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The State of the Airline, Airport and Aviation Industries

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Document pages: 85 pages

Abstract: Airlines were among the first of the major infrastructure industries to be deregulated, with the promulgation of the Airline Deregulation Act of 1978. In that legislation, Congress took the unprecedented step of sunsetting a major regulatory agency - the Civil Aeronautics Board, which had been established four decades earlier. Beginning in the Carter Administration, and perfected to an art form in the Reagan Administration, federal oversight of industries as diverse as airlines, busses, railroads, trucking, telephones, cable tv, radio and tv broadcasting, banking, savings and loans, and oil and gas was significantly trashed. The virus of deregulation was politically contagious. The means applied to transform and radically shrink government proceeded along two planes, sometimes independently. Congress passed major legislation mandating various forms of deregulation between about 1976 and 1985, while successive Presidents appointed free market ideologues to the regulatory agencies with the mission essentially to exceed their legislative mandates and ignore their oaths of office. The laissez-faire economists who convinced Congress to promulgate the Airline Deregulation Act of 1978 promised that deregulation would result neither in increased concentration nor destructive competition. This was true, they insisted, because the industry was structurally competitive, possessed few economies of scale, and was impeded by few barriers to entry. Neither economic nor equity goals have been advanced by deregulation. The assumptions upon which it was based - that there were few scale economies in aviation; that destructive competition in this industry was unlikely; that "contestability " of markets (the purported ease of potential entry) would discipline pricing - the three legs of the theoretical stool - have proven false. Remarkably, despite the disintegration of the intellectual foundation of deregulation, its proponents swear the thing works. Deregulation is a rather peculiar phenomenon. Its most fervent proponents continue to embrace it, not merely as an abstract economic theory, but with political, almost theological, devotion. No matter what evidence is adduced of widespread failure (and there is plenty), they tenaciously insist such evidence can be reinterpreted as success. Some go so far as to assert that its failures can be attributed to a belief that we didn t deregulate enough. The free market, laissez-faire movement has earned a special place in history. Not since the Bolshevik Revolution has the discipline of economics embraced an ideology with such passion. With the collapse of Marxism in Eastern Europe, no advocate of responsible public policy today advocates that government should apply command economy-type restrictions over price and supply. But some, including this author, do believe the appropriate level of government oversight for this critical infrastructure industry lies somewhere between the regulatory regime established for airlines in 1938, and the contemporary environment of laissez-faire market Darwinism.

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