The CAB did not believe in or allow much price competition, so airlines resorted to flight frequency and inflight service to lure passengers to empty seats. As an example, Continental installed a piano bar in its DC-10 aircraft. Further, the CAB consistently refused to allow airlines operating older, slower and less comfortable aircraft to charge lower fares which made the newest aircraft a competitive necessity (Borenstein & Rose, 2007). Fares remained high and passenger load factors dropped from 70% in 1950 to 50% by the mid- 1970s. Airlines were losing money to which the CAB responded with a route moratorium. Financial pressures increased, so in 1974 the CAB allowed a 20% fare increase which further depressed demand. It also sanctioned capacity limitation agreements among major carriers in an effort to staunch continuing losses (Borenstein, 1992; Button, 1991). As the futility of the CAB’s actions became apparent, many academics, regulators, politicians, and an occasional airline executive began calling for drastic changes in CAB regulation. Several factors provided impetus: (a) Capacity increased on many routes as jumbo-jets entered service, (b) The Middle Eastern oil embargo in 1973 led to skyrocketing fuel costs and contributed generally to price inflation, and (c) An economic downturn put a severe strain on airlines as business travel demand fell at the same time capacity and fuel prices were rising.
Historical Perspective 14 In 1974, the Ford Administration began to press for government regulatory reforms in response to a growing public sentiment that government regulations were overly burdensome on U.S. industry and contributing to inflation. Shortly thereafter, Sen. Edward Kennedy chaired Senate Subcommittee hearings concluding that airline prices would fall if government constraints on competition were lifted. Comparisons drawn with unregulated intrastate carriers Southwest Airlines, Pacific Southwest Airlines, and Air California exposed inefficiencies of the regulated airlines that were costly to consumers. A CAB staff report reached the same conclusion in 1975. The report said the industry was "naturally competitive, not monopolistic," (Airlines for America, 2011) and that the CAB itself could no longer justify entry controls or public utility-type pricing. On its own, the Board began to loosen its grip on the industry (Bailey, Graham, & Kaplan, 1985). The debate over airline industry economic deregulation was based, in large part, on economic studies and recommendations. Economic theory holds that under conditions of perfect competition, consumer welfare is maximized without government restriction or interference. In attempting to earn a profit under intense competition, suppliers develop and market products that consumers want while competition ensures that products are produced at the lowest possible cost and sold at prices that just cover the production expense.
- Fall '16
- Kelly Lawton
- United Airlines, Delta Air Lines, Pan American World Airways, Cab, Douglas DC-3