40 years of airline deregulation: successes and surprises · 40 years of airline deregulation:...
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40 YEARS OF AIRLINE
DEREGULATION:
SUCCESSES AND SURPRISES
Nancy L. Rose
MIT & NBER
Brookings Institution
Center on Regulation and Markets
October 30. 2018
REGULATION 1940-1978: THE GOOD
US air travel is safe, comfortable, and innovative
Large set of U.S. carriers
11 of 16 original “Trunk Airlines” (two International
‘Flag’ carriers) & 12 “Local Service”
Prices set by CAB, target 55% load factor, 12%
return
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REGULATION: THE BAD & UGLY
Administrative route and network structure
No new airline entry, informal route moratorium post-1969
Most routes have only 1 or 2 airlines
High and rising prices with little/no discounting
Vs. comparable unregulated intrastate routes
Substantial nonprice competition, of unknown net social value
Flight frequency, new aircraft, uniforms, & piano bars
Airlines are still losing money…
Douglas & Miller P↑→frequency↑ →load factor ↓ “death spiral”
Regulatory evasion efforts (Freddy Laker)3
SUCCESSES
A demonstration project for deregulation
Trucking, Railroads, Natural gas, and more….
Markets replace administrative decision-making
Air travel access expands
Prices fall and productivity rises
*Air cargo deregulation should not be footnote!
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AIR TRAVEL EXPANDS
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200,000,000
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De
pa
rtu
res
(000s)
Year
U.S. Domestic Airline Traffic 1937- 2017
Departures (000)
RPMs (000)
ASMs (000)
Enplanements
Source: Data from Severin Borenstein and Nancy L. Rose, “How Airline Markets Work,… or Do They? Regulatory Reform in the Airline Industry.” In N. L. Rose, ed., Economic
Regulation and Its Reform: What Have We Learned? National Bureau of Economic Research and University of Chicago Press. 2014. Updated with data from
www.airlines.org
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REFLECTING GREATER ACCESS NOT ONLY MORE FLIGHTS/FLYER
Source: www. airlines.org
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PRODUCTIVITY HAS RISENLoad factors increase efficiency …though not passenger comfort
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Loa
d F
ac
tor
(pe
rce
nt)
Year
Domestic Load Factor 1937- 2017
Load
Factor
(percent)
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Source: See slide 5
REAL FARES HAVE DECLINEDEven relative to a regulated benchmark?
Source: See slide 5
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EXPANSION BY SOUTHWEST & OTHER LCCSCritical to competition over past 20 years
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Expansion of Low Cost Carriers, 1995-2017
Southwest All LCC Carriers
Source: Calculations from DB1B
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SOME SURPRISES
Network evolution to hubs
The importance of domestic feed for international airlines (PanAm, TWA)
Congestion & delays: Whose fault?
Pricing strategies
Loyalty programs, price dispersion & ancillary fees
Entry, exits, and consolidations
Strategic leverage and bankruptcies?10
NETWORK EVOLUTION: HUB AND SPOKE
CONNECTS MANY O-D PAIRS
Delta 1974 System Map Delta 2015 System Map11
CONGESTION AND FLIGHT DELAYS
Data source: FAA Operational Network (OPSNET) (data through June ’17)Courtesy of J. Hansman, “Overview of Airline Industry Forces and Trends, Fall 2018,” MIT ICAT
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NEW PRICING STRATEGIES EXPANDED PRICE
DISPERSION
13Source: See slide 5
FARES TELL ONLY PART OF THE STORYand this excludes seat assignment, food, other on board revenue
Courtesy of J. Hansman, “Overview of Airline Industry Forces and Trends, Fall 2018,” MIT ICAT
FEE AND ANCILLARY REVENUE GROWTH 2005-2018 (NOMINAL $)
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ONGOING CHALLENGES
Consolidation: Mergers & Alliances
What should be the standard?
International competition: alliances & antitrust immunity?
Conduct?
Pricing transparency
Infrastructure investments and access
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