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

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ic response on the part of the airline industry to deregulation was a fear that (1) the larger airlines would enter the profitable medium-haul markets which regulation of the industry had denied to them, (2) under-price the smaller airlines operating in the markets, (3) drive the smaller airlines out of the industry, and (4) eventually raise prices in the medium-haul markets. A fear was also expressed that deregulation would ultimately result in (1) an oligopolistic airline industry in the United States, which (2) would be far less competitive than the industry which existed in the mid-1970s (Thayer 359-363). Airline industry executives opposing deregulation lauded the CAB for creating a cohesive and an effective national air transportation system, and urged the board to retain the system in its existing form. The CAB proceeded to deregulate the airline industry, however, in spite of industry protests to the contrary. Airline deregulation has been in effect for somewhat more than a decade-and-a-half in 1996. The airline industry in the United States in 1996 is dramatically different from its predecessor in 1981. This study examines the long-term economic effects on the airline industry of airline deregulation. II. CRITICAL
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Approximate Pages = 11 (250 words per page)

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