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The failure of airline deregulation

I used to think that the deregulation of the US airlines was one of the successes of deregulation, cutting service quality but at least getting prices down. Looks like I was wrong! It's failing at that and killing cities too.


Longish article. The industry has had trouble staying profitable. Services are being cut to bigger and bigger cities, like Cincinnati, St. Louis, and Pittsburgh, and where they aren't fares are monopolistic and high.

At first, the program—which was, naturally, embraced by many free market economists and the incoming Reagan administration—seemed to pay off. To be sure, many communities instantly lost air service, and the industry rapidly restructured into the hub-and-spoke system that still exists today, leading to the elimination of many direct flights. But the early years of the new regime also saw a burst of competition and price cutting in the airline industry.

What both policymakers and the public generally missed, however, was that any positive effects that occurred would be temporary, and that many of them would have occurred without deregulation. The price of energy, for example, cratered in the mid-1980s, making it possible to cut fares and even expand service on many short hauls. But that wasn’t an effect of deregulation; it was the result of a temporary world oil glut. Indeed, after adjusting for changes in energy prices, a 1990 study by the Economic Policy Institute concluded that airline fares fell more rapidly in the ten years before 1978 than they did during the subsequent decade.

Except for a period after 9/11, when airlines deeply discounted fares to attract panicked customers, real air prices have fallen more slowly since the elimination of the CAB than before. This contrast becomes even starker if one considers the continuous decline in service quality, with more overbooked planes flying to fewer places, long waits in hub airports, the lost ability to make last-minute changes in itineraries without paying exorbitant fares, and the slow strangulation of heartland cities that don’t happen to be hubs.

Despite the lack of explicit roads or railroads, the high costs of getting a plane into the air, and of running airports and traffic control, make flight a natural network monopoly like other forms of transportation and utilities, one which left to its own devices will shed marginal communities until it's restricted to the most profitable runs between giant cities.

It has amused me to realize that many libertarians probably picture a Jeffersonian yeoman idyll but their policies would actually lead to teeming megacities and wealthy estates. Perhaps they envision being on the estates.

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Damien Sullivan

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