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Airline Deregulation

Issue Analysis

Title

Airline Deregulation

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Even the partial freeing of the air travel sector has had overwhelmingly positive results. Air travel has dramatically increased and prices have fallen. After deregulation, airlines reconfigured their routes and equipment, making possible improvements in capacity utilization. These efficiency effects democratized air travel, making it more accessible to the general public.

Airfares, when adjusted for inflation, have fallen 25 percent since 1991, and, according to Clifford Winston and Steven Morrison of the Brookings Institution, are 22 percent lower than they would have been had regulation continued (Morrison and Winston 2000). Since passenger deregulation in 1978, airline prices have fallen 44.9 percent in real terms according to the Air Transport Association. Robert Crandall and Jerry Ellig (1997) estimated that when figures are adjusted for changes in quality and amenities, passengers save $19.4 billion dollars per year from airline deregulation. These savings have been passed on to 80 percent of passengers accounting for 85 percent of passenger miles. The real benefits of airline deregulation are being felt today as never before, with LCCs increasingly gaining market share.

The dollar savings are a direct result of allowing airlines the freedom to innovate in routes and pricing. After deregulation, the airlines quickly moved to a hub-and-spoke system, whereby an airline selected some airport (the hub) as the destination point for flights from a number of origination cities (the spokes). Because the size of the planes used varied according to the travel on that spoke, and since hubs allowed passenger travel to be consolidated in “transfer stations,” capacity utilization (“load factors”) increased, allowing fare reduction. The hub-and-spoke model survives among the legacy carriers, but the LCCs—now 30 percent of the market—typically fly point to point. The network hubs model offers consumers more convenience for routes, but point-to-point routes have proven less costly for airlines to implement. Over time, the legacy carriers and the LCCs will likely use some combination of point-to-point and network hubs to capture both economies of scope and pricing advantages.

The rigid fares of the regulatory era have given way to today’s competitive price market. After deregulation, the airlines created highly complex pricing models that include the service quality/price sensitivity of various air travelers and offer differential fare/service quality packages designed for each. The new LCCs, however, have far simpler price structures—the product of consumers’ (especially business travelers’) demand for low prices, increased price transparency from online Web sites, and decreased reliance on travel agencies.

As prices have decreased, air travel has exploded. The total number of passengers that fly annually has more than doubled since 1978. Travelers now have more convenient travel options with greater flight frequency and more nonstop flights. Fewer passengers must change airlines to make a connection, resulting in better travel coordination and higher customer satisfaction.

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