CONTENTS
Foreword
US Airline Deregulation: Implications for the Australian Debate
- Introduction and Overview
- Legacies of Economic Regulation
- Deregulation's Effects on Fares
- Deregulation's Effects on Service
- Industry Financial Performance
- Service to Small Communities
- Airline Safety
- Concluding Observations
Endnotes
- Introduction
- What is Wrong with the Two Airline Policy?
- Lessons from America
- Australia and America
- How Airlines Compete
- How Deregulation would work in Australia
- Other Options
- The Labour Market under Deregulation
- Other Issues
- Managing Change
- Conclusions
Endnotes
FOREWORD
Air transport is a significant part of the Australian cost structure. Because of the great distances between Australia's few cities, efficient transport is more important in Australia than in most places.
Since the end of the Second World War, domestic aviation has been a political plaything in most countries, conforming as much to the rules of politics as to those of economics. Australia has provided no exception. As always happens in such circumstances, the industry is dominated by those people best able to hold the attention of politicians. The interests of suppliers (the companies and unions) prevail over those of travellers.
In Australia, airline service on major domestic trunk routes has for many years been reserved for Ansett and Australian Airlines by the Two Airline Policy. With this impenetrable barrier to entry, the two airlines act in many ways as a single monopolist.
As would be expected in these circumstances, aircraft, aircrew and ground crew tend to be under-utilised by comparison with what is achieved in the competitive US market, and some staff and some suppliers are perhaps overpaid by comparison with the amounts actually needed to attract them into the industry. An example of under-utilisation of staff is the way in which new aircraft, flown by pilot and co-pilot in Europe and America, carry three aircrew in the fine weather and less-crowded skies of Australia.
The duopoly is preserved by Commonwealth legislation. Fares, capacity (number of seats times number of flights), and service are regulated in detail by the Department of Aviation and the Independent Air Fares Committee.
Public support for the Two Airline Policy has waned, and over the past eight years airline deregulation has been pushed high on the political agenda. The reasons for this are:
- Concerted publicity on behalf of consumers organised by companies wishing to enter domestic aviation, by the governments of the states most disadvantaged by the Two Airline Policy, and by Commonwealth politicians who favour free markets.
- Public realisation that deregulation in the United States has strongly favoured travellers. The principal consequence of deregulation there has been that more people can travel by air.
- The success of the virtual deregulation of intrastatc air travel in South Australia. Since 1979, new routes have been developed, old routes have seen increased frequencies, and passenger load factors arc up.
- Public realisation that high transport costs were hampering Australia's competitiveness both as a tourist destination and generally.
In response to this pressure, the Hawke government established the May Inquiry into domestic airline regulation, which reported late in 1986. The May Report presented the government with options ranging from maintaining the status quo to deregulation: "the virtual removal of industry-specific economic regulation".
It also published findings showing the unpopularity of the Two Airline Policy: a survey of the adult population of Australia showed that 50 per cent felt it to be to the consumer's disadvantage (including 32 per rent who felt it "very much to the consumer's disadvantage") while only 15 per cent felt it to the consumers' advantage. 35 per cent had no opinion. Thus 77 per cent of those with an opinion were opposed to the Two Airline Policy, most of them emphatically so. The report also commented that those with a higher level of knowledge about the Two Airline Policy were more critical of it, and almost 83 per cent of those with more clearly-held opinions felt that it had worked against consumers' interests. The May Inquiry stated further:
Approximately 50 per cent of the submissions received by the Review commented on the appropriateness of the present aviation policy. Of these, nearly 85 per cent were explicitly critical of the regulatory arrangements. It is noteworthy that supportive comment was largely limited to submissions received from Ansett Airlines, Australian Airlines, and unions representing employees of those airlines.
The government's prompt response to the report was to give the vested interests another go: it called for submissions on the report from interested parties. But a decision on Australian domestic airline regulation with important long-term implications will probably be made in 1987.
The Australian National Airlines Commission, which operates Australian Airlines, is wholly owned by the Commonwealth. It owns a fleet of modern aircraft and is profitable -- anything else would be surprising, given the protection provided by the Two Airline Policy.
Ironically, faced with severe budgetary difficulties, the Federal government is now considering the sale of Australian Airlines, an option which had been excluded from May's terms of reference.
This is an election year: the government and opposition are likely to be even more vote-conscious than usual. Neither will want to offend interests such as airline unions and media groups, and both will want to appeal to the travelling public. If that were the end of the tale, deregulation would founder, as it did in 1981: the concentrated interests would prevail over the dispersed interests. However, since the issue was last before Parliament the political debate has been changed. Now a political party must be seen to be, if not deregulatory, at least rational in its approach to economic questions. The advent of general interest lobbies have made it far more difficult for vested interests to "snow" the public with a barrage of purported fact.
The Labor Party has deep emotional ties to Australian Airlines. It created it (as TAA) and fought strong Liberal opposition to it. TAA is rooted deep in ALP folklore, and tangible evidence of the party's socialist credentials. Most of Australia's collectivist instrumentalities have their origins shrouded in antiquity or were, rhetoric notwithstanding, created by the Liberal and Country Parties. It is a measure of how far the debate has swung that a Labor cabinet could even contemplate selling Australian Airlines. It is also a measure of how desperately the money is needed in order to meet budget commitments and money-market imperatives. The bottom line for Caucus might well be pension cuts or sale of Australian Airlines.
The universal principle that sale of capital items should not be used to finance current expenditure should apply to governments as much as to the private sector. But as the government is borrowing to finance current expenditure, increasing the public debt with each (deficit) budget, sale of a capital item might be seen as reducing the rale at which public debt is increased. The "family silver", to use Lord Stockton's image, might be sold to spend on high living.
When it sell Australian Airlines, the government should resist any temptation to maximise the sale price, at the expense of the travelling public, by leaving the Two Airline Policy substantially intact.
Ansett and Australian Airlines are protected from repeal of the Two Airline legislation by guarantees of three years' notice of termination. Unless the Two Airline Policy is deemed unconstitutional by the High Court, or the parties to it can be induced to tear it up, Australians must live with it for at least three years more.
As Australian Airlines is wholly owned by the government, which can determine its attitude to the policy, Ansett is the only party which could prevent deregulation if the government wished it. Ansett is anxious to fly international routes but is prevented by the traditional Commonwealth policy that QANTAS should be the sole international carrier (although minor exceptions have been permitted in the recent past involving routes to New Zealand and Timor).
Ansett could be offered some attractive international routes in return for its consent to ending the Two Airline Agreement. If Ansett does not agree to an earlier termination and the agreement is not overturned in the courts the government should give the required three years' notice so that the Two Airline Policy will end in 1990.
It should be possible to alter the Independent Air Fares Committee's guidelines to give the airlines more opportunity to use differential pricing lo distinguish between peak and off-peak periods and to tailor service more closely to demand.
The tradition and structure of the Department of Aviation favour continuing regulation. It has a long record of obstructing deregulation. A deregulating government could however overcome its opposition by incorporating the Department of Aviation with the Department of Transport and appointing divisional heads who will pursue deregulatory policies with enthusiasm.
The Two Airline Policy has been a burden for Australia's air travellers. As is usually the case with tightly-regulated industries, a few people have benefited and the customers and consumers have suffered.
As Richard Wood says here, for a long time the Two Airline Policy seemed, despite many public complaints, to have become set in concrete, but it is possible that this concrete is beginning to crack: East-West Airlines have been trying to enter the market, the Hawke Government has raised the possibility of selling Australian Airlines, and we now have the example of US deregulation.
Mr Wood's paper on US deregulation shows that it has tended to lower the cost of services. It also indicates that Australia's aircraft capacity is being under-used. This is independent of the fact that Australia has a smaller population: Australia's biggest cities -- Melbourne and Sydney -- pick up and discharge numbers of passengers only comparable to that of smaller US cities like San Diego and Kansas City. Australia's high concentration of population round its six capitals should make for some advantages in efficiency.
Mr Wood's paper, as he says, does not focus on the arguments for and against deregulation. These have been largely settled in favour of deregulation. Rather, it examines the problems and opportunities of deregulation, how it might proceed, and the political realities of compensating those interests which would lose by it. He examines the ramifications of expanded short-haul and regional airline services, and the practical difficulties facing new entrants into the market. He concludes that either the Government must be prepared to override powerful groups or devise means for compensating them in ways that do not negate the benefits of deregulation.
Suggestions that deregulation would lower safety standards seem to have been answered by the fact that passenger fatalities have been decreased since US airlines were deregulated. Mr Wood examines this point in some detail.
John Hyde
1. INTRODUCTION AND OVERVIEW
Regulation of passenger airline service began in the United States with the Civil Aeronautics Act of 1938 which created the Civil Aeronautics Authority which was in turn reorganised into the Civil Aeronautics Board (CAB) in 1940. (1) The CAB exercised complete control over entry, exit, routes, fares, and mergers from its inception until 1976, when the move toward less regulation began. On 24 October 1978 the Airline Deregulation Act of 1978 was signed into law, freeing the domestic passenger airline industry from virtually all economic regulation. Thus the United States provides the most extensive empirical evidence of the impact of lessening economic regulation of the airlines.
While there are important differences between Australia and the United States and, in particular, between the environments in which the airline industries operate in the two countries, the US deregulation experience has been a topic of discussion in the debate on government policy toward the Australian airline industry. Michael Kirby, for example, offered a concise summary of the US experience as part of a conference on Issues in Domestic Aviation Policy. (2) Similarly, the Treasury provided an assessment of the principal results of the US experience as part of its submission to the Independent Review of Economic Regulation of Domestic Aviation. (3)
Although both these summaries were fair and objective and reflected the consensus of opinion of US analysts at the time, both are based on analyses of the very early years of the US experience. In particular, the results of the analyses reported in these papers were strongly influenced by ihe US airlines' attempts to cope with severe recessions from 1980 through 1982. More recent analyses, reported later in this paper, reflect both this recessionary period and the performance of the airlines during the subsequent economic recovery beginning in 1983. An accurate assessment of the US experience for an industry as sensitive to economic conditions as the airlines can only be made by considering the effects during all phases of the economic cycle.
While the papers by Michael Kirby and Treasury reflect a good understanding of the US experience as it was prior to economic recovery, other assessments presented as part of the Australian debate reflect an incomplete understanding and, as a result, are potentially misleading. For example, the submission by Anselt Transport Industries Ltd to the Independent Review of Economic Regulation of Domestic Aviation contains several statements that indicate at best only limited information and a partial understanding of the US experience. (4)
The Ansett submission states that "Services to small communities have been reduced and placed at risk". In fact, as demonstrated later in this paper, services to all size categories of US cities including the smallest (designated non-hubs) were higher in 1984 than they had been in 1978. Similarly, Ansett's submission claims that the aftermath of deregulation "brought disastrous profit results for airlines". Again as pointed out later in this paper, two separate analyses using different methods both concluded that deregulation helped rather than hurt airline profits and that the losses in the US airline industry were due to recession and dramatic fuel price increases.
These and other inaccuracies in the Ansett submission reflect a major pitfall in assessing the US experience. The US airline system is large and has undergone substantial change during the transition from regulation to more open competition. As a result, anecdotal evidence can be found that appears to support almost any contention about deregulation's effects. The purpose of this paper is to present some of the major results of several broadly based analyses of the US experience with airline deregulation. (5) The deregulation experience is best assessed by examining system-wide changes that have occurred in the context of both changing economic and regulatory environments. The general conclusion from a system-wide analysis is that the experience with deregulation has been largely favourable with most outcomes as predicted by deregulation's proponents. Overall, airline fares are lower; service to most communities is better; and most of the industry seems positioned for better financial health than had the previous pattern of CAB regulation continued. Furthermore, few, if any, of the disasters predicted by deregulation's opponents have occurred.
The issue remains, however, as to what lessons the US experience ma have for Australia. Supporters of Australia's Two Airline Policy are quick to point out that even though Australia is about the same size as the 48-state region of the US, it has only about a fifteenth the total population. The inference is that with its smaller population, Australia cannot support the degree of competition found in the US.
Such a conclusion is far too simplistic. Australia is a highly urbanised country with over 90 per cent of its population residing in its five largest cities. Thus, Australia has a substantial number of airline markets that are comparable with some of the most heavily travelled US markets. Table 1 compares Australian cities with US cities having approximately the same number of uplifts and discharges. (6) As can be seen in the table, US cities with about the same amount of originating and terminating traffic support competition in domestic markets from a far larger number of jet airlines than their Australian counterparts.
Table 1: Comparison of Australian and US Cities
| Australian City | Uplifts and Discharges | US City | Uplifts and Discharges | Domestic Jet Carriers |
| Sydney | 6,307,168 | San Diego | 6,277,512 | 16 |
| Melbourne | 5,123,561 | Kansas City Memphis Baltimore Portland | 4,807,402 4,718,884 4,563,016 4,142,438 | 18 9 11 14 |
| Brisbane | 2,805,011 | Columbus Indianapolis Austin | 2,842,870 2,595,268 2,497,518 | 9 11 11 |
| Adelaide | 1,824,260 | Omaha Rochester Louisville | 1,854,984 1,722,638 1,711,940 | 11 8 8 |
| Perth | 1,152,879 | Fort Myers | 1,164,028 | 8 |
| Canberra | 979,264 | Grand Rapids Albany Richmond | 985,640 953,872 952,274 | 6 5 5 |
| Coolangatta | 726,427 | Fresno | 706,408 | 5 |
| Hobart | 507,793 | Billings Madison Baton Rouge Colorado Springs Huntsville | 665,016 597,502 583,656 492,878 462,350 | 4 5 4 5 4 |
When comparing Australian and US cities, it is also interesting to note that the US cities generally have much smaller populations than Australian cities with similar numbers of passenger boardings. For example, referring to Table 1, San Diego, Kansas City, Memphis, Baltimore, and Portland have an average metropolitan area population that is only 34 per cent of the average population of Sydney and Melbourne. Similarly, Columbus, Indianapolis, and Austin have an average population only 67 per cent as large as Brisbane.
No doubt there are several reasons for these differences, but they suggest there may be an untapped potential for substantially increased airline travel in Australia. (7) As discussed in more detail later in this paper, deregulation tapped a similar potential in the US by stimulating improved service and lower fares, particularly for vacation travellers, with a resulting increase in airline travel. Thus, while there are important differences between Australia and the US, there would appear to be enough similarities in the airline markets of the two countries to warrant a careful examination of the US experience as part of a consideration of Australian airline policy.
The remainder of this paper is organised into six major parts. In Chapter 2, the characteristics of the industry on the eve of deregulation are discussed with a focus on how the legacies of regulation conditioned the early response of the industry to deregulation's freedoms. Chapter 2 also describes the major events unrelated to deregulation -- recession, dramatic fuel price increases, and the air traffic control reductions -- that influenced the industry's initial adaptations to a competitive environment. Chapter 3 summarises the principal impacts on airline fares, with a focus on the differential impacts on business and leisure travellers. Chapter 4 examines the service changes following deregulation, and Chapter 5 addresses deregulation's impacts on the airline industry's financial health and productivity. Chapter 6 focuses on one of the most hotly debated issues surrounding deregulation: the impact on service to small communities. Chapter 7 addresses the issue of airline safety with a particular emphasis on the safety of commuter airlines operating small propeller-driven aircraft. Finally, Chapter 8 summarises the US experience.
2. LEGACIES OF ECONOMIC REGULATION
For roughly four decades beginning in 1938 the Civil Aeronautics Board exercised tight control over the basic features of airline service: who could provide the service, where the service could be provided, and what price could be charged. Airline managements had discretion only over the time of day and frequency of flights, the type of aircraft, and amenities such as movies, food and beverage service, and airport lounges.
Throughout this period, the CAB's basic guiding principles seemed to be equalising the size of airline companies and avoiding bankruptcies so as to maintain stability in the industry. The CAB used its authority over entry, exit, route awards, and fares to attempt to maintain the financial viability of even the weakest carriers. Thus, the CAB allowed no new entry into national or trunk segments of the industry despite many applications over the years. Only under considerable pressure from Congress did the CAB allow a few new entrants into other parts of the airline industry, including the so-called local service carriers originally formed to provide regional feeder service from small communities to the trunk airlines at major airports and the supplemental carriers which were permitted to offer only nonscheduled charter flights to groups of travellers. Similarly, new route awards rarely went to the largest trunk lines even when they were best suited to provide the service. As a last resort to avoid an imminent bankruptcy, the CAB would also force mergers, with the financially strong carrier encouraged to take on the problems of the failing carrier in order to get access to its routes.
In 1976 the CAB undertook significant departures from its previous restrictive policies by allowing discount fares and advocating less airline regulation. (8) By 1977, the CAB had accelerated the move toward deregulation by giving airlines even wider latitude to experiment with discount fares and stressing fare reductions as an important factor in the selection of applicants for new routes. This administrative deregulation was a major step toward complete deregulation in many respects except that entry was still restricted; participation in the industry was limited to the same companies that had populated the industry for decades and even those companies had very limited ability to enter new routes or withdraw from those they no longer wished to serve.
On 24 October 1978, the Airline Deregulation Act removed all remaining obstacles to route entry by established carriers, opened up entry into the industry to entirely new carriers, and scheduled the eventual elimination of all fare regulation. The Act also scheduled the disbanding of the CAB thereby removing lingering doubts about the permanence of the reforms. Indeed, an important difference between administrative deregulation of 1976 to 1978, or even previous cycles of "enlightened" regulation, and formal deregulation was precisely this apparent permanence. For airline managements, incentives to introduce substantial long-lived adjustments took on added importance.
This 40-year legacy of CAB regulation left the airline industry with five important characteristics that shaped much of the industry's initial adaptations to deregulation. The first was a tradition of management unaccustomed to the rigours of a competitive marketplace. Airline managers were brought up to expect that fundamental business decisions -- what markets to enter and what price to charge for their product -- would not be wholly theirs. If an airline encountered difficulty, the CAB typically came to its aid with favourable treatment in awarding routes or with outright subsidies, even if mistakes by management had contributed to the difficulty. In cases of extreme financial distress, the CAB arranged for the failing carrier to merge with a financially stronger one. CAB actions thus helped insulate managers from the consequences of their decisions. Moreover, the regulated environment fostered managers with legal and political skills rather than the cost control and marketing skills so essential in an openly competitive environment.
The second legacy was a pattern of labour contracts featuring both high wage-rates and restrictive work-rules. Under CAB regulation, airline managements had less incentive to bargain aggressively with labour than would have been the case in a deregulated market. Although lower wages and less restrictive work-rules would have meant greater profits even under regulation, a tough bargaining stance by management would bring an airline little competitive advantage over other carriers since lower costs could not be converted into lower prices. Cost increases from labour contracts or other sources were typically passed on to travellers by the CAB in the form of higher fares. But, as some of the new post-deregulation carriers have demonstrated, in a competitive environment lower costs can contribute to lower fares and a gain in market share.
The third legacy was the patchwork route networks for most carriers, resulting from the CAB's eclectic means of awarding routes. Rather than award a new route to the carrier best positioned to serve it, for example, the CAB would sometimes award monopoly routes to financially ailing carriers in an attempt to maintain industry stability. Similarly, long routes (which were believed to be more lucrative) were often awarded to short-haul carriers to compensate for losses on short routes. The coming of deregulation saw almost all US airlines serving some routes for which their equipment was poorly suited and lacking authority to service other routes that would have fitted well into their existing networks.
The fourth legacy of CAB regulation was a fare structure only partially related to the cost of providing service. Fares were designed to be higher relative to costs for long-haul flights as compensation for low fares (relative to costs) for short-haul flights. With fares based only on distance, such factors as the number of passengers travelling the route were not permitted to influence fares. Two markets of the same distance, however, may not be equally profitable if equal fares are charged, even if the same type of aircraft is used. The Boston to Chicago market, for example, involves many more passengers than the Buffalo to Kansas City route of the same distance. While in the former market an aircraft may be fully utilised throughout the day flying back and forth, in the latter there may be only sufficient demand for a single flight in the morning and another at night, leaving the aircraft unutilised during the rest of the day. If the aeroplane cannot be used productively during "off-peak" hours, then the cost per flight will be higher in that market.
Many factors besides market density influence costs, and achieving high aircraft utilisation is far more complex than this example suggests, but the point remains: the cost of air service depends on more than distance and type of plane.
The fifth legacy was an oversupply of wide-body aircraft (B-747s, DC-10s, L-1011s, and A-300s). At the beginning of deregulation, the airlines had either in service or on order more such specialised aircraft than necessary in a competitive environment. Even as late as 1982, the five largest carriers (American, Delta, Eastern, TWA, and United) had about 30 per cent of their aircraft capacity in the form of wide-body aircraft. CAB regulation contributed to this "excess capacity" problem: first, by setting fares to make long-haul, high-density routes potentially the most profitable; second, by allowing airlines to compete only on the basis of service. Airlines bought wide-body aircraft because they were well suited to the most profitable routes and seemed indispensable in attracting travellers on long-haul routes. In a deregulated environment with fare freedom and unencumbered entry and exit, however, there is no reason for one type of route to be more profitable than any other, and so many carriers have found themselves with more wide-body capacity than they can profitably use. Indeed, the search for wide-body markets contributed significantly to the trans-continental and northeast-to-Florida fare wars.
These legacies have hampered and thus slowed the airlines' adjustment (o deregulation, and it is important to keep their lingering effects in mind when assessing deregulation's impacts. It is equally important to keep in mind the rapidly changing environment in which the airlines were operating following deregulation. Formal deregulation in October 1978 was followed by a great deal of economic turbulence. The fall of the Shah of Iran and the attendant rise in energy prices significantly increased airline operating costs and resulted in unexpectedly early obsolescence of fuel-inefficient aircraft.
Back-to-back US recessions in 1980 and then again in 1982 stultified growth in air traffic, just as previous recessions had done. Also, the shift in US monetary policy that induced historical highs in interest rates in the early 1980s occurred at a time when many airline companies wanted to purchase new fuel-efficient aircraft. Finally, the strike of the Professional Air Traffic Controllers Organisation (PATCO) in August 1981 resulted in capacity limitations at some major airports. As a consequence of these various developments during the first years of deregulation, a great deal of care must be taken in sorting out deregulation's effects from those attributable to other developments.
3. DEREGULATION'S EFFECTS ON FARES
Average airline fares paid by consumers have declined since deregulation, both compared with consumer prices in general and, more importantly, compared with the fares that would have been likely to prevail had regulation continued. The rapid increase in fuel prices and the resulting effect on airline fares may have obscured deregulation's effects to many casual observers. For example, between 1978 and 1982 average airline fares increased 46.4 per cent (in nominal terms), but at the same time the Consumer Price Index, a measure of general inflation throughout the economy, rose 59.2 per cent and the CAB index of airline costs rose 87.4 per cent. (9) From 1982 through 1985, average airline fares actually declined one per cent while the Consumer Price Index rose 11 per cent. (10) Similarly, the average fare paid by airline passengers increased much more slowly than the "standard" economy (coach) fare, as measured by the Standard Industry Fare Level (SIFL) formula used by the CAB to determine the majority of coach fares.
To be sure, airline fares did not decline in every market and a few markets experienced fare increases even after inflation. (11) But average fares have declined, even in markets with relatively little competition. Moreover, while the increased use of discount fares has contributed the most to the post-deregulation decline in average fares, even consumers unable to meet stringent discount fare restrictions have typically experienced lower fares. (12)
Figure 1 shows changes in average fares (adjusted for inflation) for two types of travellers in three types of markets. (13) Non-discretionary consumers are defined as those unable to use discount fares with either minimum stay requirements or requiring advance purchase of seven days or more. As can be seen from the top three lines of the figure, average fares for such consumers have declined since deregulation in monopoly, duopoly, and oligopoly markets with greater declines in markets characterised by more competition. Similarly, highly discretionary consumers, those defined as being able to meet the minimum stay, advance purchase, find other requirements of the lowest discount fares, have also seen fares decline since deregulation. Here again, fare declines were greatest in the most competitive markets although by 1984 the monopoly and duopoly markets had, on average, virtually identical fares.
Figure 1: Fare Changes 1979-1984
By Type of Market and Type of Consumer
Changes in first class, coach, and discount fares were analysed in detail using data from the Official Airline Guide for 1976, 1981, and 1984. (14) To control for seasonal influences, fares in effect on May 1 of each year were studied. (15) The 1976 fares were chosen to reflect pricing practices under regulation, since some 1977 and 1978 fares were influenced by the "administrative deregulation" undertaken by the CAB prior to passage of the Airline Deregulation Act. The 1981 fares illustrate fare policy in the early stages of deregulation, when fares were also strongly influenced by the sharp 1979-1980 rise in fuel prices and the 1980 recession. (16) By contrast, the 1984 fares reflect a sustained period of falling fuel prices, low inflation, and economic recovery.
FIRST CLASS
Since 1976, first class passengers have faced higher fares in the overwhelming majority of markets. However, rapid inflation and energy price increases make comparison of 1976 and 1984 fares difficult. One common approach to attempting to eliminate such influences is to adjust 1976 fares using the Consumer Price Index. Such a comparison, however, almost certainly mis-states deregulation's impact, because of the energy consumed in airline operations. Fuel accounts for roughly a third of airline costs compared with only 10 per cent for the economy as a whole. An alternative, and seemingly better, way to restate 1976 fares in 1984 terms would be to inflate the 1976 fares by the change in airline input costs, as represented by changes in the CAB's Standard Industry Fare Level (SIFL) over the period. The SIFL index almost fully incorporates the impact of the extraordinary fuel price increase of 1979-1980 and was also the CAB's basis for determining fare increases under regulation. Adjusting 1976 fares by the SIFL index thus provides a belter measure of what fares are likely to have been under continued regulation. (17)
While 1984 fares were higher in most markets, as can be seen in Table 2, the average increases were relatively small. In the top 50 markets, the mean increase was 2 per cent, while medium and small markets experienced increases of 1 per cent and 7 per cent respectively. Overall, it appears that first class fares may have increased slightly compared with Ihe fares that might have prevailed under continued regulation.
Table 2: Changes in First Class Fares
1976-1984 (adjusted by SIFL index)
| Number of Markets | ||
| 1984 Fare Less than 1976 Fare | 1984 Fare Greater than 1976 Fare | |
| Top 50 Markets | 8 (19%) | 35 (81%) |
| Markets 51-200 | 57 (41%) | 82 (59%) |
| Markets 201-500 | 51 (34%) | 99 (66%) |
Note: Due to unavailable or inconsistent data, the sample covers only 43 of the top 50 markets, and 139 of the markets ranked 51-200. Markets are ranked by volume in 4th quarter 1981.
ECONOMY CLASS
For years, economy (coach) fares were the standard price of air travel for most passengers. With the advent of deregulation, though, consumers have faced a variety of "coach" fares, often varying with time of day or day of the week, but still without restrictions concerning advance purchase, minimum stay provisions, and the like. To represent this range, the lowest unrestricted "Y" (18) coach fares available on at least half the flights for a particular city-pair in May 1984 were compared with the "Y" coach fare in effect in May 1976.
A comparison of these 1976 and 1984 coach fares is shown in Table 3. As in Table 2, fares have been adjusted using the SIFL cost index. In contrast to first class fares, coach fares were lower in 70 per cent of the largest 50 markets, with an average fare decrease of 9 per cent. However, in medium-density markets, 59 per cent of the markets faced higher fares in 1984, with an average fare increase of 3 per cent. Coach fares were most affected in smaller markets where fares rose in 70 per cent of the markets with an average increase of 6 per cent in the price of a ticket. (19) In short, those travelling on unrestricted coach class fares in large markets have apparently seen reductions while those in medium and small markets have experienced increases.
Table 3: Changes in Coach Fares
1976-1984 (adjusted by SIFL index)
| Number of Markets | ||
| 1984 Fare Less than 1976 Fare | 1984 Fare Greater than 1976 Fare | |
| Top 50 Markets | 30 (70%) | 13 (30%) |
| Markets 51-200 | 57 (41%) | 82 (59%) |
| Mukels 201-500 | 45 (30%) | 105 (70%) |
Note: Due to unavailable or inconsistent data, the sample covers only 43 of the top 50 markets, and 139 of the markets ranked 51-200. Markets are ranked by volume in 4th quarter 1981.
DISCOUNT FARES
Perhaps the most striking change since deregulation has been the proliferation of discount fares. These fares have substantially reduced the importance of standard coach fares in many markets. Table 4 shows the percentage of markets within each group in which some type of discount fare was available in 1976, 1981, and 1984. Discount fares were seldom found outside the top 100 markets in 1976, but by 1981 they were offered in well over 80 per cent of all markets served by certificated carriers.
Table 4: Growth of Discount Fares
1976-1984
| Market Rank | Percent of Markets with Discount Fares | ||
| 1976 | 1981 | 1984 | |
| Top 50 | 69% | 95% | 96% |
| 51-100 | 60% | 92% | 90% |
| 101-150 | 36% | 82% | 84% |
| 151-200 | 39% | 86% | 80% |
| Smaller Markets | 30% | 81% | 72% |
Note: Due to unavailable or inconsistent data, the sample covers only 43 of the top 50 markets, and 139 of the markets ranked 51-200. Markets are ranked by volume in 4th quarter 1981.
Along with this growth in the availability of discounts has come a sizeable increase in the depth of discounting in all markets, particularly between 1976 and 1981, as shown in Table 5. The table also shows that travellers in the top 100 markets were offered significantly deeper discounts (in addition to greater availability) than travellers in medium and smaller markets.
Table 5: Depth of Discount Fares for US Airlines
1976-1984
| Market Rank | Average Discount Fare as Percentage of Coach Fare | ||
| 1976 | 1981 | 1984 | |
| Top 50 | 78% | 63% | 61% |
| 51-100 | 80% | 67% | 63% |
| 101-150 | 80% | 70% | 72% |
| 151-200 | 80% | 72% | 77% |
| Smaller Markets | 80% | 74% | 76% |
Note: Due to unavailable or inconsistent data, the sample covers only 43 of the top 50 markets, and 139 of the markets ranked 51-200. Markets are ranked by volume in 4th quarter 1981.
The wider availability of and increasingly large savings due to discount fares have resulted in discount-fare tickets becoming the dominant form of travel in many markets. The extent of discount fare travel can be analysed using the CAB's Origin and Destination Survey, which provides data on passenger volume by carrier and fare class for most major airline markets in the United States. (20) The results are shown in Figure 2. For airline markets as a group, the use of discount fares has jumped from 15 per cent m 1976 to 55 per cent in 1981 and over 65 per cent in 1983. In the top 50 markets, fewer than 20 per cent of travellers used discount fares in 1976; by 1981, three quarters of them were flying on discount. Discount fares have been particularly important for the large established carriers. By 1985, 85 per cent of domestic revenue passenger miles by the largest 12 carriers represented discount fares, with the average discount fare only 56 per cent of the standard coach fare. (21)
Figure 2: Use of Discount Fares, 1976-1983
Percentage of Travellers using Discount fares by Market Type
The nature and use of discount fares by airlines have changed since 1978. In the early stages of deregulation, airlines instituted a variety of capacity-controlled, market-segmenting discounts aimed at inducing the discretionary traveller to fly in a seat that would have otherwise flown empty. (22) Such fares involved restrictions designed to prevent their use by business travellers, such as advance purchase and minimum stay requirements and limiting discount travel to off-peak periods. These fares typically applied to only some of the seats on any given flight. Typically, more seats were available for discount fares on off-peak flights than on flights during the most popular travel hours, so that these discounts had the effect of offering lower average fares during off-peak hours. These discount fares contributed to the record profit levels in 1978 and 1979.
After 1980, however, careful targeting of discount fares began to break down in response to deteriorating economic conditions, excess capacity of wide-body aircraft, and increasing competitive pressures. (23) Airlines eased discount fare restrictions in the face of the persistent economic recession in 1981 and 1982 in an attempt to sustain passenger volumes with the result that more business travellers were able to use discount fares. With the onset of economic recovery in 1983, though, the airlines attempted to reinstitute more effective restrictions on the use of discount fares. Even so, a great many business travellers are still able to meet the conditions needed to fly on discount fares.
The extent to which these market-segmenting discount fares will persist over time remains an unresolved issue. (24) Large fare discrepancies between ticket classes may serve to increase the sensitivity of business travel to price differentials, thereby creating ongoing pressures to bring fares in line with the cost of service. Large fare differences also increase the potential for travel agents, corporate travel departments, or other brokers to buy discount tickets in advance and then resell them to business travellers. The airlines may be able to contain this practice by enforcing mon-transferability clauses or providing other inducements against ticket transfer. (25) Bulk purchase or contract travel arrangements between airlines and large corporations could apply further pressure to keep the cost of business travel down.
The erosion of the market-segmenting discount fare structure may also continue as a result of ongoing capacity adjustments by the airlines themselves. Between 1977 and 1979, promotional discounts were very profitable not only because of effective restrictions on use by business travellers, but also because of the excess capacity that existed on many routes. Since then, airlines have made considerable progress in adjusting capacity levels to their needs. Over time, as capacity becomes better tailored to each market, the airlines may find highly differentiated pricing strategies less attractive.
The airline industry's sensitivity to national economic conditions suggests, though, that discount fares are likely to reappear or expand whenever excess capacity emerges from declines in traffic volume. Recurrent cycles in the use of discount fares may also result from long lead times on aircraft orders, as equipment and capacity adjustments in particular markets may lag behind changes in market conditions. Discounting, then, will probably remain a key feature of airline pricing, although its extent and duration in individual markets may vary with economic conditions.
DIFFERENTIAL IMPACTS ON BUSINESS AND LEISURE TRAVELLERS
The business traveller's high value of time and limited schedule flexibility place a premium on early morning and late afternoon flights, and the availability of last-minute reservations. In addition, the US tax treatment of business travel expenses can lower the effective fare by the corporate tax rate. The result is that business travellers are generally deemed to place an emphasis on flight frequency and timing, with price, although not unimportant, playing a decidedly secondary role in their choice of flight. On the other hand, leisure travellers are thought to have more flexibility in their schedules and therefore to be better able to take advantage of low fares. Air fares are not only often a large part of vacation expense but are also usually not tax deductible; leisure travellers thus seem more willing to fly in off-peak periods and to accept lower levels of service in exchange for lower fares.
These differences can result in higher costs of providing service to the business traveller. Cost differences may arise, for example, because business travellers need to make reservations on short notice and are permitted to cancel such reservations without penally. The need for flexibility in reservations requires airlines to provide greater capacity (more seats). The business traveller also places great emphasis on peak-hour departure times for business trips. These scheduling needs may limit an airline's ability to utilise its fleet intensively, again implying a greater capacity requirement and higher costs.
The combination of lower price sensitivity and the higher costs of meeting business travel requirements suggests that costs (and thus fares) should be higher in markets dominated by business travel. However, prior to deregulation the regulated pricing scheme resulted, in business and most leisure passengers (travelling in the same class of service) paying the same fare regardless of differences in the underlying cost of service.
It is hardly surprising, therefore, that some carriers apparently used their fare freedom under deregulation to raise fares in business markets. A sample of fares in 50 business and 25 leisure markets was selected and analysed for May, 1980 and May, 1984. (26) The average fare paid in each market was compared with the estimated fare under regulation as calculated from the SIFL formula. In the business markets, the 1980 average fare was 28 per cent higher than the SIFL formula; the sample of leisure markets showed only a 1 per cent markup over the SIFL. By 1984, the average fare paid in both leisure and business markets had fallen considerably, although fares in business markets remained higher. In the business markets, 1984 average fares were 12 per cent above SIFL while fares in leisure markets were roughly 7 per cent below SIFL. While part of this difference is due to the higher proportion of discount passengers in leisure markets, the unrestricted fares in business markets were approximately 11 per cent higher than unrestricted fares in leisure markets. (27)
In sum, most air travellers appear to have benefited from deregulation. Deregulation's effect on fares has varied with the type of ticket and the size of the market. First class fares are relatively higher in most markets, although increases generally have been small (of the order of 2 per cent). Average unrestricted coach fares have decreased slightly in the largest and most dense markets, while increasing slightly in medium and small markets. More importantly, since deregulation, fewer and fewer passengers fly at these "list" first class and coach prices. The extension of discount fares to over eighty per cent of all markets has been readily receivcd by travellers, so that over sixty per cent of all passengers were flying on a discount fare by 1984.
Indeed, the major effect of deregulation on fares has been the spread of discount fares. Prior to 1976, discount fares were rarely available outside the largest markets and were seldom deeper than a 20 per cent reduction. With deregulation's fare freedoms, discounts have spread to virtually all markets and the average depth of discount has increased markedly as well.
4. DEREGULATION'S EFFECTS ON SERVICE
Service patterns in the wake of deregulation have been strongly influenced by the various route strategies adopted by the airlines. After a variety of management approaches to route structure development in the first three years of deregulation, most airlines have apparently adopted hub-and-spoke network strategies. (28) This approach has led to the expansion of previous hubs as well as development of new ones.
The basic notion of a hub-and-spoke system is that flights from several different cities converge on a single airport -- the hub -- at approximately the same time and, after giving passengers sufficient time to make connections, all then leave the hub airport bound for different connecting opportunities to any of the cities -- the spokes -- served on the outgoing flights. The main advantage of such systems is that by collecting passengers bound for all the spoke cities, less dense markets can be served more frequently, and usually more cheaply, than if all city-pair markets were served only by direct flights. A disadvantage is that hub-and-spoke service is usually connecting or in a few cases one-stop service instead of the non-stop service passengers prefer.
For travellers living near these new or expanded hubs, the available service options have grown rapidly. In addition, cities linked to these hubs generally have seen increased frequencies to the hub, often with faster connecting times and a wider choice of final destinations. However, some airlines have recently scaled back the volume of hub service at several major airports due to increased passenger delays. (29) These delays stem in part from carriers building their hubs beyond peak airport capacity.
Not all cities can be hubs, and critics of deregulation have charged that service frequency and quality to medium and small cities have deteriorated since 1978. Such arguments are frequently accompanied by stories of individual cities where a major carrier has terminated operations. While such anecdotal evidence can be found, a more useful perspective can be gained by analysing trends in service patterns for a larger sample including a variety of markets. (30)
Changes in flight frequencies between 1976 and 1984 can be studied using the same sample as for fares. The results are shown in Table 6. Air service was found to have improved across all market groups, with less than half of the markets receiving less service. In markets where frequencies increased, the average increase was eight flights per day, while in those markets where frequencies fell the average number of flights was reduced by five. Moreover, the table strongly suggests that smaller markets have seen the largest increases in service of all three market groups. This finding is explained by the rapid expansion of commuter airlines and increased development of hub networks by medium-sized jet carriers such as Piedmont and Ozark that have always had a large proportion of smaller towns and cities on their networks.
Table 6 records service patterns at two particular points in time, 1976 and 1984, both of which were during periods of economic expansion. A broader picture of service trends requires an examination of service changes throughout the business cycle. This perspective is particularly important because some service reductions may have resulted from the difficult economic environment of the early 1980s.
Table 6: Service Changes in Selected Markets
1976-1984 (stratified random sample, 332 out of 500 markets)
| More Flights | Same Number of Flights | Fewer Flights | |
| Top 50 Markets | 23 (53%) | 2 (5%) | 18 (42%) |
| Markets 51-200 | 58 (42%) | 26 (19%) | 55 (39%) |
| Markets 201-500 | 115 (77%) | 9 (6%) | 26 (17%) |
Notes: Markets ranked by passenger volume, 4th quarter 1980.
Table 7 represents service changes in selected markets for the initial period of deregulation (to 1981), and for the 1981-1984 period. The 1976-1981 data reflect the effects of economic recession and the 1979 fuel price increase. On the other hand, the 1981-1984 changes occurred during a strong economic expansion, although somewhat dampened by restrictions imposed in the wake of the air traffic controllers' strike of 1981.
Table 7: Service Changes in Selected Markets
1976-1981
| More Flights | Same Number of Flights | Fewer Flights | |
| Top 50 Markets | 12 (28%) | 7 (16%) | 24 (56%) |
| Markets 51-200 | 85 (61%) | 10 (7%) | 44 (32%) |
| Markets 201-500 | 66 (44%) | 10 (7%) | 74 (49%) |
1981-1984
| More Flights | Same Number of Flights | Fewer Flights | |
| Top 50 Markets | 26 (60%) | 3 (7%) | 14 (33%) |
| Markets 51-200 | 43 (31%) | 14 (10%) | 82 (59%) |
| Markets 201-500 | 108 (72%) | 12 (8%) | 30 (20%) |
In the early years of deregulation, from June 1976 to June 1981 (prior to the August PATCO strike), about half the markets experienced reductions in frequencies. The only markets to gain substantially were medium-sized, as the airlines expanded rapidly in 1979 and 1980. Overall, though, the number of flights fell in only 142 of 332 markets, with the average decrease of 5 flights being just above the average increase of 4 in those markets where service increased.
Between June 1981 and June 1984, these initial trends were reversed, with significant expansion in large and small markets and accompanying reductions in medium-sized markets. This result can be attributed to increased volumes of vacation and business travel in the densest markets, the extensive development of hub feeder systems, and new entry in the cities. In medium markets, the reductions in flights from 1981 to 1984 may indicate a pull-back from the initial expansion in such markets, as well as the effect of financial problems of several carriers with large numbers of such routes.
Overall, service patterns appear to have improved since deregulation. Although cyclical and seasonal variations remain pronounced, the number of flights has increased or remained the same in roughly two thirds of all markets, with no market group showing overall decreases in frequencies.
The service offered air travellers has changed in two other important ways as well. First, as indicated in Table 8, the average number of carriers serving each airport has increased with increases found not only at large hubs and medium hubs, as might have been expected, but at small hubs and non-hubs as well. More carriers serving each airport means a greater variety of service offerings for travellers and more competitive checks on the actions of each carrier. There was even a modest increase among non-hubs, indicating that fewer small communities are the "captive" of a single carrier.
Table 8: Change in the Average Number of Carriers per Airport
by Hub Type, December 1978 -- December 1983
| Hub Type | Average Number of Carriers per Airport | Percent Increase in Carriers per Airport | |
| 1978 | 1983 | ||
| Large Hub | 24.3 | 31.7 | 30.6 |
| Medium Hub | 9.7 | 14.6 | 51.0 |
| Small Hub | 4.5 | 6.4 | 42.2 |
| Non-hub | 1.3 | 1.5 | 15.0 |
Source: Official Airline Guide, December 1978 and December 1983, as reported in Civil Aeronautics Board, Report on Airline Service, Fares, Traffic, Load Factors, and Market Share, Issue Number 29, March 1984, table 8, page 36.
A second change, as can be seen in Figure 3, is a marked shift away from multi-stop flights toward more direct non-stop and one-stop flights. The increase in non-stop and one-stop flights has been an accompaniment to the hub strengthening route strategies of virtually all major airlines. Non-stop flights and one-stop flights with the hub as the intermediate stop are the building blocks with which hub-and-spoke route networks arc developed.
Figure 3: Number of Stops per Flight
Per Cent Change in Monthly Flights by Number of Stops per Flight,
December 1978 to December 1983
In sum, service has either improved or held constant in most instances. The development of hub systems has meant increased frequencies in most markets, with smaller markets receiving the largest gains. The evidence also suggests that under deregulation business travellers have benefited more from service improvements than from fare reductions while leisure travellers have been more direct beneficiaries of lower fares. (31)
5. INDUSTRY FINANCIAL PERFORMANCE AND PRODUCTIVITY
US airline financial performance has experienced three distinct phases since deregulation formally began in 1978. Record traffic volumes and profits were achieved in 1978 and early 1979, but this unprecedented performance deteriorated steadily over the next four years. Battered by fuel price increases, recession, and air traffic control restrictions, the industry barely broke even in 1980 and then realised unprecedented losses in 1981 and 1982. In 1982, Braniff became the first major carrier to file for bankruptcy in the history of the industry. Braniff was soon followed by Continental, Air Florida and several smaller carriers. Beginning in 1983, the industry recovered somewhat, aided by economic expansion and moderation in fuel and labour costs. The recovery continued into 1984, 1985, and 1986 as most airlines once again returned to profitability.
SORTING OUT THE EFFECTS
Recession was almost certainly the industry's major problem after deregulation took effect. It probably accounted for half or a bit more of the industry's net operating losses in the years 1980 through 1982. Indeed, without recession, the airlines would likely have earned at least $700 million more in net operating income between 1980 and 1982. (32) Though the recessions of 1980 and 1982 predictably resulted in lower traffic volumes, these volumes nevertheless held up better than in previous recessions. This lower drop in volumes was apparently due to the stimulative effect of more discount fares permitted under deregulation.
Apparently, major pockets of overcapacity appeared in 1981 and 1982, so that expenses in the airline industry did not fall as sharply as revenues. The problem was especially acute on long-haul routes served by wide-bodied aircraft; a surplus of wide-bodies was one of the legacies of the incentives of prior regulation. Not only did regulation allow (even encourage) airlines to pass on excess costs into fares, it also created incentives to acquire substantial numbers of wide-bodied aircraft particularly suitable for long hauls. (33) Not surprisingly, therefore, the most intense fare wars after formal deregulation tended to be in the now no longer protected transcontinental and other long-haul markets served by trunk carriers, and not just in markets entered by entirely new carriers. By contrast, most short-haul carriers did reasonably well and seemingly experienced minimal overcapacity problems in the difficult 1980-1982 period.
The adverse effects of the two recessions were almost certainly further intensified by failure of airline managements to anticipate the length and double-dip character of the recession period. There was not only a lack of experience in coping with a competitive environment, but also seemingly limited managerial comprehension of the serious financial penalties (including bankruptcy) for mistakes in such an environment.
The unprecedented increase in aviation fuel prices that occurred beginning in early 1979 had almost as severe an impact on the industry as the recessions. The industry's cumulative 1980 through 1982 operating loss would probably have been cut by as much as 80 per cent if fuel prices had remained stable.
Fuel price increases had two major system-wide effects on US commercial aviation: (1) an acceleration of the transfer of short-haul routes in low-density markets from jet carriers to commuter carriers using turbo-props (because of the high short-haul fuel consumption of narrow-body jets); and (2) rendering almost one quarter of the industry's jet capacity obsolete much more quickly than had been anticipated. (34) This sudden obsolescence of equipment because of fuel price increases may also have induced an overcommitment to new fuel-efficient aircraft at a time when US interest rates were high by historical standards.
Whatever the cause, airline industry interest expenses skyrocketed in the late 1970s and early 1980s after being roughly stable in the mid-1970s. These higher interest rates and costs also took a major toll on airline profitability, especially for several carriers that were highly leveraged or had large amounts of short-term debt. (35)
Indeed, virtually all the industry's problems until late 1982 are easily accounted for by recession or fuel and interest cost effects unrelated to deregulation. While it can be argued that fare wars permitted by deregulation may have added to the industry's problems in late 1982 and early 1983, lower fares prior to late 1982 helped to sustain volumes during recession. Still, deregulation may also have contributed to the industry's problems in those years because the combination of a competitive environment and a business recession demanded new managerial skills and abilities (e.g. in marketing and cost control) that were not readily available to the airlines, apparently because under regulation they had not been important and therefore had not been recruited.
FINANCIAL CONSEQUENCES
After formal deregulation, the industry displayed a remarkable ability to finance new equipment and startups in spite of generally adverse economic conditions. New entrant carriers tapped a wide variety of financial sources ranging from US and foreign governments to venture capitalists. Many of the old-established carriers, including some that were quite weak financially, such as Pan American and Eastern Airlines, had successful public offerings. The airlines also eased the financing of new equipment by transferring much of the financial burden back onto the equipment manufacturers (e.g. General Electric, Boeing, and McDonnell-Douglas).
Under deregulation, though, airline bankruptcy became a reality as the CAB no longer acted to prevent it. Route access was also no longer an incentive for a financially strong carrier to take on the problems of a weak one through merger. Routes could now be easily acquired through straight-forward entry. The reality of bankruptcy also meant that unrestricted credit, always scarce to airlines, became virtually non-existent and airlines became increasingly reliant on equipment trusts and leases.
PRODUCTIVITY AND COST EFFICIENCY
Measuring airline productivity is beset with many problems. Regardless of the technique or procedure used, however, the rate of improvement in airline productivity has been at least maintained and probably improved since deregulation. (36) Deregulation has permitted much better matching of aircraft to markets, resulting in better aircraft utilisation and improved load factors. In addition, the more complete development of hubs after deregulation has improved efficiency of operations.
The evidence on costs since deregulation is even more unequivocally favourable than that on productivity. Specifically, since deregulation, costs per available seat mile (ASM) have not escalated as fast as factor input prices. Costs per revenue passenger mile (RPM) have generally done even better relative to factor input prices as load factors have also improved under deregulation (especially after controlling for recession effects). The new entrant carriers have also clearly put downward pressure on costs. Their labour costs are approximately 20 per cent lower than those of established carriers (apparently due to less unionisation and less restrictive work rules). The newer carriers also seem to achieve more productivity per unit of factor input. In addition, the new entrant carriers use older (and therefore cheaper) planes, less congested and lower-cost airports and often offer fewer amenities (e.g. interconnecting reservations, meal services, and luggage transfers). All of these have lowered operating costs, although obviously at some reduction in quality of service.
Thus, the financial condition of the industry has apparently been helped by deregulation, because of greater managerial freedom to respond lo changing economic conditions. The improvement, however, may not have been immediate, as managers accustomed to a regulated environment that emphasised legal and political skills have only slowly become attuned to the cost-control and marketing skills needed in open competition.
Productivity is almost certainly higher since deregulation, largely because of the added incentives for low costs in an openly competitive environment and the removal of regulatory incentives and restrictions that hampered efficient use of airlines' resources. There is also limited evidence suggesting that these pressures for productivity improvement will be enhanced and will continue under deregulation.
6. SERVICE TO SMALL COMMUNITIES
A principal policy concern in the United States prior to airline deregulation was whether easing restrictions on entry and exit would result in reduced service to small communities. Many expected the airlines to redeploy their aircraft away from low-density markets serving small communities to high-density markets, with the result that small communities would have greatly reduced or, in extreme cases, no air service. (37)
In response to these concerns, a provision guaranteeing essential air service to small communities was included in the deregulation act. A so-called Section 419 subsidy was authorised with compensation based on community needs and the use of appropriately-sized aircraft. The act also scheduled the eventual end of the previous subsidy programme (Section 406 subsidy), which had supported small community service prior to deregulation.
The new Section 419 subsidy guaranteed service to a far greater number of communities than had received subsidised air service under the old programme. Critics of deregulation therefore predicted that the subsidy cost to the government would be much higher than under the old programme. Supporters of deregulation argued, however, that since commuter carriers were eligible to provide essential air service under the new programme (they had previously been excluded), and that since commuter aircraft were much better suited for small community service than the jet service typically supported under the old programme, the total subsidy costs would be reduced despite the expanded coverage. In essence, these proponents were arguing that the entrepreneurship unleashed by deregulation would result in a better matching of operations and equipment with the needs of various communities so that costs would be lowered overall.
Table 9 shows the changes in aircraft departures for each size category of airport between September 1978, the month before passage of the Airline Deregulation Act, and September 1984. Comparing the same month in two different years controls for any seasonal variations in airline service. As the table indicates, each of the four airport categories had overall increases in departures during the period. Even the smallest category of communities, non-hubs, which many feared would suffer severe service losses, had a 9.4 per cent increase. Clearly, airline deregulation has not resulted in service losses to small communities; on the contrary small communities, as a group, have experienced improved service since deregulation.
Table 9: Changes in Airline Service by Hub Class
September 1978 -- September 1984
| Hub Class | Aircraft Departures Per Week | ||
| 1978 | 1984 | % change | |
| Large | 65,398 | 85,215 | 30.3 |
| Medium | 22,318 | 28,491 | 27.7 |
| Small | 12,098 | 14,470 | 19.6 |
| Non-hub | 32,017 | 35,030 | 9.4 |
| Total | 131,831 | 163,206 | 23.8 |
To be sure, not all small communities have had service gains. Figure 4 shows the distribution of service changes between September 1978 and September 1984. As the figure indicates, many communities had less service in 1984 than in 1978. However, there were more communities with service increases (266) than with service losses (245). The remaining communities (62) had no significant change in service.
Figure 4: Changes in Weekly Departures, Non-Hub Airports
September 1978 to September 1984
Even the communities with service losses cannot automatically blame deregulation for reduced service. Deregulation's exit freedoms applied only to established jet carriers; commuter carriers operating small propellor-driven aircraft could enter and exit markets at will before deregulation. Service to communities served by established jet carriers was protected, at least in part, by the Essential Air Service programme that was part of the Airline Deregulation Act. Although some of these communities experienced service losses, the vast majority gained more frequent service under deregulation. (38) Thus, most of the service losses represented in the figure are instances where commuter airlines dropped service, as they could have done and often did before deregulation. In these instances, recession rather than deregulation seems to have been the major factor. As with other small businesses, many commuter airlines were under-capitalised and some failed during the recessions. In fact, just over 70 per cent of the communities that lost all service between 1978 and 1983 had been receiving service in 1978 by a commuter that was out of business by 1983.
Because the commuter airlines' basic service was providing business travellers with connections from small communities to major hubs, they were far more likely to provide more frequent and more conveniently scheduled departures to and from these communities during the popular business travel hours. Indeed, between 1 October 1977 and 1 October 1982, there were 145 communities in which a commuter carrier replaced a departing established jet carrier. For these communities as a group, total weekly departures were 26 per cent higher in 1982 than in 1977. Some of the former "jet carrier" service, however, was provided in propellor-driven aircraft still owned by mostly-jet airlines. If only the loss of turbo-jet/turbofan service is considered, the increase in departures by replacement commuter carriers is even more striking. Between June 1978 and June 1984, 61 communities lost all-jet service -- but among these communities total (jet plus non-jet) aircraft departures were on average over 47 per cent higher in 1984 than in 1978.
In short, commuter airlines not only typically provided service to small communities at lower unit cost than the jet carriers had done, but also provided service that had more frequent and conveniently-timed departures. A service trade-off thus existed between the greater comfort and roominess of the jets and the greater schedule convenience of the commuter flights. While some community leaders have decried the loss of jet service, most passengers have found the operations of well-run commuter airlines acceptable. Indeed, the higher service frequencies have typically resulted in increased patronage when a commuter has replaced a withdrawing jet carrier.
In general, concerns that small communities would suffer drastic losses in air service under deregulation have proved largely unfounded. As expected, the trunk and local service airlines have withdrawn from much of their small-community service, but the commuter airlines have filled the void, typically with more frequent and more conveniently scheduled service. Furthermore, this has happened with total government subsidies less than before deregulation and much lower than they would have been on a pro forma basis if regulation had continued. (39) Thus, the commuter airline industry, aided and abetted by the flexibility created by deregulation and changes in the subsidy system, has thus largely solved the small-community problem that has so long preoccupied US aviation policy.
7. AIRLINE SAFETY
Deregulation has clearly increased airlines' incentives to operate more efficiently and to reduce costs. Prior to deregulation, many people were concerned that added competitive pressure, particularly on financially weaker carriers, might result in cutbacks in maintenance expenditures or in other operational changes that could compromise airline safety. It must, however, be stressed that neither the regulations governing airline safety nor the Federal Aviation Administration's role in enforcing those regulations were in any way weakened by airline deregulation.
So far, there is no evidence that deregulation has led to any deterioration in airline safety. Figure 5 shows passenger fatalities per million emplanements for both the jet carriers and commuter carriers from 1970 ihrough 1984. As can be seen in the figures for both segments of the industry, these fatality rates are on average lower in the post-deregulation period (1979-1984) than in the pre-deregulation period (1970-1978). Indeed, for jet carriers the post-deregulation rale is only about one third the pre-deregulation rate while for commuter carriers the average post-deregulation rate is about half the pre-deregulation rate. There is no evidence that deregulation has brought about any reduction in airline safety.
Figure 5: US Airline Safety
Passenger Fatalities per Million Emplanements, Scheduled Domestic Service,
1970-1984
The difference in safety performance between commuters and jet carriers that is evident in the figure raises a second sort of safety issue. As described in the previous section, the small-community problem anticipatcd by many prior to deregulation has been solved by increased reliance on commuter airlines operating propellor-driven aircraft of fewer than 60 seats. If commuters are really markedly less safe than other airlines, potential customers may choose ground transportation or forgo a trip rather than fly commuters, and commuters will not be able to provide viable small-community air service in the long run. The perception of safety differences could thus reduce the competitiveness and profitability of commuter airlines, especially newly-formed commuter airlines. This effect could be important in an industry like commercial aviation in which safety considerations have historically received substantial media and public attention.
COMPARING SAFETY: COMMUTERS AND JETS
Statistics clearly give some credence to the belief that commuter airlines are less safe, although some measures of safety performance overstate the actual differences in risk to the passenger. For example, using a distance-based measure, commuters were typically 10 to 30 or more times less safe than certificated jet carriers over the 1970 to 1980 period (although even on this basis, commuters have a record about equal to that of the private car).
Major differences in flight lengths, however, make such comparisons quite misleading. A typical jet, a B-727-200, flying full on an average jet flight of 730 miles will amass approximately 105,850 passenger miles, yet will take off and land only once. For a typical commuter aircraft (e.g. a Swearingcn Metro) to accumulate a similar number of passenger miles flying the industry average of 120 miles per flight with all seats occupied, it would have to make over 46 flights (thus landing and taking off 46 times). Since the greatest risk of accidents occurs during takeoff and landing, commuters will naturally appear less safe than certificated jet carriers when distance-based measures are used. A more useful statistic, therefore, is passenger fatalities per one million emplanements, as used in Figure 5. (40) Although commuters are less safe by this measure, the difference is substantially less than that suggested by distance-based measures.
Clearly the safety record of commuter carriers is not as good as the excellent safety record of large jet carriers. The difference, however, is not nearly as great as is popularly perceived. Although there is a higher probability that a person boarding a commuter will experience a fatal accident, reliance on statistics based on passenger-miles greatly exaggerates the danger. Of perhaps more importance, the commuter industry's safety performance has improved significantly as it has continued to mature following deregulation.
Assessing the safety of commuters relative to jet carriers is more complex than simply comparing the safety measures cited here. Although a passenger departing on a jet flight faces, on average, a smaller risk than one departing on a commuter flight, the larger size of the jet aircraft usually dictates operating flights with more intermediate stops, so that the actual risk a passenger faces for the total trip may in fact differ very little between jets and commuters.
STATISTICAL ANALYSIS OF INTRA-INDUSTRY SAFETY
Commuter airlines vary widely in terms of size, experience, managerial sophistication, route network, aircraft fleet, and financial condition. Concluding that commuter carriers are less safe than jet carriers tells little more than what occurs, on average, in both industries. It is important to look at safety by asking the question: Are there differences in safety among various segments of the commuter industry? By dividing the commuter industry into segments based on specific operational characteristics and examining differences in the safety performance of these segments, a better understanding can be gained of the role these characteristics play in contributing to safe operations and of the role of safety as a barrier to entry and a partial determinant of commuter growth.
The difficulty with such an approach is that a commuter accident is a rare event. By dividing the industry into segments based on some characteristic (or a combination of characteristics), it can only be observed that for the time period covered by the data, these rare events were less rare in some segments of the industry than in others. Such a finding does not prove that the characteristics used to divide the industry contribute to safer or less safe operations, nor does it in any sense mean that all carriers in the less safe segment are conducting unsafe operations. Rather, these findings must be used in combination with observations of commuter management and pilots, and other research into the determinants of airline safety, to draw even tentative conclusions.
CARRIER SIZE
In 1980 commuter airlines differed significantly in terms of size. For the 12-month period ending 30 June 1980, emplanements ranged from as few as 514 for Cape Smythe Air Service to as many as 761,447 for Puerto Rico International Airlines, Inc. As Table 10 indicates, size does seem related to the safety record of commuters, as a significant difference exists between the safety record of the largest commuters and that of the rest of the industry. On average during the 1970 to 1980 period the top 20 commuters (measured in terms of emplanements) were over five times safer than the rest of the industry. As a group, the top 20 carriers carried over half of all commuter passengers. Referring back to Figure 5, it is evident that the top 20 carriers have a safety record only slightly worse than that of the certificated jet carriers. At the same lime, the rest of the commuter industry had a significantly less good record than the jet carriers. Hence, although the overall safety record of the commuter industry is worse than the jet carriers', a passenger on one of the large commuters faces about the same small risk of being killed on a flight as a passenger on a jet carrier.
Table 10: Passenger Fatalities per Million Emplanements
Top 20 Commuters v. Other Commuters
| Year | Top 20 | Others |
| 1970 | 1.05 | 11.05 |
| 1971 | 0.61 | 24.15 |
| 1972 | 2.52 | 17.06 |
| 1973 | 0.00 | 4.12 |
| 1974 | 1.21 | 12.20 |
| 1975 | 2.48 | 0.37 |
| 1976 | 1.36 | 4.40 |
| 1977 | 0.20 | 5.57 |
| 1978 | 1.76 | 3.15 |
| 1979 | 0.33 | 3.50 |
| 1980 | 1.11 | 1.53 |
| Average 1970-80 | 1.15 | 7.92 |
| Overall rate 1970-80 | 1.12 | 5.91 |
Source: René Riecke, "Commuter Airlines: Impact of Carrier Size and Rate of Growth on Safety", honours thesis, Indiana University, Bloomington, 1981, table V-2.
One hypothesis as to why size might contribute to safer operations is that a larger carrier can afford greater specialisation in maintenance, training, and operations. By allowing each individual in the organisation to concentrate on a narrower range of responsibilities, it may be possible for these responsibilities to be discharged more competently. There may be other ways too in which size makes some functions easier. For example, maintaining an aircraft requires a substantial inventory of spare parts. A larger carrier with more aircraft may find it easier to maintain the necessary inventory, both financially and in terms of space and organisation. Although the size and depth of inventory should not matter too much for scheduled maintenance, it may matter, on occasion, for marginal unexpected repairs; if a part shows wear or slightly diminished performance, it might be replaced quickly if the part is on hand, while replacement might be postponed if the part has to be ordered.
THE ALLEGHENY COMMUTERS
The Allegheny Commuter System has been a special subset of the commuter industry since the first Allegheny commuter started operations on 15 November 1967. USAir, formerly Allegheny Airlines, has had contractual arrangements with several commuter operators to provide feeder service from small communities to larger cities served by USAir jets. In return USAir provides assistance in marketing, ticketing, reservations, and scheduling -- and in some cases financial guarantees. In order to qualify as an Allegheny commuter, an operator must meet operation and maintenance standards set by USAir that are more stringent than those required by the FAA for commuters.
As can be seen in Table 11, Allegheny commuters have amassed a significantly better safety record over the 1970s (0.12 passenger fatality per million emplanements) than either the top 20 non-Allegheny commuters (1.40) or the rest of the industry (3.96). In fact the Allegheny commuters outperformed the certificated jet carriers by a substantial margin during this period. Furthermore, while some of the Allegheny commuters are very large, others are small, with quite limited operations. It would seem that the more stringent standards imposed by USAir, coupled with the generally high quality of management in the commuters they select, have had a significant impact on safety. The record of these carriers may provide support for the argument that the 1978 revisions in commuter safety regulations, which bring maintenance and operation requirements more in line with those for large jet carriers, should improve safety in the commuter industry. (Recall from Figure 5 that, in fact, there does seem to be improvement in the commuter safety record during the past few years.)
Table 11: Passenger Fatalities per Million Emplanements
Allegheny, Top 20 Non-Allegheny, Rest of the Industry
| Year | Allegheny | Top 20 Non-Allegheny | Rest of the Industry |
| 1970 | 0.00 | 1.08 | 4.60 |
| 1971 | 0.00 | 0.62 | 6.93 |
| 1972 | 0.00 | 2.63 | 8.18 |
| 1973 | 0.00 | 0.00 | 1.76 |
| 1974 | 0.00 | 1.27 | 6.61 |
| 1975 | 0.00 | 3.00 | 2.01 |
| 1976 | 1.36 | 1.54 | 2.87 |
| 1977 | 0.00 | 2.45 | 2.91 |
| 1978 | 0.00 | 0.78 | 2.93 |
| 1979 | 0.00 | 0.60 | 2.34 |
| 1980 | 0.00 | 1.47 | 2.44 |
| Average 1970-80 | 0.12 | 1.40 | 3.96 |
Source: CAB data tape.
AIRCRAFT TYPE
Commuter operators utilise a wide variety of aircraft, ranging from small piston-engine craft originally designed as corporate or general aviation aircraft to large 55- to 60-seat turboprops designed as commercial passenger-transport aircraft, with a few air boats for water-based operations mixed in as well. Turboprop aircraft use turbine engines, operating with the same basic mechanism as large fan-jet engines found on such aircraft as B-747s. Although the propeller appears very different to passengers from the fan portion of a high-bypass turbofan, in reality the difference is more one of degree than basic approach. Turbine engines, with or without props, offer advantages over piston engines (e.g. far fewer moving parts and greater simplicity of operation) and therefore easier maintenance and greater reliability.
There is no reason to believe that the apparent impact of carrier size on safety performance operates independently of impacts of other operational characteristics. To examine the influence of the type of aircraft fleet operated, it is also necessary to control for the effect of carrier size. Table 12 presents the results of an analysis of the interaction of carrier size and the type of fleet operated. For carriers operating only piston-engine aircraft, the top 20 piston carriers, as expected, had a better safety record than the remaining piston carriers. Also, perhaps somewhat surprisingly, the top 20 piston carriers had about the same safety record as the top 10 carriers who operated only turbine-engine aircraft (which carried about the same number of passengers); this result suggests that among the larger carriers both piston and turbine aircraft can be operated with the same degree of safety. It may be that the managerial, maintenance, and financial capability of the larger carriers is sufficient to ensure safe operations with either type of aircraft.
Table 12: Interaction of Carrier Size and Fleet Type
Passenger fatalities per million emplanements, 1974-1980
| Top 10/20 | Remainder | |
| Piston only (top 20) | 1.66 | 3.73 |
| Turbine only (top 10) | 1.60 | 0.11 |
| Combined (top 10) | 0.59 | 6.34 |
Operating a combined fleet of piston- and turbine-engine aircraft might be expected to pose added difficulty over either purely piston or purely turbine fleets. Mechanics, for example, might be split between the two types of aircraft and thus not be able to "master" either type. Similarly, it might be more difficult to maintain an adequate spare parts inventory for two types of engines than for a single type. As the table indicates, small carriers do seem to have difficulties with combined fleets and have a safety record far worse than any other type of carrier. Somewhat surprising is that the top 10 carriers operating combined fleets had a better safety record than either piston-only or turbine operators. Apparently, arguments about the increased difficulty of operating a combined fleet are less applicable to a large carrier than to a small.
Of particular interest is the observation that both large and small turbine operators seem to be able to operate safely. Such a finding is perhaps not unexpected given the relative simplicity of turbine-engine maintenance and operation. Among both piston and combined operators the large carriers operate more safely. The very poor safety performance of the smaller combined-fleet carriers is, however, particularly disturbing and suggests that a phased transition from piston to turbine operations may be particularly difficult for a small operator. It would seem that the poorer safety record of the smaller piston and combined carriers was largely responsible for the impact of carrier size on safety seen in Table 11.
LANDING AIDS
An assertion often made is that part of the difficulty commuters have in operating as safely as larger jet aircraft stems not from the commuters themselves but rather from the nature of the airports they serve. Many commuter flights are made into airports that are not equipped with the array of landing and navigational aids found in the airports served by the larger jet carriers. A major difference in airports is the provision of an electronic glide slope (precision approach). The availability of a glide slope to aid in landing puts fewer demands on the pilot, particularly in marginal weather conditions. In interviews, commuter pilots have usually maintained that a precision approach is an important aid to safe operations. The counter-argument, however, is that the minimum landing conditions for each airport take into account the presence or absence of such landing aids and that it should not be more hazardous to operate in unequipped airports.
It is certainly true that many of the airports served by commuters do not have a glide slope, and an analysis of accidents occurring during the landing phase reveals that passenger fatality rates are, indeed, higher on flights into airports not equipped with glide slopes than into airports so equipped. However, it must be recognised that airports not equipped with glide slopes are more frequently served by smaller commuter carriers which have worse safety records.
Table 13 presents the results of an analysis of the interaction of carrier size and the presence of a glide slope. Only accidents occurring during the landing phase of flight were included; thus the fatality rates are somewhat lower than in the previous tables. The table indicates that the presence of glide slopes at airports does not affect the safety records of commuters landing at these airports. Instead, large commuters are seen to operate with equal safety into airports equipped or not equipped with this landing aid. Likewise, small commuters have similar safety records whether they are operating into airports equipped with glide slopes or not.
Table 13: Interaction of Carrier Size and Glide Slope
Passenger fatalities per million emplanements, 1970-1980
| Top 20 | Remainder | |
| Airports with glide slopes | 0.89 | 3.72 |
| Airports without glide slopes | 0.66 | 4.24 |
Source: Derived from Civil Aeronautics Board, Form 298, Schedule T-l, National Transportation Safety Board Accident Briefs, and Federal Aviation Administration, Master File of Airport Facilities Information.
These results further strengthen the conclusion that the size of the commuuter carrier is a critical determinant of safety performance. They also imply that service to small community airports not equipped with the latest landing aids is not inherently less safe than service to the larger, better equipped airports. Of course, though the absence of a glide slope need not result in less safe operations, it may well result in more flights being cancelled due to an inability to land in poor weather.
Two major observations emerge from a system-wide examination of commuter safety. The most important is that when appropriate measures of safety are used -- those not strongly biassed against commuter carriers -- commuters are found to have had, historically, a worse safety record than certificated jet carriers, but one that is perhaps only three times worse rather than the more commonly cited 10 to 30 times worse. Moreover, the safety record of commuters has improved markedly in recent years as the industry has matured and as stricter safety standards have taken effect.
The second observation is that safety performance varies widely and systematically within the commuter industry, with carrier size being an important determinant of safety. For example, the top 20 carriers, which carry about 58 per cent of commuter passengers, have a safety record much better than the rest of the industry. In fact the record of the top 20 carriers is about the same as the excellent safety record of the certificated jet carriers. And another subset of the industry, the Allegheny commuters, has a safety record even better than that of the jet carriers.
Two conclusions flow from these observations. First, since a major segment of the commuter industry has demonstrated an ability to operate with safety virtually equal to that of the jet carriers, safety should not hamper commuters' ability to enter into competition with jet carriers in markets where their cost and service characteristics are comparable. Thus safety differences need not present commuters with an insurmountable barrier to entry in markets that they are otherwise well equipped to serve.
The second conclusion is that within the commuter industry, safety differences between large and small carriers may provide an edge to the large carriers in battles for commuter markets. Indeed, the superior safety performance of the larger carriers may hamper new entry by small commuters. An exception may be for those small commuters who chose to operate turbine rather than piston aircraft.
Thus, the safety record of the industry as a whole, when properly measured, does not seem so bad as to preclude commuters from playing an increasingly important role in the nation's air transportation system. At a minimum, safety considerations should not keep the larger and better established commuters from replacing or otherwise challenging the established jet carriers, if and when market opportunities present themselves.
8. CONCLUDING OBSERVATIONS
Air travellers in the US appear to have benefited from deregulation. Average unrestricted economy fares have decreased slightly in the largest markets, although they have increased slightly in medium and small markets and first class fares are slightly higher in most markets. More importantly, since deregulation, fewer and fewer passengers fly at these "list prices". The extension of discount fares to over 80 per cent of all markets has been readily received by travellers, so that over 60 per cent of all passengers were flying on a discount fare by 1984. The average depth of discount has increased markedly as well. The result is that fares for the vast majority of travellers are much lower than had regulation continued.
Service has also either improved or held constant in most instances with smaller markets receiving the largest gains. Business travellers have benefited more from service improvements than from fare reductions, while leisure travellers have been more direct beneficiaries of lower fares.
The financial condition of the industry has apparently been helped by deregulation because of greater managerial freedom to respond to changing economic conditions, particularly once managers became attuned to cost-control and marketing skills. Productivity is almost certainly higher since deregulation, largely because of the added incentives for low costs and the lemoval of regulatory incentives and restrictions that hampered efficient use of airlines' resources.
Concerns that small communities would suffer drastic losses in air service under deregulation have proved largely unfounded. Although the trunk and local service airlines have withdrawn from much of their small community service, commuter airlines have filled the void, typically with more frequent and more conveniently scheduled service and with far less government subsidy.
Finally, there is no evidence that deregulation has led to any deterioration in airline safety. Indeed, for jet carriers the post-deregulation rate is only about one third the pre-deregulation rate, while for commuter carriers the average post-regulation rate is about half the pre-deregulation rate.
In sum, the US experience with airline deregulation has been largely favourable with travellers reaping substantial benefits in the form of lower fares and improved service.
ENDNOTES
1. For a detailed discussion of the early development of the airline industry in the US and the role of regulation in that development, see J.R. Meyer and C.V. Oster (eds), Airline Deregulation: The Early Experience, Auburn House, Boston, 1981, Chapter 2.
2. M. Kirby, "The US Airline Deregulation Experience and its Implications for Australia", in Changes in the Air? Issues in Domestic Aviation Policy, CIS Policy Forum 3, Centre for Independent Studies, Sydney, 1984.
3. Competition in the Air, Treasury Submission to the Independent Review of Economic Regulation of Domestic Aviation, Treasury Economic Paper Number 11, AGPS, Canberra, 1985.
4. Ansett Transport Industries Ltd, Submission to Independent Review of Economic Regulation of Domestic Aviation, Melbourne, July 1985.
5. This paper draws heavily on research discussed in greater detail in J.R. Meyer and C.V. Oster, Deregulation and the New Airline Entrepreneurs, MIT Press, Cambridge, 1984; and J.R. Meyer and C.V. Oster, Deregulation and the Future of Intercity Travel, MIT Press, Cambridge, forthcoming.
6. US airline data report emplanements (passenger boardings) whereas Australian data are reported in terms of uplifts and discharges. To facilitate comparisons in the table, US emplanements were doubled to approximate uplifts and discharges.
7. Some might argue that the relatively high numbers of uplifts and discharges in US cities are the result of the hub-and-spoke route networks that most major US jet carriers have developed. Such networks do result in some passengers passing through hub airports who neither originate from nor are bound for those cities. None of the US cities in Table 1, however, is a major connecting hub and only Kansas City and Baltimore have even moderate amounts of connecting activity. With these cities removed, the average population of San Diego, Memphis, and Portland is only 30 per cent of the average of Sydney and Melbourne. Thus, the argument is even stronger if these minor hubs are excluded from the US figures.
8. Airline Deregulation: The Early Experience, op. cit., Chapter 3.
9. General Accounting Office, The Changing Airline Industry: A Status Report Through 1982, 6 July 1983, Table 1, page 7.
10. Air Transport Association, 1986 Annual Report, page 5.
11. M.A. Brenner, J.O. Leet, and E. Schott, Airline Deregulation, Eno Foundation for Transportation, Westport, Connecticut, 1985, Chapter 4, especially Table 9.
12. For a more detailed discussion of the airlines' use of discount fares see Airline Deregulation: The Early Experience, op. cit., Chapter 4.
13. The data presented in this figure were taken from Tables 1, 2, and 3 in J.P. Schweiterman, "Fare is Fair in Airline Deregulation -- The Decline of Price Discrimination", Regulation, July/August 1985, although the data were used in this article to investigate trends in price discrimination rather than the impact of varying degrees of competition. The data were taken from random samples of 25 markets served by a single carrier, 25 markets served by two carriers, and 25 markets served by multiple carriers. The specific markets in each sample are listed in the article.
14. The principal omission from this sample is the large number of smaller cities and towns served by commuter airlines. In essence, fares in commuter markets have also risen (in nominal terms) after deregulation but at a slower rate than average airline costs; specifically, changes in commuter fares have been roughly equivalent to changes in inflation as measured by the Consumer Price Index. See Deregulation and the New Airline Entrepreneurs, op. cit., Chapter 8, pages 149-162.
15. It should be noted that the May 1 date may not fully eliminate seasonal considerations, because airlines may have put summer fares into effect earlier some years than others.
16. The 1 May 1981 date avoids complications introduced by the air traffic controllers' strike beginning in August, 1981.
17. The SIFL is adjusted based on average airline costs and thus reflects any productivity gains made by the airlines. To the extent that productivity gains were induced by deregulation, the increase in SIFL understates the expected price rise under continued regulation.
18. The letter "Y" is used by airlines to indicate economy class.
19. None of the smaller markets in the sample were served by local service carriers receiving Section 406 subsidy in exchange for provision of service. Fare increases since deregulation are more likely to have occurred in these previously subsidised markets, in the wake of subsidy reductions since 1978. See Deregulation and the New Airline Entrepreneurs, op. cit., Chapter 10.
20. The survey is reported quarterly on the basis of a continuous ten percent ticket sample. The detail recorded for each trip shows the complete routing from origin to destination, carriers used, and fare basis code for each stage of the itinerary. The sample information becomes more reliable as market density increases.
21. Air Transport Association, 1986 Annual Report, page 5.
22. See Airline Deregulation: The Early Experience, op. cit., Chapter 4.
23. Data on the extent and nature of capacity-controlled fares are not available. While data can be found on unrestricted discount fares, such data are not very useful in that many discount fares have "restrictions" which are not effective or enforced.
24. There is a growing literature in economics over the efficacy of pricing differentials based on differential elasticities of demand. See W.B. Tye and H.B. Leonard, "On the Problems of Applying Ramsey Pricing to the Railroad Industry with Uncertain Demand Elasticities", Transportation Research, November 1983, pages 439-450; and M.L. Weitzman, "Contestable Markets: An Uprising in the Theory of Industry Structure: Comment", American Economic Review, June 1983, pages 486-487.
25. One effect of "frequent flyer" programmes is to make such arbitrage less attractive for the recipient of the discount ticket since frequent flyer credit would presumably not accrue to a ticket in someone else's name.
26. The market classification was based on the results of a travel survey conducted by the Air Transport Association in 1982.
27. The apparent higher markups in business markets may also be due in part to the higher proportion of business flights involving capacity-constrained airports.
28. For a discussion of these strategic options, see Deregulation and the Future of Intercity Travel, op. cit., Chapter 5.
29. W.M. Carley, "Big Airlines Alter Scheduling Strategies As Costly Delays Increase 50 per cent in a Year", The Wall Street Journal, 19 July 1984, page 6.
30. Many of the anecdotes of severe service losses are also misleading because they reflect a transition from one carrier to another. The level of service shortly after one carrier has pulled out but before the replacement carrier has fully adjusted service to the new market is obviously not a good indication of long-term service trends, yet those are frequently the situations cited by deregulation's critics.
31. S.A. Morrison and C. Winston, The Economic Effects of Airline Deregulation, Brookings Institution, Washington, 1986.
32. Deregulation and the Future of Intercity Travel, op. cit., Chapter 3.
33. Under regulation, the fare per mile fell more slowly as distance increased than did the cost per mile, making long-haul flights more profitable than shorter ones.
34. For a detailed discussion of the impacts of rising fuel prices see Airline Deregulation: The Early Experience, op. cit., Chapter 8.
35. E.g. Eastern, Republic, Pan American, and Western.
36. See Deregulation and the Future of Intercity Travel, op. cit., Chapter 6; and E.E. Bailey, D.R. Graham, and D.P. Kaplan, Deregulating the Airlines, Cambridge, MIT Press, 1985, Chapter 8.
37. See for example R. Kaus, "The Dark Side of Deregulation", Washington Monthly, May 1979; and Kysor Industrial Corporation, advertisement in The Wall Street Journal, 1 March 1980.
38. Deregulation and the New Airline Entrepreneurs, op. cit., pages 187-188.
39. For a thorough discussion of the savings in the small community subsidy programme see Deregulation and the New Airline Entrepreneurs, op. cit., Chapter 10.
40. The best measure would be fatalities per passenger departure rather than per enplanement. Unfortunately passenger-departure data are not available. For non-stop flights the measures are identical, but for multistop flights a passenger may make several departures yet be counted as a single enplanement. Thus the tables that follow may slightly overstate the risk for non-stop flights while slightly under-stating the risk for multistop flights. This bias, however, is not believed to affect the validity of comparisons within the commuter industry.
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