Regulation Policy

What Full-Fare Air Travelers Gain From Deregulation

It is a widespread misconception that full-fare airline passengers subsidize discount air fares, says Robert L. Crandell of American Airlines. Actually, it is the other way around: discount air travelers "subsidize" full-fare business travelers.

Prior to airline deregulation in 1978, the federal government set domestic air fares based on average industry costs by length of flight. Today, fares are set by supply and demand in the market place, creating a very complex fare structure that offers customers any combination of price and convenience they want.

  • About 93 percent of American Airlines' passengers fly on some sort of discount, says Crandell -- with the most heavily discounted tickets imposing the greatest restrictions on their use.

  • The other seven percent of passengers pay full fare -- their tickets are unrestricted.

  • Unrestricted fares are worth more than discounted ones because they include a premium -- in effect -- that pays airlines to keep seats unsold until the last minute and forgo the opportunity to sell those seats at an earlier date for a lower price.

By selling seats not needed by business travelers to so called leisure fliers, airlines gain revenue that would otherwise have to be made up by charging still higher unrestricted fares. And by making it possible for airlines to offer far more flights than business-travel demand alone would fill, the discount travelers benefit business class fliers.

Thus there are far more scheduled flights today than under regulation, and airline tickets are 37 percent cheaper on average than before deregulation -- even after adjusting for inflation.

Source: Robert L. Crandell, "How Airline Pricing Works," May 1, 1998, American Way.

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