40 YEARS OF AIRLINE

DEREGULATION:

SUCCESSES AND SURPRISES

Nancy L. Rose

MIT & NBER

Brookings Institution

Center on Regulation and Markets

October 30. 2018

REGULATION 1940-1978: THE GOOD

US air travel is safe, comfortable, and innovative

Large set of U.S. carriers

11 of 16 original “Trunk Airlines” (two International

‘Flag’ carriers) & 12 “Local Service”

Prices set by CAB, target 55% load factor, 12%

return

2

REGULATION: THE BAD & UGLY

Administrative route and network structure

No new airline entry, informal route moratorium post-1969

Most routes have only 1 or 2 airlines

High and rising prices with little/no discounting

Vs. comparable unregulated intrastate routes

Substantial nonprice competition, of unknown net social value

Flight frequency, new aircraft, uniforms, & piano bars

Airlines are still losing money…

Douglas & Miller P↑→frequency↑ →load factor ↓ “death spiral”

Regulatory evasion efforts (Freddy Laker)3

SUCCESSES

A demonstration project for deregulation

Trucking, Railroads, Natural gas, and more….

Markets replace administrative decision-making

Air travel access expands

Prices fall and productivity rises

*Air cargo deregulation should not be footnote!

4

AIR TRAVEL EXPANDS

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De

pa

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(000s)

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U.S. Domestic Airline Traffic 1937- 2017

Departures (000)

RPMs (000)

ASMs (000)

Enplanements

Source: Data from Severin Borenstein and Nancy L. Rose, “How Airline Markets Work,… or Do They? Regulatory Reform in the Airline Industry.” In N. L. Rose, ed., Economic

Regulation and Its Reform: What Have We Learned? National Bureau of Economic Research and University of Chicago Press. 2014. Updated with data from

www.airlines.org

5

REFLECTING GREATER ACCESS NOT ONLY MORE FLIGHTS/FLYER

Source: www. airlines.org

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PRODUCTIVITY HAS RISENLoad factors increase efficiency …though not passenger comfort

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Loa

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Domestic Load Factor 1937- 2017

Load

Factor

(percent)

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Source: See slide 5

REAL FARES HAVE DECLINEDEven relative to a regulated benchmark?

Source: See slide 5

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EXPANSION BY SOUTHWEST & OTHER LCCSCritical to competition over past 20 years

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Expansion of Low Cost Carriers, 1995-2017

Southwest All LCC Carriers

Source: Calculations from DB1B

9

SOME SURPRISES

Network evolution to hubs

The importance of domestic feed for international airlines (PanAm, TWA)

Congestion & delays: Whose fault?

Pricing strategies

Loyalty programs, price dispersion & ancillary fees

Entry, exits, and consolidations

Strategic leverage and bankruptcies?10

NETWORK EVOLUTION: HUB AND SPOKE

CONNECTS MANY O-D PAIRS

Delta 1974 System Map Delta 2015 System Map11

CONGESTION AND FLIGHT DELAYS

Data source: FAA Operational Network (OPSNET) (data through June ’17)Courtesy of J. Hansman, “Overview of Airline Industry Forces and Trends, Fall 2018,” MIT ICAT

12

NEW PRICING STRATEGIES EXPANDED PRICE

DISPERSION

13Source: See slide 5

FARES TELL ONLY PART OF THE STORYand this excludes seat assignment, food, other on board revenue

Courtesy of J. Hansman, “Overview of Airline Industry Forces and Trends, Fall 2018,” MIT ICAT

FEE AND ANCILLARY REVENUE GROWTH 2005-2018 (NOMINAL $)

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ONGOING CHALLENGES

Consolidation: Mergers & Alliances

What should be the standard?

International competition: alliances & antitrust immunity?

Conduct?

Pricing transparency

Infrastructure investments and access

15