The High Price of Airline Deregulation

A month ago, I was searching online for a nonstop flight from Albany, N.Y. to Washington, D.C. United's flight was full, but a direct flight was available from a company called Independence Air and it was $100 cheaper. I was intrigued. Having never heard of that airline, I did what any seasoned traveler would do -- I googled it. A story from USA Today, dated the day before, reported that Independence Air's CEO had just notified the securities community that the airline might file for bankruptcy, perhaps even before my flight was to take off.

Independence Air: born 2004, died 2005, a remarkably common corporate tombstone in the era of deregulated airlines.

This July, the Government Accounting Office issued a report discussing the dismal financial state of the industry. "While the airlines industry was deregulated 27 years ago, the full effect on the airline industry's structure is only now becoming evident," it concluded.

In the 27 years before airline deregulation, no airline went bankrupt. Since 1978, 160 airlines have come and gone. In the last quarter-century, the rate of bankruptcy among air carriers has been as much as 10 times higher than that of the general business community. In 2005, virtually all major airlines are either in bankruptcy (United and US Air were joined Wednesday by Delta and Northwest) or on the verge of bankruptcy. How did we come to this?

In the late 1970s, the airline system was straining under an inflexible and cumbersome regulatory system. A long, drawn-out proceeding was needed simply to get permission from the Civil Aeronautics Board (CAB) for employees of two affiliated airlines to wear similar uniforms! Something needed to be done.

The liberals in control of Congress, the White House and the CAB opted for revolution rather than evolution. Rather than mend the existing system, they blew it up. By the early 1980s, federal controls over the entry and exit of airlines, over flight schedules and airfares were abolished. Quality of service requirements ended. Financial oversight was abandoned. Only airline safety remained under federal regulation.

Today, conservatives control Congress and the White House, and they fight even the tiniest move to reestablish some federal control over airlines. A near consensus exists that airline deregulation, in the words of The Economist, has been a "virtually unqualified success."

From my perspective, the cost-benefit analysis of airline deregulation depends on how wide a lens one is using.

Advocates of deregulation point to the fact that the number of air passengers has soared since 1978. They rarely note that it soared just as fast in the years before deregulation. They point out that airline rates have dropped significantly since deregulation for most (but not all) passengers. They rarely divulge that rates fell just as fast in the 27 years before deregulation.

Indeed, the use of price alone as a measure of success is looking increasingly suspect. In the last four years, for example, airfares have dropped more than 15 percent. In the same time frame, 20 airlines have gone bankrupt. United and US Air have walked away from their pension obligations. Northwest just imposed a 25 percent unilateral wage reduction on its machinists. The industry as a whole has lost $25 billion. This is not healthy competition.

The most ardent proponents of airline deregulation argue that as much as half the price decrease since 1978, or about 20 percent overall, is a result of deregulation. Others argue that this figure is wildly exaggerated. For example, the emergence of internet booking alone may have had a substantial impact on ticket prices, since it all but eliminated the 10 percent commission travel agents had earned for booking flights.

So let's split the difference and say deregulation has resulted in a 10 percent ticket price reduction; perhaps $35 on a typical round-trip flight. That's the benefit. What's the cost?