which has saved consumers 12.4 billion annually (Morrison 15). This estimate tries to exclude the exogenous factors and focus just on the issue of regulation by excluding changes in load factors and technology. (Refer to Figure 2-4)
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(Morrison 14)


Without regulation airlines have been free to charge more varied prices for their tickets, effectively targeting markets that will pay more. Business travelers tend to put a higher value on their time and thus will pay more. The graph shows the greater variance in price distribution as deregulation takes hold. (Refer to Figure 2-5)
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(Morrison 16)

One of the largest effects of deregulation was the reformatting of the structure of the system. The old routing system was based on north-south and east-west movement, with routes being allocated as such. Without regulation the hub-and-spoke method dominated. This method saves the airlines money by better employing their resources, increasing load factor, and an increase of destination service with only one stop. The new structure design enabled airlines to charge lower prices and decreased net loss from time spent in travel. (Refer to Table 2)


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(Bailey 24)
Conclusions

Deregulation has provided some concrete benefits to three different entities. The public has received lower prices and more options. The airlines have been able to take advantage of economies of scale as well as being able to provide a more diversified pricing strategy to attract more customers. The economy has benefited through a reduction in the opportunity cost, shown by a decrease in travel time which has saved an estimated one billion dollars. However even with the benefits of deregulation it is important to consider the changing nature of the market and be receptive to applying regulation should the market change in such a way to make that regulation necessary. Airlines must be continually studied for signs of predatory practices that could result in a monopoly, allowing this process until consolidation would bring about too great of a market power. Currently deregulation has provided a system that is more fluid to change and has benefited the majority of interests.
Works Cited


Bailey, E. (1992, May. - Jun.). Airline Deregulation Confronting the Paradoxes.Cato Review of Business & Government, 13, 18-25.
Bailey, E. E., Graham, D. R., & Kaplan, D. P. (1985).Deregulating the Airlines (Regulation of Economic Activity). London: The Mit Press.
Dempsey, S. P., & Goetz, A. R. (1992). Airline Deregulation and Laissez-Faire Mythology. Westport: Quorum Books.
Morrison, S. A., & Winston, C. (1995). The Evolution of the Airline Industry. Washington, D.C.: Brookings Institution Press.
Wells, A. T., & Wensveen, J. G. (2003). Air Transportation: A Management Perspective
(5 ed.). New York: Brooks Cole.