Economic Effects of Airline Deregulation

Deregulation in the airline industry was expected to improve customer service by increasing competition. Competition was expected to improve as a result of (1) the flexibility permitted in the setting of fares, (2) the freedom of carriers to alter services offered according to demand, and (3) an increase in the number of competitors, which was expected to result from (a) a reduction in regulatory barriers to entry into the industry, and (b) an increase in the demand for services. Certainly, deregulation brought with it flexibility in fares. The subsidization of routes, however, did not end. Only the identification of the routes receiving subsidies changed. Under regulation, uneconomic routes were subsidized, as a means of insuring that certain communities would continue to receive air travel service. Under deregulation, the major trunk air carriers often raise prices on lower density routes, when they engage in price competition on cross-country routes.

Adverse economic factors which continue to beset the industry spur some carriers to engage in deep discount pricing, with the result that all carriers eventually join in the practice. Discounting has adversely affected industry profitability.

The primary issue is the policy action that should be implemented by the federal government in the 1990s to assure that the traveling public is being served by the airline industry, as opposed to the existing case in w