Can You Make Any Sense Out of Recent Events in the Airline Industry?

There are more airline news than we care for in recent weeks. One way or another, these events have something to do with the 1978 Airline Deregulation Act.

Airline deregulation, created by Alfred E. Kahn, who led the Civil Aeronautics Board (CAB) at the time, was supposed to achieve two goals: bringing down airfares and spurring competition.

Prior to deregulation, there were 10 big airlines, controlling 90% of the American market, and the 8 regional airlines. The airline industry was tightly controlled by the CAB, which regulated and approved the routes that airlines can operate. It also set the airfares that guaranteed airlines a 12% return on flights that were 55% full. Airlines were also confined to the cities that they can serve. Service was limited and discounts were rare.

With deregulation, airfares are cheaper and there are more flights to more cities. It also brings cutthroat competition and the temptation to cut corners on passenger services. Small cities lose airline services. Airline hubs keep competitors at bay, giving the dominant airline in the city more control over pricing. More than 150 airlines have sought bankruptcy protection or disappeared, but new airlines keep springing up as people find it easy to start an airline.

The airline industry incurred more than $30 billion loss from 2001 to 2006. Profits are dismal. High fuel costs are driving airlines into bankruptcy court, or one another’s arms. The recent Delta-Northwest merger is a good example. It may also push other airlines to pursue partners of their own. Hawaii's Aloha and Frontier Airlines have sought bankruptcy protection in recent weeks. It is a tough environment all over in the airline industry!

With respect to the news on fleet maintenance, Southwest planes were allowed to fly with cracked fuselages. Concerns about wiring on American Airlines' 300 MD-80 jets forced flight cancellations. These are the symbols of a broken system at work. However, I have to admit that the airline industry's safety record has remained plenty much intact.

Does deregulation works? Properly not. On a day when American Airlines canceled more than 1,000 flights and stranded about 100,000 passengers, the chairman of a congressional committee overseeing transportation warned that pressure is mounting to "re-regulate" the airline industry.

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