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Airline Deregulation and Laissez-Faire Mythology: Economic Theory in Turbulence

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Document pages: 108 pages

Abstract: This article examines the effect of airline deregulation on the airline industry, its customers, and on the United States air transportation system. Specifically it compares the actual experience of the last decade against the promises that were made by those who successfully promoted the Airline Deregulation Act of 1978. After a decade of airline deregulation: (1) concentration of national and regional market power is greater; (2) routes are more circuitous; (3) service is poorer; (4) labor-management relations have deteriorated; and, (5) air travel is less safe. . Contrary to widespread assertions, lower ticket fares have not accompanied these adverse effects. Adjusting for the impact of changes in inflation and fuel prices - which would have occurred with or without deregulation - ticket prices today are at least 2.6 percent higher than they were before deregulation. If ticket prices could be adjusted for the loss of convenience and productivity resulting from increased route circuitry, there would be an even greater disparity between pre and post deregulation pricing trends. After an initial burst of competition and price cutting, a new pattern of monopolistic and oligopolistic market power, based on regional fortress hubs, emerged, erecting significant barriers to new entrants into the market. Thus, the comparatively vigorous price competition that characterized the industry during the years immediately following deregulation is unlikely to return. The regulated oligopoly which existed under regulation has been replaced with an unregulated oligopoly, with inevitable adverse effects on consumers. Deregulation advanced neither economic nor equity goals. The assumptions upon which deregulation was based -that few scale economies existed in the field of aviation; that destructive competition in the industry was unlikely; that "contestability " of markets (the ease of potential entry) would discipline pricing -have proven false. The time has come to reconsider the experiment of airline deregulation. Airline transport is too critical to the economy and the well-being of the general public to be abandoned for private concentrations of market power. This article sets forth a legislative agenda for reform which attempts to steer a common sense course between heavy-handed regulation and laissez-faire. The legislative provisions include: (1) the establishment of an independent Federal Transportation Commission - immune from capture by any single transport industry - which would regulate the industry from a broader perspective than possible with the old regulatory system; (2) the prohibition of a single airline maintaining a dominant position at more than a single airport; (3) price regulation directed at keeping fares within a range which would prohibit price-gouging in thin markets on the one hand, and predatory pricing to drive out new competitors on the other; and, (4) regulatory or legislative changes directed at eliminating price discrimination, so that fare differences reflect cost differences and not differential market power.

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