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Economic Regulation of the Commercial Aviation Sector and the 1978 Airline Deregulation Act

The following is a guest post by Gregory Navasarkian, an intern with the Digital Resources Division of the Law Library of Congress. He is a recent graduate with a degree in history from UCLA.

To help address the long-term needs of America’s aviation sector, Congress enacted the nation’s first comprehensive commercial airline regulatory regime in 1938. The Civil Aeronautics Authority Act of 1938 authorized the federal government to regulate pricing, airline routes, and safety standards. In 1940, President Franklin Delano Roosevelt divided the Civil Aeronautics Administration (CAA) into two unique agencies – the Civil Aeronautics Administration and the Civil Aeronautics Board (CAB). The reorganized CAA was responsible for air traffic control, certification, and safety measures, while the CAB managed “safety-related rulemaking, accident investigations, and economic regulation of commercial airlines.”

Six men point at large document on table.

Washington gets a new airport. Washington, D.C., Oct. 27. After showing the President the plans for the new Gravely Point Airport, Chairman Edward J. Noble of the Civil Aeronautics Authority, center, and Col. Sumter Smith, Chairman of the Air Safety Board, right, explain to White house correspondents, the workings of the new airport, 10/27/38. / Harris & Ewing, photographer. Library of Congress Prints and Photographs Division, hdl.loc.gov/loc.pnp/hec.25261

For over 40 years, the CAB regulated domestic air travel and the economics of the nation’s commercial airline industry. It set pricing, established new commercial air routes, and specified flight frequencies between city pairs. The objective of the board was to ensure the “growth of aviation,” establish price controls, and safeguard public access to air travel. With its congressional mandate, the CAB stabilized the post-war domestic airline industry and allowed air service to reach smaller, less prosperous cities and airports. As the commercial aviation sector grew, the board’s ability to react to market demands and address the needs of the American public began to falter. For example, in the late 1960s, the CAB failed to approve Continental Airlines’ request for a new route between Denver and San Diego. After eight years of regulatory roadblocks, Continental sued the CAB (Continental Airlines v. CAB) to obtain air service rights between the two cities. The board’s failure to act on Continental’s route request was not a regulatory aberration. Numerous carriers faced similar setbacks as they sought to expand service and discount fares.

In 1975, the Senate Subcommittee on Administrative Practice and Procedure held a series of hearings to consider the regulatory landscape of the nation’s aviation sector and the potential benefits of airline deregulation. Under the direction of Senator Ted Kennedy, the committee concluded that the long-term welfare of the nation’s aviation sector required Congress to limit the Civil Aviation Board’s ability to “control prices, restrict entry, and confer antitrust immunity.” In his summary report on the “Practices and Procedures” of the Civil Aviation Board, Senator Kennedy argued that “less economic regulation and increased reliance on market forces” would lower ticket prices and better protect consumer interests. The subcommittee report stated that the nation’s depression-era aviation statute – a period in which “competition was looked upon with suspicion and disfavor” – no longer served the interests of the American public. The majority in the subcommittee felt that the board should redefine its mission and make sure that air service “is made available to passengers at a price all can afford.” Following successful market tests in 1975 – wherein the board allowed smaller charter airlines to compete with regulated carriers and allowed American Airlines to discount its fares up to 45% – congressional leaders pursued and enacted the nation’s first significant overhaul of the Civil Aeronautics Act in 1978. Known as the “Airline Deregulation Act,” the new law ended the Board’s four-decade control over America’s commercial route network and its unilateral right to determine airline ticket prices.

Senator Howard Cannon introduced the Airline Deregulation Act on February 2, 1978. Co-sponsored by a bipartisan group of senators including Ted Stevens and Wendell Ford, the measure passed the Senate on April 19, 1978. The Senate and the House of Representatives approved the conference report on October 14, and President Carter signed the bill into law on October 24, 1978. The economic reforms enshrined in the Airline Deregulation Act transformed the airline industry and reduced the federal government’s economic influence over the nation’s aviation sector. The Civil Aeronautics Board was gradually phased out under the CAB Sunset Act and ceased all regulatory operations on December 31, 1984. Though the Airline Deregulation Act of 1978 ended federally-mandated price controls, route certification requirements, and marketplace-related rulemaking, it did not affect the government’s involvement in safety-related aviation matters. The United States continued to regulate crucial aspects of air travel – including passenger safety, pilot certification, and the nation’s air traffic control system (under the auspices of the FAA).

Airlines in the Post-Deregulation Era

The Airline Deregulation Act placed “maximum reliance on competition,” restricted “industry concentration,” and eliminated artificial economic constraints within the commercial aviation sector. Proponents of the act believed that the benefits of deregulation outweighed the potential impact on the nation’s legacy carriers. Experts claimed that competition would force legacy airlines (such as Pan American, Delta, TWA, American, and Eastern) to reform business practices and overhaul operations. Low-cost carriers such as Southwest Airlines and PSA quickly filled any voids left by faltering legacy carriers.

Trans World red and white commerical airplane with TWA on tail.

[TWA airplane at] JFK Airport / Gotfryd, Bernard, photographer. Library of Congress Prints and Photographs Division, //hdl.loc.gov/loc.pnp/gtfy.06767

In the years since Congress passed the Airline Deregulation Act, the nation’s commercial aviation sector has witnessed a significant change to its pricing model, its route network, and the fleet that serves the needs of the American consumer. Some estimates suggest that economic deregulation reduced the average price of airline tickets by 50% – and by extension – made air travel accessible to more Americans. Increased competition among airlines also increased industry load factors (the percentage of airplane seats filled per flight) from around 50% in the early 1970s to 74% percent in 2003. In addition, deregulation helped introduce operational innovations (such as the hub and spoke model) to the industry and allowed low-cost carriers (airlines with flexible fare structures serving short point-to-point routes) to enter the interstate travel market.

The Global Impact of the Airline Deregulation Act

Airline deregulation reshaped the economic and competitive profile of America’s commercial aviation sector. The record indicates that by 1986, American consumers paid 25% less for air travel than their European counterparts. This price gap and the overall success of America’s deregulation strategy motivated the European Union (EU) to consider and institute similar regulatory reforms. To help revitalize Europe’s commercial aviation sector, the EU approved its first economic “liberalization” package in 1987. Much like the United States, European leaders believed that deregulation would reduce the cost of air travel and increase competition among airlines. In 1992, the European Community agreed to lift economic regulations across Europe’s aviation sector and extend price and route flexibility to airlines operating within the Union. By 1998, European airlines could compete “freely for one another’s domestic passengers.” Though Europe’s deregulation strategy did not produce “drastic” initial results, evidence suggests that economic deregulation reduced overall ticket prices and made air travel more accessible to citizens of the European Union.

Major Commercial Aviation-Related Congressional Bills

The following congressional bills shaped the economic silhouette of the nation’s commercial airline industry:

 

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