The good, the bad, and the ugly: 30 years of US airline deregulation
Andrew R. Goetz a,*, Timothy M. Vowles b
a
Department of Geography, University of Denver, Denver, CO, United States
b
Department of Geography, University of Northern Colorado, Greeley, CO, United States
a r t i c l e i n f o
Keywords:
Air transportation
Airlines
Deregulation
a b s t r a c t
The US airline industry was deregulated in 1978 and has undergone significant changes in industry structure,
profitability, employment, passenger volume, and patterns of service and fares, among other characteristics.
This paper sets out to make three contributions to the literature as related to the story of
airline deregulation. First, discussion of economic theory will provide the context for an updated overview
of the positive, negative, and really negative results of US airline deregulation, summarized in the
form of ‘‘the good”, ‘‘the bad”, and ‘‘the ugly”. Second, this paper provides a periodization of the 30-year
history of US airline deregulation that is important in understanding the cycles of change as reflected in
the industry’s financial performance and other relevant data. Third, this paper contributes to the renewed
debate about the efficacy of deregulation and liberalization policies, particularly at a time when the global
financial crisis has cast a harsh spotlight on the (un)desirability of these policies. Some of the good
results during the 30 years of airline deregulation, from the industry and consumer perspective, include
higher passenger volumes, more service to the most popular destinations, and lower fares on average.
Bad results include financial and employment instability, diminution in the quality of airline service overall,
and fewer flights and higher fares to smaller places. The recent 2000–2005 period has been particularly
ugly, as the airline industry has lost over $30 billion, and several high-profile carriers, such as
United, Delta, Northwest, and US Airways, were forced into bankruptcy.
Ó 2009 Elsevier Ltd. All rights reserved.
1. Introduction to airline deregulation
It has been 30 years since the US Airline Deregulation Act was
approved by Congress on October 24, 1978 and was signed into
law by President Jimmy Carter four days later. This act meant that
the government would no longer be engaged in economic regulation
of the airline industry, after forty years of domestic regulatory
control by the Civil Aeronautics Board (CAB). Instead, private airlines
were allowed to make all decisions regarding entry, exit,
and fares, while authority over mergers and acquisitions was
transferred to the Department of Transportation (and later to the
Department of Justice) upon the CAB’s termination on December
31, 1984.
The domestic airline industry was one of the first US industries
to be deregulated,1
and has come to symbolize the beginning of a
tectonic shift in global economic policy toward neoliberalism that
started in the late 1970s and 1980s. Seen from today’s perspective,
deregulation was part of the neoliberal policy agenda enacted by
the Thatcher government in the UK and the Reagan Administration
in the US, based on the economic theories of Frederick von Hayek,
Milton Friedman, and the Chicago School of Economics that
favored a more laissez-faire approach to economic matters. From
the structural adjustment programs of the 1980s to the
Washington Consensus in the 1990s, neoliberal economic policies
held sway in the US and UK, and were actively promoted around
the world through the actions of the US government, the World
Bank, and International Monetary Fund, among other governments
and agencies. Friedman (2000) identified deregulation as one of the
central characteristics of the ‘‘golden straitjacket” approach for national
success in the contemporary era of globalization, along with
privatization, free trade, reducing state bureaucracies, opening
markets to foreign investment and ownership, and other policies
that favor the private sector (Goetz, 2002).
Airline deregulation in the US has been widely hailed as a success
by government agencies, several research organizations and
think-tanks, the airline industry itself, and the popular media.
The US Department of Transportation (1990, 1996, 2000), the US
Government Accountability Office (2006), the Transportation Research
Board (1991, 1999), and the Brookings Institution (Morrison
and Winston, 1995, 2008; Winston and Peltzman, 2000), among
others (Levine, 2006) have each documented the success of airline
deregulation, especially in terms of lower fares, increased passenger
traffic, and more flights since 1978. The airline industry, mainly
through the US Air Transport Association and other trade groups,
0966-6923/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jtrangeo.2009.02.012
* Corresponding author.
E-mail address: agoetz@du.edu (A.R. Goetz).
1
Deregulation of the airline industry was followed closely by other transportation
industry deregulation, including railroads (1980), and motor carriers and buses
(1982). Deregulation of financial services, (including savings and loan institutions),
energy, and telecommunication industries occurred over the next two decades.
Journal of Transport Geography 17 (2009) 251–263
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has also touted the benefits of deregulation, and has remained
publicly supportive.2
Two popular video documentaries and companion
books, Commanding Heights: The Battle for the World Economy
(Yergin and Stanislaw, 2002) and The First Measured Century (Caplow
et al., 2001) featured airline deregulation as one of the marquee successes
of the neoliberal agenda over the last 30 years.
Yet, despite this chorus of support, numerous concerns regarding
US airline deregulation have emerged. The industry has gone
through waves of mergers and consolidations that have resulted
in high levels of single-firm concentration in certain markets. The
widespread adoption of hub-and-spoke networks, in conjunction
with industry consolidation and barriers to entry, has led to the
establishment of ‘‘fortress hubs”, where a single airline has come
to control 70%, 80%, or even 90% of the market in those cities. This
domination has resulted in a fare premium, or ‘‘monopoly rent”
that travelers from those cities have been forced to pay. In addition
to the fortress hubs, many mid-sized and smaller communities
have encountered substantially increased average fares and reduced
levels of service, leading to the development of programs
to ameliorate these problems. Certain regions of the US, such as
the southeast Piedmont area, the upper Midwest, and parts of
the Northeast, have been identified as ‘‘pockets of pain” because
of perennially high fares and poorer quantity and quality of service
(Goetz, 2002). Throughout the period of deregulation, and especially
in the late 1990s, smaller carriers have alleged that larger airlines
engaged in predatory pricing behavior to drive the smaller
carriers out of lucrative markets or out of business altogether (USDOT,
2001). And, the financial condition of the US airline industry
since deregulation began has been highly erratic, as losses have
overwhelmed profits by a wide margin.
Added to these concerns is the overall role that deregulation has
played in other industries, which has resulted in a number of major
economic scandals. The global economic crisis of 2008 is the most
recent and largest crisis that, many analysts contend, had its roots
in the deregulation of the financial services industry, serving as an
example of why the implementation of deregulation as a universal
economic policy panacea is naïve and short-sighted. The weakening
of New Deal-era financial regulations and regulatory structures
in the name of laissez-faire economic policy, has been a contributing
factor in the current financial disaster. The abdication of
responsible government oversight has led to conflicts of interest
and fraudulent abuse that contributed to the collapse of the financial
services industry and the need for a federal government bailout
totaling at least $700 billion as of September and October
2008 (Kuttner, 2007).
The most recent and largest crisis was not the first. The savings
and loan (S&L) crisis of the late 1980s and early 1990s was caused
in part by federal legislation, such as the Depository Institutions
Deregulation and Monetary Control Act (the Garn-St Germain
Act), that deregulated the industry and ultimately led to a $125 billion
US government bail-out when many S&Ls failed (Calavita et al.,
1997; Congressional Budget Office, 1992; Lowy, 1991; Mayer,
1990; Robinson, 1990; White, 1991). Energy deregulation in California
facilitated corporate fraud and abuse in the case of the Enron
scandal and collapse in 2001 (Slocum, 2001). And the global economic
crisis of 2008 also has its roots in the sub-prime mortgage
crisis that is ravaging many homeowners, neighborhoods, and
financial institutions, while wreaking general havoc on the US
economy. Mortgage giant Countrywide Financial received a $5 billion
US government bail-out in 2007, the US Federal Reserve assisted
the sale of financial institution Bear-Stearns in March 2008
with $30 billion of guarantees, and the US Treasury Department
and Federal Reserve bank announced their support of the Federal
National Mortgage Association [Fannie Mae] and the Federal Home
Loan Mortgage Corporation [Freddie Mac] in July 2008 due to the
losses incurred as part of the sub-prime mortgage crisis. These actions
were taken before the collapse of Lehmann Brothers in September
2008 sent the stock market into a tailspin, and the US
Treasury Department announced the need to provide $700 billion
of relief to financial institutions to help loosen the tightening credit
market.
In comparison to the financial services industry, the airlines
have been a relative success story. Yet, there are troubling similarities
in each of the cases of industry deregulation. While the airline
industry has not yet experienced crises on the scale of the savings
and loan industry or the mortgage institutions, the deregulatory
ethos that dismisses the role of government oversight is the common
denominator. Fortunately for the airline industry and travelers,
the problems of deregulation have been relatively less
severe, but experiences in the other industries are important lessons
that should be heeded.
Accordingly, this paper sets out to make three contributions to
the literature as related to the story of airline deregulation. First,
economic theory will provide the context for an updated overview
of the positive, negative, and really negative results of US airline
deregulation, summarized in the form of ‘‘the good”, ‘‘the bad”,
and ‘‘the ugly”. Second, this paper provides a periodization of the
30-year history of US airline deregulation that is important in
understanding the cycles of change as reflected in the industry’s
financial performance and other relevant data. Third, this paper
contributes to the renewed debate about the efficacy of deregulation
and liberalization policies, particularly at a time when the global
financial crisis has cast a harsh spotlight on the (un)desirability
of these policies.
2. Theoretical and historical background
2.1. Relevant economic concepts
There are a number of economic concepts that are relevant to
the theoretical discussion of regulation and deregulation in industries
and economies.
Many traditional neoclassical economic models are predicated
on the assumption of ‘‘perfect” or ‘‘pure” competition, wherein
very large numbers of buyers and sellers trade standardized products
or services in a market and no one entity can control prices.
While few, if any, actual industries can be described as perfectly
competitive, some industries, such as traditional agriculture, have
approximated this behavior. The concept of perfect competition
has attained considerable analytical importance because it is a
tractable starting point against which actual economic performance
can be compared and has been widely used as a basic
assumption in economic models. According to orthodox neoclassical
economic theory, there should not be a need for government
regulation in a perfectly competitive market because the market
is not subject to monopoly abuse. This argument sets aside a host
of other reasons why there is a need for government regulation in a
free market economy, e.g., the nature of public goods, environmental
concerns with common resources, workers’ rights, national
security and defense, and other national or state interests.
At the other end of the spectrum is ‘‘perfect” or ‘‘pure” monopoly,
wherein the market for a product or service is controlled by
only one seller, and prices are wholly determined by that seller.
An oligopoly refers to a market that is controlled by only a few
2
The airlines were initially opposed to deregulation, but after the lead of United,
they eventually all fell into line with the new policy and became highly supportive of
it. The airlines became attracted to deregulation because of the increased power and
control ceded to industry management which would prove useful in curbing labor
costs, as well as the potential for each airline to become a ‘‘big” player in the newly
scrambled industry.
252 A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263
sellers, and can behave like a monopoly. Similar to perfect competition,
there are few, if any, actual industries that are perfect
monopolies, but some industries with large economies of scale
and high barriers to entry such as classic public utilities (e.g., electric
power, water supply), have been considered to be monopolistic.
An industry that is characterized by only one buyer that can
exert control over prices is called a perfect monopsony. In an
industry characterized by monopoly or monopsony conditions,
and in which there is a significant ‘‘public interest” in the operation
of an industry, it has been necessary for government to enact regulations
so that single entities cannot unduly control prices and
quantity produced to the detriment of the public.
Real-world industries and markets lie on a continuum somewhere
between pure competition and pure monopoly. The need
for government regulation depends on the degree to which an
industry is subject to monopoly abuse, as well as the degree of public
interest in that industry. The extent of government regulation
has changed over time, depending on economic conditions and perceptions.
Throughout much of the 1800s in the US, a laissez-faire
system of capitalism reigned supreme whereby government played
virtually no role in economic matters, and private firms had carte
blanche in business matters within the existing legal framework.
This led to a period of Darwinistic survival of the fittest, where very
large firms came to dominate important industries, including steel,
oil, railroads, banking, and communications. The railroad industry
was one of the first to be subject to significant government regulation
in the US because of the outcry from farmers as part of the
Granger movement which strenuously objected to monopoly pricing
by the railroads. This political movement led to the promulgation
of the Interstate Commerce Act of 1887 that created the
Interstate Commerce Commission (ICC) with the purpose of regulating
railroad rates, entry, and exit. This form of regulation was extended
to motor carriers (trucks) and airlines in the 1930s.
The US airline industry in the 1930s was just starting to become
a contributor to the movement of passengers and mail, although it
was beset by a number of problems due to its fledgling technology
as well as depressed economic conditions of the time. Market failure
during the Great Depression of the 1930s led the federal government
to develop a variety of regulatory mechanisms to
stabilize and bolster the national economy. In the airline industry,
the federal government had been supporting airline delivery of
mail through a subsidy program, but the cash subsidies were growing
larger, which was a problem. Numerous airline companies
started and failed, creating an air of instability in the industry,
compounded by a disastrous safety record for a technology that
was still in its developmental phase. In response to these concerns,
the US Congress promulgated the 1938 Civil Aeronautics Act which
created the Civil Aeronautics Authority (renamed in 1940 as the
Civil Aeronautics Board [CAB]) to:
 encourage and develop the air transport system,
 promote safety and economic growth,
 regulate route entry and exit,3
fares, mergers and acquisitions,
and subsidies.
The CAB was authorized to award ‘‘certificates of public convenience
and necessity” to airlines to serve specific markets. Sixteen
airlines (including American, Continental, Delta, Northwest, and
United) were ‘‘grandfathered” in as original trunk airlines. Local
service airlines and air taxis (commuter airlines) were also allowed
to begin service during the 1940s. The CAB awarded routes to airlines
so as to provide a mix of larger and smaller markets to each
airline, expecting that each airline would be able to cross-subsidize
losses in smaller markets with profits earned in larger ones. Thus,
each airline was required to serve certain less profitable routes but
was also given more lucrative routes to help compensate.
The system of regulation provided stability in the airline industry
that facilitated its technological and economic growth over the
next forty years. But a number of problems with the regulatory
system led to the beginning of its reconsideration, as the system
created some market inefficiencies. Airlines were not able to compete
with each other based on price, due to regulated pricing by
the CAB, and thus competed with each other on quality of service.
The CAB was very inflexible regarding changes in pricing, entry, or
exit, thus depriving travelers of different price/service options. The
CAB did approve fare increases regularly as airlines sought to pass
along increasing costs. And, the issue of regulatory capture (who
regulates the regulators?) by special interests is always a concern
in any regulated environment.
By the 1970s, these concerns with the regulatory system led to a
reexamination of the efficacy of a regulated airline industry. A
number of economic studies (Caves, 1962; Levine, 1965; Jordan,
1970; Keeler, 1972; Douglas and Miller, 1974) laid the groundwork
for deregulation by showing that unregulated intrastate airlines in
California and Texas were able to offer lower fares and increased
service in comparison to regulated airlines. These and other studies
(Crane, 1944; Koontz, 1951; Proctor and Duncan, 1954; Wheatcroft,
1956; Cherrington, 1958; Gordon, 1965; Eads et al., 1969;
Straszheim, 1969; Murphy, 1969; White, 1979) also found that
there were no significant economies of scale or barriers to entry
in the airline industry, thus supporting the claim that continued
regulation was not needed. Other studies and testimonies (Kahn,
1977, 1978; Bailey and Panzar, 1981; Baumol et al., 1982) suggested
that the theory of contestable markets, wherein just the potential
threat of entry would cause firms to eschew monopoly
pricing and keep fares at lower levels, was applicable to the airline
industry. Armed with these studies, a political consensus began to
emerge that the airline industry should be deregulated. Congressional
hearings in 1975, led by Senator Edward Kennedy and assisted
by current Supreme Court Justice Stephen Breyer, and the
appointment of deregulation advocate Alfred Kahn as Chairman
of the CAB in 1977 paved the way for the decision to deregulate
the airline industry.
The Airline Deregulation Act was promulgated by the US Congress
and signed into law in October 1978, calling for removal of
CAB authority over fares, entry, and exit. Any carrier that was
‘‘fit, willing, and able” would be allowed to serve any route at
any fare. After a transition period from 1978 to 1982, the CAB itself
was sunsetted in December 1984. Authority over mergers and
acquisitions was transferred to the Department of Transportation
from 1985 to 1989, and then finally to the Antitrust Division of
the Department of Justice in 1989, though most merger requests
have been granted throughout the deregulation period.
3. Results of airline deregulation
3.1. Overview of the US airline industry since 1978
Since 1978, the US airline industry has experienced several
waves, or phases, of expansion and retrenchment, with significant
effects on industry structure, profitability, patterns of service, and
average fares (see Table 1). From 1978 to 1983 (‘‘Rise of the New
Entrants, Part I”), the newly deregulated industry witnessed an influx
of new entrants in many markets that had previously been
protected by the CAB. The ten trunk airlines that were in existence
3
It should be noted that CAB regulation did not extend to frequency nor capacity of
service, so once an airline had the authority to serve a route, that airline could add as
many flights and seats to that route as it deemed appropriate. In order to be more
competitive, airlines would add more frequencies but the additional capacity resulted
in lower average load factors during the pre-deregulation period.
A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263 253
at the start of deregulation (American, Braniff, Continental, Delta,
Eastern, Northwest, Pan Am, TWA, United, and Western) saw their
market share decline from 87% to 75% as a result of the growth
among the formerly local service/regional airlines (e.g., Frontier,
Ozark, Piedmont, Republic, US Air), the intrastate airlines (e.g.,
Air California, Air Florida, Pacific Southwest, and Southwest), charter
airlines (e.g., American TransAir [ATA], Capitol and World), and
completely new airlines (e.g., America West, Jet America, Midway,
Midwest Express, Muse, New York Air, and PEOPLExpress).
From 1983 to 1993 (‘‘The Majors Strike Back”), the former trunk
airlines (now referred to as majors based solely on their size) were
able to grow through mergers, acquisitions, and bankruptcies leading
to increased concentration and market share. After the demise of
Braniff, Eastern, and Pan Am, and the absorption of Western into
Delta, the remaining ten largest airlines held a 97% market share
in 1991 (Goetz, 2002). American, Continental, Delta, Northwest,
United, and US Air became the dominant players through acquisitions,
alliances with regional and commuter airlines, increasing control
over airport gates and slots, and successful marketing strategies
such as development and use of computer reservation systems
(CRSs), frequent flyer programs, and travel agent commission overrides
(Levine, 1987; Petzinger, 1995). Smaller independent airlines
were unable to compete with the majors, and many were acquired
or folded.
In the mid-late1990s (‘‘Rise of the New Entrants, Part II”), another
wave of expansion occurred that featured new entrants such
as Frontier,4
JetBlue, Kiwi, Midway,5
Reno, Spirit, ValuJet/AirTran,
Vanguard, and Western Pacific. Together with the continued growth
of Southwest Airlines, America West, ATA, and Midwest Express, the
larger carriers experienced a decline in their market share through
the 1990s. But by the late 1990s (‘‘Major Responses”), buoyed by a
strong economy and increased demand for air travel, the majors
reasserted their strength for a brief time.
The post-2000 period (‘‘LCC Growth and ‘Legacy’ Decline”) has
been very difficult for the US airline industry. The principal catastrophe
was the terrorist attacks on September 11, 2001, in which
two American Airlines and two United Airlines planes were hijacked,
and deliberately crashed into the World Trade Center, the
Pentagon, and a field in southwestern Pennsylvania. This event
was followed by an unprecedented four-day shutdown of the airline
system, and a prolonged period of low demand due to economic
recession, heightened security restrictions, the SARS
outbreak, concerns over the invasions of Afghanistan and Iraq,
and rising fuel costs. This ‘‘perfect storm” of events led to the loss
of nearly $35 billion from 2001 to 2005 (US Air Transport Association,
2006), by far the largest losses ever for the US airline industry.
The largest and oldest airlines, increasingly referred to as ‘‘legacy”
carriers, were particularly hard hit. Delta, Northwest, United, and
US Airways (twice) filed for bankruptcy protection since 2002,
TWA was acquired by American in 2001, US Airways merged with
America West in 2005, and the publicly-supported Pension Benefit
Guarantee Corporation (PBGC) was forced to take over pension benefit
plans from United, US Airways, and Delta. In contrast, low-cost
carriers (LCCs) such as Southwest and JetBlue were profitable
throughout much of this period, and other surviving low-cost carriers
were not as badly affected as the legacy carriers. Most recently,
in the 2005–2008 period, the sharp increase in the cost of fuel has
hurt the entire industry, leading to the termination of service by
Aloha Airlines, ATA, and Skybus Airlines, bankruptcy protection
for Frontier, and continuing financial losses for most other airlines.
3.2. Results of deregulation – ‘‘the good”
As mentioned previously, most assessments of US airline deregulation
have been positive. Reports from the Transportation
Research Board (1991, 1999) endorsed airline deregulation, noting
that consumers had benefited from low prices and new services,
carriers had become more cost conscious, and industry productivity
was improving. The US Government Accountability Office
(2006) stated that ‘‘the change in fares and service since deregulation
provides evidence that the vast majority of consumers have
benefited, though not all to the same degree.” They also concluded
that ‘‘reregulation of airline entry and fares would likely reverse
much of the benefits that consumers have gained and would not
save airline pensions.” The Brookings Institution (Morrison and
Winston, 2008) noted that the nation has reason to celebrate the
30th anniversary of the Airline Deregulation Act because fares have
fallen significantly, flight frequency has increased, carriers have become
more efficient, and air travel safety continues to improve.
Indeed, there have been benefits to airline deregulation. The total
number of passengers flying on US airlines has nearly tripled over
the past 30 years from approximately 275 million in 1978 to nearly
750 million in 2006 (see Fig. 1). It could be argued that the number of
passengers would have increased without deregulation, but it most
likely would not have been nearly as high. Every one of the top 100
air passenger cities experienced an increase in the number of passengers
over the last 30 years (see Fig. 2). The largest increases were
for cities along the East Coast, Florida, Texas, and the Far West. Many
cities in the Midwest and South had smaller increases. These patterns
tend to mirror overall population and economic growth among
US cities over the last 30 years, but cities with an economic orientation
toward higher-order producer services and leisure/resort markets
typically had the largest increases. The number of flight
departures increased over twofold from five million in 1978 to over
11 million in 2006 (see Fig. 3). Nearly every major air passenger city
experienced an increase in flight departures (see Fig. 4). The largest
increases were in the Northeast, Florida, and California, while Pittsburgh
and New Orleans were the only two cities with decreases.
Pittsburgh recently lost its main hubbing airline (US Airways) while
New Orleans was devastated by Hurricane Katrina, and has experienced
a sharp dropoff in population and economic activity.
It has been well-documented that average fares have declined
during the period of deregulation (Transportation Research Board,
1999; US Department of Transportation, 2000). Fig. 5 illustrates
that average fares have continued to trend downward from 1993
to 2007, especially when controlling for inflation. Non-adjusted
fares increased slightly during the 1990s, dropped significantly
Table 1
The historical periods of US airline deregulation, 1978–2008.
Dates Period Airlines in ascendancy
1978–1983 Rise of the New Entrants, Part I PEOPLExpress, New York Air, Midway, America West, Southwest
1983–1993 The Majors Strike Back: mergers, acquisitions, and increased concentration American, Continental, Delta, Northwest, United, US Air
1993–1996 Rise of the New Entrants, Part II ValuJet/AirTran, Frontier, Kiwi, Spirit, Vanguard, Western Pacific
1996–2000 Major responses American, Continental, Delta, United
2000–2008 LCC Growth and ‘Legacy’ Decline Southwest, JetBlue
Source: Authors.
4
The original Frontier Airlines was a local service carrier before deregulation and
was acquired by PEOPLExpress and then folded into Continental in 1986. The new
Frontier Airlines started operations in 1993.
5
The original Midway Airlines started shortly after deregulation began and ceased
operations in 1991. The new Midway Airlines started service in 1993.
254 A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263
during the first half of the 2000s, but started to rise again in the last
several years due to the rapidly rising cost of fuel.
Air safety has generally not been compromised during the period
of deregulation, despite concerns that carriers under financial
stress might forego safety overhauls and aircraft maintenance in
order to save money. Airline fatalities have generally declined over
the last 30 years, including several years with no fatalities (see
Fig. 6). Of course, 2001 stands out as a year with a sharp increase
in fatalities but that was due to the terrorist attacks of September
11. The number of fatal accidents per 100,000 departures has also
been trending downward.
US domestic airline deregulation has had a major effect on the
international aviation regulatory environment. Since US aviation
policy has embraced deregulation in both the domestic and international
arenas, a large number of liberalized ‘open skies’ bilateral
air service agreements have been signed with other states that
shared this policy initiative. As a result, international fares have
been reduced, international flights and passengers have increased,
0
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
Fig. 1. Total US Airline Passengers, 1977–2006 (in thousands). Source: FAA Terminal Area Forecast (TAF), 2007.
Fig. 2. Percent Change in US Airline Passenger Enplanements for the Largest 100 US Air Passenger Cities, 1978–2007. Source: FAA Terminal Area Forecast (TAF), 2007.
A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263 255
and more cities are now receiving international service than before
deregulation started.
3.3. Results of deregulation – ‘‘the bad”
Even though there have been some positive results as
just discussed, there have also been some negative aspects
associated with US airline deregulation. There has been a tremendous
amount of turnover in the US airline industry over
the last 30 years, with many carriers being merged, acquired,
or liquidated. This has led to increased instability in employment
and distinct periods of labor strife. The takeover of Eastern
Airlines by Continental CEO Frank Lorenzo in the late 1980s
led to a particularly acrimonious strike by Eastern’s mechanics
which ultimately resulted in the demise of Eastern and
bankruptcy for Continental. Overall, labor–management relations
in the airline industry over the last 30 years have not been
stellar. Labor strife has negatively affected most of the major
airlines, with some notable exceptions such as Southwest
Airlines.
0
2.000.000
4.000.000
6.000.000
8.000.000
10.000.000
12.000.000
14.000.000
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Departures
Fig. 3. Flight Departures, 1977–2006. Source: FAA Terminal Area Forecast (TAF), 2007.
Fig. 4. Percent Change in Flight Departures for the Largest 100 US Air Passenger Cities, 1978–2007. Source: FAA Terminal Area Forecast (TAF), 2007.
256 A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263
Numerous studies by the US Government Accountability Office
(1988, 1989, 1990a,b,c, 1991a,b, 1993, 1996a,b,c, 1997a,b,c,
1998a,b,c, 1999a,b,c,d, 2000, 2001a,b,c, 2002, 2003, 2004,
2005a,b, 2006a,b),6
the Transportation Research Board (1991,
1999) and others (Borenstein, 1989; Brenner, 1988; Debbage,
1993; Dempsey and Goetz, 1992; Fleming, 1991; Goetz, 2002; Goetz
and Sutton, 1997; Ivy, 1993; Reynolds-Feighan, 1998; Vowles, 2000)
have identified some problems with airline service and fares. In general,
service and fares in shorter-distance7
and less-traveled city-pair
markets (i.e., smaller cities) have not been as good as those in longer-distance
and heavily-trafficked markets (US Government
Accountability Office, 2006). Travelers in concentrated markets subject
to single-carrier domination with market shares of 60% or higher
have tended to pay higher fares. Travelers have also experienced a
decline in the quality of airline service, as measured by increased
$150.00
$170.00
$190.00
$210.00
$230.00
$250.00
$270.00
$290.00
$310.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Non-Adjusted
Inflation Adjusted
Fig. 5. Average One-Way Fares, 1993–2007 (in US dollars). Source: The Airline Origin and Destination Survey (DB1B), Office of Airline Information of the Bureau of
Transportation Statistics, 2008.
0
100
200
300
400
500
600
700
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
0.000
0.020
0.040
0.060
0.080
0.100
0.120
0.140
Fatalities Fatal Accidents / 100,000 departures
Fig. 6. Fatalities and Fatal Accidents, 1977–2006. Source: US Air Transport Association, Annual Report of the US Airline Industry, 2007.
6
Called the US General Accounting Office prior to 2004. 7
The GAO defined short-distance routes as less than 250 miles.
A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263 257
congestion and delays, longer travel times, and poorer customer
service.
The combination of these service and fare tendencies has exhibited
a distinctive spatial form, wherein certain cities in certain regions
have chronically received poorer service and higher fares.
Fig. 7a–c exhibits the spatial pattern of low and high fare regions,
as well as low and high yield (fares per passenger-mile) cities for
1993, 1998, and 2003, respectively. The Southwest and West Coast
Fig. 7. Geography of Air Fares for FAA-Defined Large, Medium, and Small Hub Cities: (a) 1993, (b) 1998 and (c) 2003. Source: The Airline Origin and Destination Survey (DB1B),
Office of Airline Information of the Bureau of Transportation Statistics.
258 A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263
have generally experienced lower air fares throughout this time
period, while the Southeast, the upper Midwest, and parts of the
Northeast have had higher fares. These geographic patterns have
remained relatively stable throughout this time period, resulting
in certain places (e.g., Charlotte, NC; Cincinnati, OH; Memphis,
TN, and Richmond, VA) that have experienced higher than average
fares throughout much of the period of airline deregulation (see
Fig. 8). Fig. 9 displays average fares for 2007, showing continued
higher fares in the Southeast, Upper Midwest, and parts of the
Northeast, in addition to higher fares along the West Coast. Lower
fares are concentrated in Florida, Texas, and parts of the Northeast,
Midwest and West. Much of this relatively consistent pattern can
Fig. 8. ‘‘Pockets of Pain” in the US Air Transport System. Source: Goetz (2002).
Fig. 9. Geography of Air Fares for the Largest 100 US Air Passenger Cities, 2007. Source: The Airline Origin and Destination Survey (DB1B), Office of Airline Information of the
Bureau of Transportation Statistics.
A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263 259
be explained by the presence or absence of low-cost carriers, as
well as regional concentrations of cities with single-carrier
domination.
3.4. Results of deregulation – ‘‘the ugly”
What is undoubtedly the ugliest aspect of the US airline industry
over the last 30 years has been its financial performance. Fig. 10
illustrates the cyclical nature of US airline financial performance
from 1977 to 2006. While there have been some highly profitable
periods, such as 1995–2000, there have been some spectacularly
unprofitable periods, such as 1990–1994 and especially 2001–
2005. The most troubling aspect of this cyclical pattern is that
the amplitudes of the cycle keep getting larger and the degree of
losses is larger than the previous degree of gains. This trend does
not bode well for the future of the airline industry, especially considering
the sharp increases in fuel costs from 2005 to 2008, and
long-term uncertainties with petroleum-based aviation jet fuel
(Dempsey, 2008).
The financial problems in the US airline industry have led to
many changes in industry structure. Table 2 documents significant
bankruptcies, terminations, mergers, and acquisitions just from
2000 to 2008. Industry stalwarts Delta, Northwest, United, and
US Airways (twice) have each declared bankruptcy since 2000, as
has 1990s startup Frontier. Aloha, ATA, and Skybus have ceased
operations as of 2008. TWA was acquired by American in 2001,
US Airways merged with America West in 2005, and Delta and
Northwest merged in 2008. United and Continental agreed to an
alliance, or ‘‘virtual merger” in 2008 to link international networks
and share technology and passenger perks (Johnsson, 2008).
Another disturbing consequence of the financial disasters in the
airline industry has been the move by some airlines under bankruptcy
protection to terminate their defined benefit pension programs.
Since 2000, United, US Airways, and Delta Airlines, in
addition to Eastern and Pan Am in 1991, were successful in paring
their pension obligations, thus necessitating the federal Pension
Benefit Guarantee Corporation (PBGC) to assume some of their pension
liabilities. Together with some of the most negatively affected
steel industry firms, the airlines dominate the list of the largest pension
bailouts in PBGC history (see Table 3). In many cases, the PBGC
does not cover the full amount of pensions that workers in the original
pension plans were entitled to receive. Nevertheless, these
workers are provided some level of pension benefits from the PBGC,
-$12,000
-$9,000
-$6,000
-$3,000
$0
$3,000
$6,000
$9,000
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
($ millions)
Fig. 10. Profits and Losses in the US Airline Industry, 1977–2006 (millions of US dollars). Source: US Air Transport Association, Annual Report of the US Airline Industry, 2007.
Table 2
Significant US airline bankruptcies, terminations, mergers, and acquisitions, 2000–
2008.
Airline Entered bankruptcy Exited bankruptcy Ceased operations
Bankruptcies and terminations
Midway August 2001 October 2003
Sun Country January 2002
Vanguard July 2002
US Airways August 2002 March 2003
United December 2002 February 2006
Hawaiian March 2003 June 2005
US Airways September 2004 September 2005
ATA November 2004 March 2006 April 2008
Delta September 2005 April 2007
Comair September 2005 April 2007
Northwest September 2005 May 2007
Independence November 2005 January 2006
Big Sky January 2008
Champion March 2008 May 2008
Aloha March 2008
Skybus April 2008
Frontier April 2008
Airlines Date
Mergers and acquisitions
TWA acquired by American April 2001
US Airways merged with America West September 2005
Delta merged with Northwest April 2008 (subject to regulatory
approval)
United alliance agreement with
Continental
June 2008
Source: US Air Transport Association (2008).
http://www.airlines.org/economics/specialtopics/USAirlineBankruptcies.htm.
Accessed August 8, 2008.
260 A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263
which is funded through insurance premiums paid by sponsors of
defined benefit plans and through other funds.
4. Conclusions and reflections
After experiencing 30 years of deregulation in the US airline
industry, most observers agree that it has been a success, particularly
in lowering average fares, providing more flights, and increasing
carrier efficiency, while maintaining a good safety record. On
the negative side, airlines have encountered wide swings in profitability,
with losses being much larger than gains. This financial turbulence
has resulted in increasing instability in industry structure
and employment, while service quality has declined. Fares and service
for smaller cities, shorter-haul routes, and more concentrated
markets (where single-carrier domination persists) have also been
negatively affected.
Why has the US airline industry’s financial performance been so
miserable over the 30-year period of deregulation? Part of the answer
lies in the cyclical nature of the industry and its particular
vulnerability to economic conditions. When the economy is doing
well, the airline industry tends to perform very well, such as during
the late 1990s in the midst of the dot-com boom. But when the
economy retrenches, such as during the economic/international
security crises of the early 1990s and the early 2000s, the airline
industry is negatively affected far more than other industries.
The early 1990s economic recession and Gulf War intervention depressed
demand for air travel, leading to a loss of over $13 billion
from 1990 to 1993. Likewise, the ‘‘perfect storm” of negative
events from 2001 to 2005 led to a loss of over $30 billion. But there
are other factors that contributed to the size of the losses. The airlines
themselves are to blame for mismanagement and poor financial
decision-making. Many industry observers also cite overly
generous bankruptcy laws that allow insolvent airlines to continue
flying while restructuring under Chapter 11 protection from creditors.
This results in maintaining additional capacity and lower
fares during economic downturns, thus causing greater losses for
the entire industry.
The other part of the answer to the miserable financial results
has to do with deregulation itself. Under the period of regulation,
from 1938 to 1978, the US airline industry never experienced
financial losses anywhere near the scale of those of the post-deregulation
period. The US airline industry was profitable and enjoyed
steady growth and development during those forty years, albeit
not without problems as identified earlier in this paper. Once the
industry was deregulated, however, the airlines were allowed to
make their own decisions regarding entry, exit, fares, and mergers
and acquisitions.8
Left to their own devices, some airlines made
good decisions, some made bad decisions, while others were just
plain ugly. In theory, the invisible hand of the free market should
have weeded out the underperformers, but because the airline
industry is naturally oligopolistic, the competitive strategies taken
by some firms affect the behavior of others not necessarily in a logical
manner, and the collective results are not necessarily positive.
Thus, there is a compelling need for at least some regulatory oversight
over this industry, since it exhibits a tendency towards destructive
competition. A vital and viable airline industry is important to
national economic competitiveness, regional economic development,
and the ‘‘public interest,” and should not be left solely to an
imperfectly competitive laissez-faire regime. This is not to suggest
that we should return to the overtly heavy-handed regulation of
the past, but that we should never abdicate responsible regulatory
oversight in an industry that is naturally oligopolistic and is so vital
to the national interest.
That said, the experience with deregulation in the airline industry
has nonetheless been better than in some other industries that
have been deregulated. Deregulation in the financial services
industry caused, at least in part, the savings and loan scandal of
the 1980s, and is directly responsible for the current global economic
crisis and related sub-prime mortgage crisis. Though not
experiencing nearly as much turmoil, the airline industry shares
some of the troubling developments that have affected other
deregulated industries, especially financial instability and the need
for ‘‘non-market interventions” (i.e., governmental bailouts). In
important ‘‘public interest” industries like financial services, energy,
aviation, and others, there is a necessary role for government
oversight. Many industries were deregulated in the ‘‘frenzy” of the
movement of the 1980s and beyond, oftentimes with insufficient
regard for the long-term consequences. A ‘‘deregulation mindset”
took over wherein it seemed that well-established, well-intentioned,
and common-sense regulations no longer mattered and
that the invisible hand of the laissez-faire market would solve all
problems. In retrospect, in the most egregious cases of abuse, an
ounce of regulatory prevention would have been worth more than
a pound of cure. It is thus the irrational aversion to government
regulation, no matter the justification, that typified the excesses
of the deregulation movement and ultimately laid the groundwork
for the deregulation-attributed scandals that have occurred. Fortunately,
at least in comparison, the airline industry and travelers
have not experienced a complete meltdown.
The principal concern for the immediate future of the airline
industry is financial sustainability. Losses on the order of those
encountered by the US airlines especially since 1990 are clearly
not sustainable. Outside of Southwest Airlines, no airline has been
able to maintain a consistent record of profitability. It is inevitable
that fares will increase via industry consolidation as a result of the
need to cover costs. What is not clear is the effect that rising fares
will have on passenger demand. Many travelers have grown accustomed
to relatively low fares, but may balk at significant fare increases.
Changes in business and leisure travel behavior may
signal the need for retrenchment in airline service capacity. Other
modes of travel (e.g., rail) or telecommunication alternatives to travel
(e.g., videoconferencing, skype, etc.), will become more attractive
as the fares rise. The demand for air travel is relatively elastic,
and substantial increases in fares will have a depressing effect on
demand.
Table 3
Pension Benefit Guarantee Corporation (PBGC) top 10 firms presenting claims (1975–
2007) – single-employer programs.
Firms Years of Termination Claims (by Firm)
United Airlines 2005 $7.50 billion
Bethlehem Steel 2003 $3.65
US Airways 2003, 2005 $2.68
LTV Steel 2002, 2003, 2004 $2.13
Delta Airlines 2006 $1.74
National Steel 2003 $1.28
Pan American Airlines 1991, 1992 $0.84
Trans World Airlines 2001 $0.67
Weirton Steel 2004 $0.64
Kaiser Aluminum 2004, 2007 $0.60
Source: Pension Benefit Guarantee Corporation. Pension Insurance Data Book, 2007,
Table S-5, p. 44.
8
Mergers and acquisitions continued to be subject to some regulatory oversight
after deregulation, first by the lame-duck Civil Aeronautics Board (1978–1984), then
by the Reagan Administration Department of Transportation (1985–1989), and then
by the Department of Justice (since 1989). Throughout this period, these agencies
tended to approve most merger and acquisition requests, best exemplified in the
merger and acquisition frenzy of the 1980s. The debt that airline companies incurred
as a result of their highly leveraged buy-outs (LBOs), was a drag on profitability, and
contributed to the poor financial performance of this period.
A.R. Goetz, T.M. Vowles / Journal of Transport Geography 17 (2009) 251–263 261
Acknowledgements
The authors wish to acknowledge the useful comments of the
anonymous reviewers and John Bowen, the editor for this special
issue.
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