David R. Henderson  

The Air Travel Revolution

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Derek Thompson's "How Airline Ticket Prices Fell 50% in 30 Years (and Why Nobody Noticed)" is a nice round-up of the facts about the effects of airline deregulation. People who know the story well--I guess Derek would call us "nobodies"--won't be surprised, but he tells the story nicely.

Some excerpts followed by my comments.

Derek's opening is great:

Frank Sinatra's "Come Fly With Me" was the best-selling album in the United States for five weeks in 1958, but the irony of its popularity (or, perhaps, the source of its aspirational appeal) is that practically none of us could take up the offer to "glide, starry-eyed" on an aircraft with anybody in those days. More than 80 percent of the country had never once been on an airplane. There was a simple reason. Flying was absurdly expensive.

And there was simple reason why flying was absurdly expensive. That was the law.

There are many sad stories to tell about the U.S. economy in the last 30 years, but here's a happy story for everybody (except the airlines), from radical capitalists to the most liberal consumer advocates. Getting government out of the business of regulating the skies has led to a remarkable collapse in airline prices.


I remember Sinatra's song--I was 7 at the time. It seemed like a fantasy song, kind of like hearing about Disneyland and just knowing that I would never go there. Nobody in my family had ever flown. My father was the first to fly and that was in the early 1960s when my great aunt Violet had died in Peoria--she was a spinster--and my father took Northwest Orient from Winnipeg to Chicago to wind up her modest estate.

One other memory of this time. In April 1965, when I was 14, I wanted to travel from Carman, Manitoba to Nacogdoches, Texas to visit my uncle and aunt. I was paying my own way. Just out of curiosity, I checked airfares. Round trip fare: $288 in 1965 dollars. So my sister and I took the bus: 50 hours but the round trip fare was $50.

With prices skyrocketing during the energy crisis of the 1970s, an all-star team of senators and economists decided that Washington should get out of the business of coddling the airlines.

Derek then quotes from Stephen Breyer, now a Supreme Court Justice, who helped get deregulation through Congress. He links to a good piece by Breyer on that battle. One of the heroes was Alfred Kahn, whom I commissioned to write the airline deregulation piece for the first edition of The Concise Encyclopedia of Economics (originally called The Fortune Encyclopedia of Economics.)

One of the untold stories here, by the way, is that I had a small role in this. When I was a summer intern at the Council of Economics Advisers in 1973, my boss, Bob Tollison, recommended that I fill in as an acting senior economist between the time he left in early July and the time his replacement showed up in early August. My big boss, Herb Stein, went for it. The airline deregulation movement was in its infancy and that was one of the issues I was covering. I represented the CEA at meetings with the Undersecretary of Transportation and pushed deregulation of airlines and trucking. One day, Herb asked me if we just shouldn't bother because we would never win. I said that the cost of my going to these meetings was not high and I thought we should do our part to keep the issue alive. Herb bought my argument.

When US Airways and American Airlines announced their mega-merger this year, it set off national hysterics, as flyers claimed the new behemoth would painfully raise prices. The reaction seemed unaware that consumers have enjoyed an amazing (and unsustainable) three decades in cheap flying while the price of fuel, which accounts for more than a third of airfare costs, has gone up 260 percent since the turn of the century.

Well put. When friends get upset about the coming air-fare increases, I like to remind them of what Bob Crandall, former CEO of American Airlines said: "I've never invested in any airline."
Why do we hate fees if they keep basic prices low? Because we're Americans, Heimlich said: "It's the American way to want a product approaching first-class for a price approaching zero."

In an earlier post, I quoted the words of wisdom from a flight attendant I talked to on a flight:
In every transaction with an airline there are two customers. The first is the one who buys the ticket. He wants the best deal and is willing to go to another web site to save ten bucks. The second is the customer who shows up and acts as if he bought first class.


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CATEGORIES: Regulation



COMMENTS (13 to date)
John Strong writes:

How many people remember the outcry from disgruntled supporters of the old system who complained loudly that lines in airports were now too long and we should heed the maxim: "if it ain't broke don't fix it"? How many people remember the bruising battles in Congress to pass both airline & trucking deregulation? It was no cakewalk, and if you study the strange chemistry of the coalition that pulled it off, it will depress you, because we have nothing like that in our current political landscape. For anyone interested in a stroll down memory lane, I recommend Braking the Special Interests, by Dorothy Robyn, where the impassioned resistance by truckers to reform is chronicled in lurid detail. Safety cassandras should be required to read this.

Mark writes:

First, I'm not certain that airlines were all that profitable before deregulation. They certainly were not in the same situation they're in now, but given that they could not compete on price, they competed on amenities, which drove the costs of operating upward. I love the story told by Breyer where the CAB had to define a sandwich since (I believe it was) American Airlines was serving a steak and two rolls and calling it a sandwich. (The CAB had regulated that airlines could only serve sandwiches on certain routes.)

Second, Southwest Air, which was not regulated since it operated only in the state of Texas, never dealt with the cost problems of the legacy carriers, which also explains their success post-deregulation and their expanding into intranational service.

Lastly, one other big change in airlines since deregulation is that in order to attract the predominantly male business passenger, airlines invariably employed only young and beautiful flight attendants. This changed after deregulation, much to the pleasure of many females, but probably to the displeasure of many males. Granted, a lot of this change can also be attributed to the fact that more females now fly, and more females are now business travelers. But the fact that airlines exclusively employed only the young and beautiful in order to attract the predominantly male passenger is another byproduct of regulating airlines.

David R. Henderson writes:

@Mark,
First, I'm not certain that airlines were all that profitable before deregulation. They certainly were not in the same situation they're in now, but given that they could not compete on price, they competed on amenities, which drove the costs of operating upward.
You're right. And you missed the biggest type of competition: frequency. Remember Delta's ads in the early 1970s: "Delta is ready when you are." Average load factor back then: about 55%. Average load factor now: above 80%.
Also, the unions were very good at getting the rents. So they're the ones who took the huge loss from deregulation. Flight attendant pay, in nominal dollars, has been close to flat for over 20 years, I believe.

David Boaz writes:

As a young (gulp) conservative activist, I participated in the airline deregulation battle. I remember lead organizer Jim Campbell telling me how his former boss and continuing ally Ted Kennedy had apparently gotten into the effort without realizing that the unions would be on the other side. But he stuck with it.

I testified before Congress around 1977 or 1978. And then I became a victim of airline deregulation. In those days Ozark Airlines (it was better than it sounds) wasn't allowed to fly direct from St. Louis to Nashville, so they had their 727s stop in Paducah, near where I grew up and my parents still lived. As soon as deregulation happened, people stopped flying 727s into Paducah, and I had to choose between prop planes and driving from Nashville. Isn't economic efficiency great? (Now, I think, they fly regional jets, but to very few destinations.)

Mark writes:

@David R. Henderson
Also, the unions were very good at getting the rents. So they're the ones who took the huge loss from deregulation. Flight attendant pay, in nominal dollars, has been close to flat for over 20 years, I believe.

My understanding is that the same is true of pilots. The only group that did not find themselves too adversely affected by deregulation is airplane mechanics, who have more alternatives for their skills than do pilots and flight attendants.

Tom E. Snyder writes:

The PBS video series "Commanding Heights" has a great segment on this. Scroll down to "Chapter 14: Deregulation Takes Off" for several video options.

MingoV writes:

One of the important factors in today's low airfares is the ease of finding discount tickets from online services. I've used three of these services, and ticket prices typically are one-half to one-third of airline list prices.

One thing that hasn't been fixed by deregulation is the absurdly high cost of one-way tickets. They usually are 80-120% of the cost of round-trip tickets. It's like a store selling two shirts for $50 and one shirt for $55. The logic of such pricing escapes me.

Pietro writes:

Where's Ryan Air?

ajb writes:

Anyone who thinks that the persistence of old, cranky, and mostly unhelpful flight attendants is primarily due to the shift in flyers away from businessmen has not traveled on international and especially Asian carriers. Their flight attendants are not simply young and attractive, they are genuinely more helpful, competent, and able to pass things like swim tests which are arguably more useful in terms of potential accident safety than most of the things that are done "just in case." Since the U.S. has closed skies and foreign airlines are not allowed to compete for domestic U.S. passengers, we will not get to see what would happen if international airlines not subject to union rules were allowed to fly here. Given that the big drivers of profits are still the business class passengers, I suspect that allowing JAL, KAL, and Singapore to fly here would have an impact on airline service. But unions would never permit this.

blsdaniel writes:

What I don't understand is why, if prices have fallen so much, the CPI for air travel has risen about 300% from 1983 (roughly the year where the index is set to 100) through now, while prices for all goods have risen only about 225% in the same period? Can anyone out there explain this?

ross writes:

airlines aren't exactly "degregulated" now. What routes they can fly are determined by the FAA.

David R. Henderson writes:

@ross,
airlines aren't exactly "degregulated" now. What routes they can fly are determined by the FAA.
I'm 95% sure you're wrong.

j.arimathea writes:

Air travel was once a luxury. So a half-century before so was train travel. Why otherwise such a song as
Chattanooga Choo Choo.

Travelling from NY to NC must have been quite an experience in that age.

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