In one form or another the U.S. government has regulated the domestic airline industry since 1930. The imposition of various rules and regulations has kept the industry from becoming as efficient as it might have become had it evolved in a free market. While many controls ended in 1978 and the Civil Aeronautics Board (CAB) was abolished in 1985, the bureaucracy associated with the Federal Aviation Administration (FAA) continues, and the government still thwarts the competitive process.
For example, foreign airlines are barred from flying passengers between domestic locations–so-called “cabotage.” By requiring airlines carrying domestic passengers to be American-owned, the government limits competition in a way that resembles how the CAB limited it. During the CAB years, domestic carriers were allowed to serve only routes for which they held licenses. The certification procedure limited competition between carriers. In 1978 that control was abandoned. However, the protectionist policy continues to limit competition in domestic markets.
Airline deregulation was wildly successful.1 In the aftermath of decontrol, airfares dropped while the number of passengers increased. Competition forced the airlines to significantly change their business strategies. Among the most prominent changes was the hub-and-spoke networking system now used by almost all major airlines. Only Southwest Airlines uses substantial point-to-point market segments in its system. Yet even Southwest employs hub locations. As expected, those unable to make the changes needed to succeed have been forced out of the industry. The system has thus been greatly improved, and travelers today have far better options than they have ever had before.
Despite the success of decontrol, a number of problems remain. Anyone who flies knows that a scheduled arrival time is only a tentative guess made by airlines. It is calculated that more than half the flights in the United States are late. In addition, passengers have leveled many other complaints against the airlines about a host of inefficiencies. Why do such inefficiencies remain? Some suggest that the problem is that there are fewer airlines operating now. However, that is the necessary result of a competitive process.
The real answer to why problems persist is that the industry is not entirely free. For example, airports are funded by tax dollars and operated as local government monopolies. In addition, the FAA maintains a monopoly on the air traffic control system, which continues to lag far behind the technology curve. This has resulted in gross inefficiencies in the routing of aircraft that might otherwise have been remedied. Finally, domestic deregulation never resulted in global free-market competition. As a result, the domestic market is not as competitive as it would otherwise be.
The federal law that prohibits cabotage also limits foreign investment in domestic airlines. Shareholders from other countries cannot own more than 25 percent of the voting stock of a domestic firm or more than 49 percent of the outstanding equity.2 Given the high fixed costs of entry into the industry, this rule limits competition domestically. In effect, the regulation creates a cartel.
If globalization is understood as the ever-increasing liberalization of international trade and investment, then globalization of the airline industry would greatly benefit travelers. It would do so, first, by increasing their range of choice, putting pressure on airlines to improve quality and lower prices. To the extent that foreign carriers could undercut ticket prices profitably, domestic carriers would be forced to evaluate their use of scarce resources.
This would lead to a second benefit: domestic innovations in technology and organization. Airlines that did not improve their operations would risk being forced out of business.3 While no one can know what advancements would be made, the history of the free market teaches us that the gains should be substantial.
A third benefit of removing the protectionist restriction is that it would pressure foreign countries to remove their restrictions on American carriers.4 Unilateral decontrol would put the U.S. government in a better position to negotiate the liberalization of rules elsewhere. Maintaining barriers has never been effective in that regard. On the contrary, such policies merely maintain the status quo.5
One final benefit from relaxing the rules against foreign carriers and foreign investment is that it would open the door to greater capital investment in the domestic industry.6 This, combined with decontrol of airports and the air traffic control system, would rapidly attract the capital investment needed to address some of the worst problems associated with air travel today. A more efficient air transportation system would ultimately serve the traveling public.
Paul Cleveland is an associate professor of economics at Birmingham-Southern College and an adjunct scholar for the Center for Economic Personalism at the Acton Institute. Jared Price recently graduated from Birmingham-Southern College and is a graduate student in economics.
- See Kenneth J. Button, “Opening U.S. Skies to Global Airline Competition,” Trade Policy Analyses no. 5, Cato Institute, November 24, 1998, www.freetrade.org/pubs/pas/tpa-005es.html, and Paul A. Cleveland, Market Performance Under Deregulation: An Industry Study of Air Transportation (College Station, Tex.: Texas A&M University, 1985).
- Button, p. 2.
- Kenneth J. Button, “Open U.S. Skies to Global Competition,” Center for Trade Policy Analysis, Cato Institute, December 23, 1998, www.freetrade.org/pubs/articles/airline.html.
- Jim Powell, “Protectionist Paradise?,” in Edward L. Hudgins, ed., Freedom to Trade: Refuting the New Protectionism (Washington, D.C.: Cato Institute, 1997).
- Button, “Open U.S. Skies to Global Competition.”