Ensuring Competitive Pricing of Commercial Aviation
Perhaps the most significant federal policy change regarding aviation occurred in 1975 when the Civil Aeronautics Board (CAB) began giving air carriers greater freedom in discounting prices and serving new markets.
1 These administrative actions were followed by the Airline Deregulation Act of 1978, which removed restrictions on market entry, pricing, and route service and began the phase-out of the CAB itself. Whereas this legislation did not affect federal safety regulations, it greatly reduced federal economic controls on air carriers. Deregulation resulted in a substantial upheaval among carriers and sharply increased competition. Passengers have generally benefited from the resulting reduced fares and increased air service throughout the country, with little or no indication of increased risk.
Deregulation was expected to lead to the emergence of new, service-oriented carriers that would compete with the existing heavily regulated, inefficient carriers. Although many new carriers have tried to enter aviation markets, few have survived. The TRB committee that reviewed developments in domestic air transport service following deregulation concluded that preexisting carriers were able to exploit inherited advantages such as the ability to exercise considerable control over the use of airports they served (Special Report 230: Winds of Change: Domestic Air Transport Since Deregulation; TRB 1991). This advantage became pronounced as carriers shifted from point-to-point to hub-and-spoke service, which has many operational advantages for both carriers and passengers. The ability to limit competition at major hub airports, however, greatly reduces opportunities for the entry of new carriers. Such inherited advantages were compounded by a period in which many mergers between old-line carriers, including several mergers between rivals, were permitted.
Yet even with barriers to entry and anticompetitive mergers, the airline industry is intensively competitive. Some carriers, such as Southwest and Jet Blue, have been able to grow and prosper with low-fare, point-to-point service between secondary airports. The committee concluded that although the first decade of deregulation had proved largely beneficial for consumers, the question remained whether the number of major carriers would continue to decline, resulting in too few competitors to discipline pricing.
During the mid-1990s, new-entrant carriers filed formal complaints with USDOT, contending that large established airlines were engaging in predatory pricing (pricing below cost). Such strategies were alleged to include matching low fares and providing far more service than a new entrant could but then raising fares and cutting service as soon as the new entrant failed or withdrew. USDOT contemplated writing regulations against such alleged practices, but the committee that studied entry and competition in the U.S. airline industry advised against doing so. Given the difficulties involved in defining fair and unfair competition, the proposed regulations could have proved as harmful as helpful (Special Report 255: Entry and Competition in the U.S. Airline Industry: Issues and Opportunities; TRB 1999). The committee noted that USDOT has other policy instruments that could be used to promote the entry of new carriers, such as supporting the development of additional gates and airports, eliminating service restrictions at some key airports, and ensuring that federal rules promote rather than hinder more open access to major airport facilities.
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Special Report 230
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Special Report 255
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1 The reports referred to in this section were written before the terrorist strikes of September 11, 2001. Federal policy toward enhanced aviation security, accompanied with a downturn in the economy, is having a profound effect on commercial aviation.