Airline Deregulation: Myth or Reality?

June 11, 2012

The major "deregulation" of interstate freight airline services occurred in 1977, followed by similar regulatory changes for passenger services in 1978.  The legislation of the 1970s demonstrably produced net welfare gains for the American people, primarily by allowing domestic airlines to compete on price and innovations in their services, says Kenneth Button, a professor at George Mason University.

However, substantial governmental control remains in a number of areas, including monopolistic dominance over air transportation infrastructure and limitations on foreign competition.

  • The U.S. air navigation system is part of the U.S. Department of Transportation and operated by the Federal Aviation Administration.
  • There is actual little pricing for services; rather, revenues are generated through taxation.
  • Airport services, including slots and gates, are not priced according to market-based principles, with "first come" a common principle used regarding take-offs and landings.
  • In particular, fees do not reflect the prevailing congestion levels at airports and the congestion caused by different types of aircraft at different times of the day.
  • Efforts to auction portions of infrastructure, thereby introducing market forces, have been limited in application.

Furthermore, the government has maintained Open Skies policies for more than 30 years, thereby liberalizing air transportation markets.  However, this competitive atmosphere has been confined to domestic carriers to the exclusion of powerful foreign carriers that could bring lower prices.

  • In recent times, the airline market has become increasingly global with considerable amounts of cross investments between airlines.
  • Foreign markets have also seen the emergence of the three mega airline alliances: the Star Alliance, Oneworld and SkyTeam.
  • While the U.S. market is, to some extent, integrated into this system, the integration has been gradual and is incomplete.
  • The result is that U.S. air travelers have not always enjoyed the full potential of globalization.
  • In particular, investment in U.S. airlines is limited in a number of ways in terms of the extent of foreign participation and control.
  • Thus, competition to stimulate efficiency within the U.S. domestic market is limited to American carriers.

Market-oriented reforms in other countries to address these problems and others have been largely to the benefit of passengers and have resulted in more efficient air transportation sectors.

Source: Kenneth Button, "Airline Deregulation: Myth or Reality?" Mercatus Center, May 2012.

For text:

http://mercatus.org/sites/default/files/Airline-Deregulation-Myth-Or-Reality-Button.pdf

 

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