Airline Deregulation, Revisited

Supreme Court Justice Stephen Breyer reflects on the benefits of competitionand its hazards

Thirty-five years ago this month, Senator Edward Kennedy (D-Mass.) held hearings on the federal government's regulation of the airlines. His primary focus was on fares. Why were they so high? Officials at the Federal Trade Commission believed that regulation itself was the primary reason. The Civil Aeronautics Board had forbidden price competition. The result was service competition instead: empty seats, steak sandwiches, Aloha bars near the galley, and sky-high prices. A business traveler may be pleased to find an empty seat for his briefcase, an FTC official said at the time, but probably doesn't realize he is paying full fare for the briefcase.

The hearings' objective was to determine if creating more competition—in fares and routes—would improve things. The answer seemed to be yes. In California and Texas, where fares were unregulated, they were much lower. The San Francisco-Los Angeles fare was about half that on the comparable, regulated Boston-Washington route. And an intra-Texas airline boasted that the farmers who used to drive across the state could fly for even less money—and it would carry any chicken coops for free.

Although the board, supported by the airlines, tried to find plausible explanations for high fares, it ultimately failed to do so. For example, were high fares on popular routes needed to support air service to small communities? If so, why should a grandmother flying New York-Los Angeles pay more to help the business traveler flying Utica-Albany pay less? Empirical investigation showed the amount of any such cross-subsidy was tiny and could take the form of a direct government transition payment instead.

When an East Boston constituent asked Kennedy, "Senator, why are you holding hearings about airlines? I've never been able to fly," Kennedy replied: "That's why I'm holding the hearings."

The hearings brought together a Democratic senator and a Republican President in Gerald Ford. They created alliances among consumer groups, pro-competition business groups, economists, and regulatory reformers. They helped make the "regulatory reform" issue politically visible. They showed that government regulation, being administered not by angels but by human beings, was itself imperfect. And they gave content to the notion of reform: In some areas where regulation was necessary—such as health, safety, and the environment—reform would mean "smarter" regulation, sometimes relying more heavily on incentives. In other areas of transportation regulation, reform would mean increased reliance on competition, sometimes to the point where government could abandon the effort to control prices.

Pressure from these broad alliances eventually brought change to the airline industry. President Jimmy Carter took up the theme and appointed as chairman of the Civil Aeronautics Board a Cornell economist, Alfred E. Kahn. Kahn knew regulation; he understood government; and he understood human nature. He began to dismantle fare and route controls and he supported deregulatory legislation, which, with the support of Kennedy and Senators Orrin Hatch (R-Utah) and Strom Thurmond (R-S.C.), became law in 1978. (Kahn, age 93, died last month, and was much mourned by all who knew him.)

What does the industry's history tell us? Was this effort worthwhile? Certainly it shows that every major reform brings about new, sometimes unforeseen, problems. No one foresaw the industry's spectacular growth, with the number of air passengers increasing from 207.5 million in 1974 to 721.1 million last year. As a result, no one foresaw the extent to which new bottlenecks would develop: a flight-choked Northeast corridor, overcrowded airports, delays, and terrorist risks consequently making air travel increasingly difficult. Nor did anyone foresee the extent to which change might unfairly harm workers in the industry. Still, fares have come down. Airline revenue per passenger mile has declined from an inflation-adjusted 33.3 cents in 1974, to 13 cents in the first half of 2010. In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: $1,442. Today one can fly that same route for $268. That is why the number of travelers has gone way up.

So we sit in crowded planes, munch potato chips, flare up when the loudspeaker announces yet another flight delay. But how many now will vote to go back to the "good old days" of paying high, regulated prices for better service? Even among business travelers, who wants to pay "full fare for the briefcase?"

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