Airline deregulation is a phenomenon that has only occurred in economically stable states that can support a competitive airline industry, and even then, its inherent flaws have led many governments to eschew it...

American deregulation

Most of the large U.S. airlines had their genesis in the 1930's as air mail carriers under government contracts. The Civil Aeronautics Board drew up maps of the routes it wanted, and awarded those routes to the best bidders. Airfares were also dictated by the government so that half-empty planes on less-traveled routes would be balanced out by full planes on high-density routes. For every big route the CAB awarded, they also mandated service to many smaller cities. It was a good system at the time, when the market was still limited.

Fast-forward forty years, and thirty-seat Douglas DC-3's were replaced by 400-seat Boeing 747's. Networks like Sabre and Apollo were capable of managing multi-tiered fares on the same flight. Airfares were high, load factors were low, and regulation was becoming inefficient. Stephen Breyer (now a justice on the Supreme Court) wrote a paper on this inefficiency while he was at Harvard, and it caught the attention of local senator Ted Kennedy and Airline Committee chairman Edward Cannon, who both entered a race to see who could push a deregulation bill through the Senate first.

The airlines didn't want deregulation: what they wanted was permission to introduce lower, restricted fares within the old regulated framework. Congress, however, turned against the airlines: it passed its deregulation bill in 1978.

The effects of this legislation were enormous. Point-to-point service almost disappeared among the major airlines, which began routing all of their flights through hubs in order to save money, thus increasing travel time and distance, and sometimes leaving passengers stranded midway through a trip. Smaller airlines went under in unprecedented numbers: Braniff, Piedmont, People Express, and Western, followed by giants like Eastern, Pan Am, and TWA. The carriers that survived had to dramatically cut back on wages and benefits, resulting in increasingly shoddy service.

On the flip side, the long term effect was positive. More people flew, more airplanes were purchased, more airline jobs were created, and base fares fell considerably, all as the U.S. economy skyrocketed in the 1990's. Today, of course, the money isn't there, and many airlines are folding or restructuring, leaving their airplanes in desert boneyards. This has led some analysts to propose a "re-regulation" of the industry. Good or bad? Who knows.

European deregulation

The open borders of the European Union were the first step to deregulation. Then, in April of 1997, 17 countries opened their skies to each other's airlines, and carriers like Virgin Express, Ryanair, and easyJet took off, offering travel for fifty to ninety percent less than their competitors' book fares.

While fares across Europe initially fell, they quickly came back up again, as Europe's majors adopted the price discrimination strategy employed by US airlines. Restricted fares stayed low, but the price of an open ticket shot through the roof, increasing up to seventy percent from regulated levels. The increasing weight of airline alliances in Europe also led to some key city pairs falling exclusively under one alliance's control, allowing for very casual price fixing to take place.

Japanese deregulation (or lack thereof)

Japan's airlines were regulated by the government until 1996, by which point there were only three: Japan Airlines, All Nippon Airways, and Japan Air System. JAL concentrated on international routes, while ANA and JAS concentrated on domestic. All three airlines offered the same fares, which were set by the Ministry of Transportation.

In 1996, the MoT agreed to let the airlines set their own fares. The initial result was that most fares rose slightly, while fares during peak travel periods (Golden Week and New Year's Day) skyrocketed. Eventually, half-price restricted fares emerged, but the base fares remained at unusually high levels. Haneda to Chitose, the world's busiest air route (8m passengers a year), became the world's most expensive: for the trip of 500 mi (800 km), one-way fares averaged ¥23,000 (US$190), twenty to forty percent higher than equivalent non-restricted tickets in the US or Europe.

The oligopoly was not broken until the emergence of two new firms, Skymark Airlines and Air Do, from money put up by corporations in Hokkaido and Kyushu (who rely on air access because of their distance from Tokyo). However, the upstarts faced a number of problems. Independent outsourcing is unavailable for maintenance, so Air Do paid JAL $16m a year to maintain a single Boeing 767... so much that there was talk of taking the plane to Hong Kong or Singapore for repairs. The Big Three's iron triangle relationship with the MoT led to a number of nasty regulations, including forcing Air Do to hire sixteen pilots (at upwards of $100,000 salary each) to fly three round trips a day.

Still, Skymark and Air Do changed the domestic travel industry in Japan. The majors had to cut their fares and introduce previously unheard-of perks, including domestic frequent flyer miles, to compete. Even ferry operators slashed fares. Since then, Skymark and Air Do had to declare bankruptcy, and only Skymark was able to re-emerge: JAL and JAS then had a merger, and ANA bought out upstart FairLink, further reducing the level of competition in the Japanese air travel market.

The limits of deregulation

Open skies agreements, deregulating international air travel, are still rare: most international flights are regulated by strict bilaterals, such as the Bermuda II Agreement that restricts flights between the US and Heathrow. The international air travel order will remain overly friendly to national airlines for years to come, until smaller countries lay their parastatals on the line and open up to foreign countries.

In the meantime, expect oligopoly, convoluted pricing, and lots of nuts (both on your tray table and in the crew). That is the blessing and the curse of deregulation.

Al Casey, Casey's Law

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