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October 23, 2008

Happy (?) 30th Birthday Airline Deregulation

by Barbara S. Peterson

Thirty years ago this Friday, President Jimmy Carter signed into law the airline deregulation act of 1978, ending a half century of tight government regulation. The law's supporters, a surprisingly bipartisan crowd ranging from Ted Kennedy to Milton Friedman, promised that it would lead to lower air fares and better service, and that a new generation of consumer-friendly upstart airlines would rise to take on the "dinosaur" airlines that had been protected from competition for years (the same "legacy" airlines that still dominate most of the business, minus a Pan Am or TWA here or there).

Not exactly how the flying public sees it these days.

Mention the D-word and it conjures up not just the sorry state of air service but debacles ranging from Enron to the current calamity on Wall Street. 

Here are some of the milestones of the last three decades in deregulated air travel:

* More than 200 airlines started up and flamed out, ranging from the pioneering and briefly successful People's Express in the 1980s, to oddball niche lines like the "Lord's Airline" or MGM Grand. Mark Schulte, managing director at the New York boutique investment bank Dahlman Rose, who saw close to 100 of these business plans as an investment banker in the 1980s and 1990s, cracks that "New airlines have a higher mortality rate than an Ebola victim"--about  99 percent, to be precise.

* The airlines collectively have lost so many billions of dollars since deregulation that it has effectively wiped out all the profits of the airlines since the birth of the industry. Warren Buffett once joked that airlines have proven to be such a bad investment that someone should have done the world a favor and shot down Orville and Wilbur Wright at the outset.

* Air fares, on the other hand, did in fact go down--just as the authors of the law had predicted. In fact, if anything, the price of travel has failed to keep pace with inflation to the point where airlines can't hike fares even when one of their biggest costs--jet fuel--goes haywire. But the trade-off is that service standards have also headed south: Delays in 2007 reached record proportions, and complaints about everything from lost luggage to missed connections have gone way up.

* The number of airline companies, however, continues to shrink: Once there were 10 "network" airlines and dozens of smaller, nimble challengers, but now, after waves of bankruptcies and mergers, we're down to five or six major full-service airlines (Northwest will soon disappear as a separate company if its expected merger with Delta goes through later this year). What's different now is that the climate is so forbidding for newcomers, who would find it virtually impossible to raise the capital needed to take off. "The barriers to entry are significantly higher than they were in 1984," says Schulte.

So did deregulation succeed or fail? Perhaps the final word should go to Cornell economist Alfred Kahn, Jimmy Carter's competition czar, who once joked that whenever he is introduced as the father of deregulation, "People think I'm going to demand a blood test."

Further reading:
* Note for all of you fans of extinct airlines: If you can't get enough of these entrepreneurial schemes gone bad, check out a tome called Deregulation Knock-Outs, an illustrated tribute to these deluded fly boys. Today only a handful of lower-cost upstarts--Air Tran, JetBlue, Frontier, and Virgin America--continue to fly as independent companies (Midwest, in case you are wondering, began life as Kimberly Clark's corporate airline, and Southwest actually started up as a Texan puddle-jumper seven years before deregulation.)
* On the Fly: The Daily Traveler's Barbara S. Peterson on the airline industry

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