Is it Time to Re‐regulate the Airline Industry?

• DOI: http://doi.org/10.1111/j.1467-9701.1982.tb00043.x
• Date: 01 December 1982
• Author: Alfred E. Kahn
• Published date: 01 December 1982

Is

it Time to Re-regulate

the Airline Industry?

Alfred

E.

Kahn

HE MOST

dramatic change

in

the fortunes of the civil aviation in-

dustry in the United States since de-regulation has obviously been the

enormous financial losses that many of its most prominent members have

suffered in the last couple of years.' After record operating profits in 1978

and more modest ones in 1979, the trunk carriers suffered operating losses

of

$230

million in 1980 and $544 million in 1981; and the end

is

not yet in

sight. In considerable measure, it is less widely understood, the heavy losses

recently suffered by the trunk carriers were the counterpart

of

continued,

and in some cases increased, prosperity in the rest

of

the industry: the

(misnamed) local service carriers as a group earned operating profits

of

$160

million in 1980 and $177 million in 1981; and the commuter carriers

have continued to grow rapidly in both numbers and market share.

Do these distressing losses experienced by the civil aviation industry in

the aggregate prove, as the proponents of regulation have contended, that

competition among airlines tends inevitably

to

be destructive? It seems

unarguable that the preponderant causes

of

the recent deterioration in the

industry's financial fortunes have been the doubling of fuel prices and the

recession. The major companies suffered similar losses the last time these

two events occurred, in 1974-75, when regulation was at its tightest

-

when

for almost six years the

Civil

Aeronautics Board

(CAB)

had refused, as a

matter

of

policy,

to

hear a single application

for

altered route authority.

Indeed, during the first half

of

the 1970s, a period that contained both good

and bad years, the trunk carriers earned on average only

3

per cent on equity.

Moreover, in appraising the feasibility of competition, the profitable years

1978 and 1979 cannot be ignored. Although the Airline Deregulation Act

ALFRED

E.

KAHN: Robert Julius Thorne Professor of Economics, Cornell University,

Ithaca, United States of America, since 1966, and Special Consultant, National Economic

Research Associates, New

York;

previously Adviser to the President on Inflation, and Chair-

man

of

the Council on Wage and Price Stability, 1978-80, having been Chairman

of

the Civil

Aeronautics Board, Washington, 1977-78; author

of

The

Economics

of

Regulation,

in

two

volumes (1970 and 1971).

341

342

ALFRED E. KAHN

was passed only in late October 1978, de-regulation cannot be said

to

have

sprung full-blown from the brow

of

Jimmy Carter, Senators Howard

Cannon and Edward Kennedy or myself on that date. In 1976 and 1977,

under the chairmanship of John Robson, the CAB

took

some major steps

towards removing the shackles on competition. The most notable of these

was its liberalisation

of

charter rules and, as a logical counterpart, its

approval of the scheduled carriers’ competitive response, namely the Super-

Saver, which taken together had a dramatic effect. The CAB let in Freddy

Laker’s Skytrain in June 1977 and within a few months there were Super

APEX, Budget and stand-by fares widely available over the North Atlantic

and many systems of discounting throughout the United States. The sharply

intensified competition

in

1977 and 1978 was obviously, at the very least, not

incompatible with very satisfactory profits.

The deteriorating financial results

of

1979 and 1980 may in some measure

have been the consequence

of

regulation, not de-regulation. Some carriers

complained that the

CAB

was slow in permitting them

to

raise their rates in

step with the sharp increases in fuel prices

in

this period. It appears, how-

ever, that regulatory lag made only a comparatively small contribution

to

the drop in their earnings.2

At

the same time, de-regulation must accept substantial responsibility for

the problems as well as the benefits of intensified competition.

First, de-regulation permitted the local service carriers to extend their

operations into the longer hauls, taking business away from the trunk car-

riers to whom they had, previously, dutifully delivered their traffic at the

intermediate points. In doing

so,

the local service carriers contributed to

excess capacity on the long hauls, the principal breeder

of

price wars.

Secondly, de-regulation permitted the mutual interpenetration of markets

by the trunk carriers themselves, a leading incident

of

which was the entry

of

Eastern Airlines, hitherto largely confined to north-south operations, into

the trans-continental routes

~

-

a more important factor,

I

suspect, than

World Airways

or

Capitol in precipitating the price wars that have contin-

ued

to

plague that market.

Thirdly, de-regulation allowed the entry of new and very low-cost price-

cutting competitors like

Air

Florida, World and Capitol, on the long hauls,

and Midway Airlines, People Express and New York Air, on the somewhat

shorter routes.

Fourthly, it was the removal

of

the CAB’S restraining hand that made

possible the chronic price wars that have been experienced, particularly on

the long hauls, under the pressure

of

excess wide-bodied jet capacity, but

also in highly selective responses

to

the new entrants on the intermediate-

length hauls.