Airline Deregulation Act

Based on Wikipedia: Airline Deregulation Act

In 1967, World Airways filed an application with the federal government to offer cheap flights between New York and Los Angeles. The Civil Aeronautics Board studied the request for six years. Then they rejected it—not because it was a bad idea, but because the paperwork had become "stale."

That single anecdote captures everything wrong with American aviation before 1978.

Continental Airlines once waited eight years—eight years—just to get permission to fly between Denver and San Diego. They only got approval because a federal court finally ordered the regulators to stop stalling. This wasn't some obscure bureaucratic hiccup. This was how the entire industry worked.

The Strange World of Regulated Skies

Since 1938, the Civil Aeronautics Board had controlled American air travel the way a utility commission controls electricity rates. Every fare, every route, every schedule required government approval. Want to fly a new city pair? Submit an application. Want to charge less than your competitor? Submit an application. Want to exist as a new airline? Good luck.

The system had a certain logic to it. The government wanted to ensure airlines remained financially stable, so they guaranteed reasonable profits. They wanted to make air travel accessible to smaller communities, so they cross-subsidized: charge more on popular long-haul routes to keep prices artificially low on short-haul flights to places like Topeka or Boise.

But something happens when you shield an industry from competition. You get complacency. You get stagnation. You get bureaucrats studying a straightforward route application until the file grows dusty and irrelevant.

The major airlines loved it. Why wouldn't they? Competition was effectively illegal. New entrants couldn't get certificates. Existing players couldn't undercut each other on price. Profits were essentially guaranteed by federal regulation.

Then came the 1970s.

When the System Broke

The oil crisis of 1973 sent fuel prices through the roof. Stagflation—that peculiar combination of stagnant growth and rising prices—squeezed everyone. And a new generation of aircraft, the wide-body jumbo jets like the Boeing 747, completely changed the economics of flying.

Passengers watched their fares climb higher and higher. Small communities that relied on subsidized service saw those subsidies balloon. And Congress grew nervous. They'd just witnessed the Penn Central Railroad collapse in 1970—at the time, the largest bankruptcy in American history. The government had to create two entirely new corporations, Conrail and Amtrak, and pour taxpayer money into the wreckage.

Could the same thing happen to airlines?

Economists had been arguing for decades that regulation was making air travel more expensive and less efficient than it needed to be. But academic papers don't change policy. What changes policy is political will, and by the mid-1970s, that will was finally building.

An Unlikely Alliance

The push for airline deregulation brought together people who agreed on almost nothing else. Ted Kennedy, the liberal lion of the Senate, led hearings starting in 1975. The Nixon administration had proposed loosening transportation regulation. Gerald Ford supported the effort. And then Jimmy Carter made it a priority.

In 1977, Carter appointed Alfred Kahn to run the Civil Aeronautics Board. Kahn was an economics professor from Cornell, and he had a peculiar assignment: dismantle the very agency he was leading.

Kahn was perfect for the job. He understood the theory—that competition generally produces better outcomes than government-managed markets. But he also had a gift for explaining complex economics in plain language, and he genuinely believed that ordinary Americans would benefit from lower fares.

The coalition that formed was remarkable. Economists from think tanks across the political spectrum. Consumer advocates. The Carter White House. Even some airlines who saw opportunity in a deregulated market. They moved fast.

First came air cargo. On November 9, 1977, Carter signed the Air Cargo Deregulation Act. It was a test case, less controversial than passenger service. The law let cargo carriers fly wherever they wanted within the United States and charge whatever prices the market would bear.

One company benefited enormously from this change: Federal Express. Before deregulation, FedEx had been restricted to flying small Dassault Falcon 20 aircraft. Suddenly they could operate Boeing 727s. The modern overnight shipping industry traces directly back to that 1977 law.

October 24, 1978

Senator Howard Cannon of Nevada introduced the main deregulation bill in February 1978. Eight months later, President Carter signed the Airline Deregulation Act into law.

The law didn't abolish regulation overnight. It phased out controls over four years. By the end of 1981, airlines could fly any domestic route they wanted. By January 1983, the government would stop setting fares entirely.

In practice, change came faster than the law required.

The goals were explicit: maintain safety as the highest priority, rely on competition rather than regulation, encourage new airlines to enter the market, prevent any single carrier from dominating, and strengthen small airlines. The Federal Aviation Administration kept full authority over safety—inspections, air traffic control, pilot certification. Deregulation meant economic freedom, not a free-for-all on safety.

The Civil Aeronautics Board itself had an expiration date. Dan McKinnon became its last chairman, presiding over the agency's final closure on January 1, 1985. For the first time since 1938, no federal agency controlled where airlines flew or what they charged.

What Happened Next

The changes were dramatic and not entirely what anyone predicted.

Fares dropped. A 1996 government report found that the average fare per passenger mile was about nine percent lower in 1994 than in 1979—and that's adjusting for inflation. Between 1976 and 1990, the inflation-adjusted price of flying declined by roughly thirty percent.

But here's the thing about averages: they hide enormous variation.

On popular, long-distance routes, prices plummeted. Competition flourished. New airlines appeared, offering no-frills service at rock-bottom prices. The New York to Los Angeles route that World Airways couldn't get approved in 1967? By 2010, you could fly it for $268 round trip. In 1974, the cheapest legal fare for that same trip was $1,442 in today's dollars.

Shorter routes to smaller cities didn't see the same benefits. The cross-subsidization was gone. Flying from a small regional airport often meant connecting through a hub—a system that emerged naturally as airlines optimized their networks for efficiency rather than following routes mandated by regulators.

The Hub-and-Spoke Revolution

Before deregulation, airlines flew many point-to-point routes because regulators told them to. After deregulation, they consolidated around hubs.

Here's how it works. Instead of flying directly from, say, Omaha to Orlando, you fly from Omaha to Chicago, change planes, then continue to Orlando. The airline can fill larger planes on the spoke routes into Chicago and offer more total destinations than if they tried to fly direct routes everywhere.

This system is more efficient in aggregate. It lets airlines serve smaller markets that couldn't support direct flights. But it also created "fortress hubs"—airports where a single airline dominates so completely that meaningful competition becomes difficult.

If you've ever wondered why airfares from certain mid-sized cities seem unreasonably high, fortress hubs are often the answer.

Creative Destruction

Deregulation unleashed genuine competition, and competition has casualties.

Between 1978 and 2001, eight major airlines either went bankrupt or were liquidated: Eastern, Midway, Braniff, Pan Am, Continental, Northwest, Frontier, and TWA. More than a hundred smaller carriers disappeared. Many of the new airlines that launched in deregulation's early years—attracted by the suddenly open market—failed within a decade.

Workers felt the impact acutely. The old regulated airlines had powerful unions and stable employment. Competition meant pressure on wages, contentious labor negotiations, and layoffs when carriers went under. The law tried to help: it required airlines to give hiring preference to workers laid off by competitors for ten years after deregulation. But that provision couldn't prevent the broader disruption.

Pan Am's collapse in 1991 was particularly symbolic. Once the glamorous face of American aviation, the airline that had pioneered transatlantic travel and built the iconic Pan Am Building in New York, simply couldn't compete in the new environment. Its routes were carved up by survivors. Its name became a nostalgia brand.

The Southwest Effect

Not every story was tragic. Some airlines thrived precisely because of deregulation.

Southwest Airlines had been operating within Texas since 1971, flying only intrastate routes that the Civil Aeronautics Board didn't control. They had perfected a low-cost model: one type of aircraft (Boeing 737s, which simplified maintenance and training), no assigned seats, no frills, quick turnarounds at the gate, and relentlessly low fares.

Deregulation let Southwest expand nationwide. Everywhere they went, fares dropped. Economists even coined a term for it: the "Southwest Effect." When Southwest entered a market, competitors had to lower prices or lose passengers.

Southwest's success inspired imitators. JetBlue, Spirit, Frontier (the new one, not the pre-deregulation carrier that failed)—a whole category of low-cost carriers emerged, collectively pushing the industry toward the cheap-but-cramped flying experience familiar to anyone who's traveled recently.

The View from 2011

Stephen Breyer was a young lawyer on the Senate Judiciary Committee staff in the 1970s, working with Ted Kennedy on the deregulation hearings. By 2011, he was a Supreme Court Justice with decades of perspective on what had happened.

What does the industry's history tell us? Was this effort worthwhile? Certainly it shows that every major reform brings about new, sometimes unforeseen, problems. No one foresaw the industry's spectacular growth, with the number of air passengers increasing from 207.5 million in 1974 to 721.1 million last year. As a result, no one foresaw the extent to which new bottlenecks would develop: a flight-choked Northeast corridor, overcrowded airports, delays, and terrorist risks consequently making air travel increasingly difficult.

Breyer was being honest about the downsides. The system that emerged wasn't elegant. Crowded planes. Potato chips instead of meals. Endless delays. Security theater after September 11th that made airports feel like low-grade prisons.

But then he asked the right question:

How many now will vote to go back to the "good old days" of paying high, regulated prices for better service? Even among business travelers, who wants to pay "full fare for the briefcase?"

That's the essential tradeoff. Flying used to be expensive and comfortable. Now it's cheap and miserable. More people fly because more people can afford to fly. Whether that's progress depends on what you value.

Deregulation's Long Shadow

The Airline Deregulation Act did something else that passengers rarely think about: it preempted state consumer protection laws. If an airline delays your flight, bumps you from a seat, or treats you badly in ways that would violate state law, you generally can't sue under state law. Federal law—and international treaties for international flights—control the relationship between airlines and passengers.

This preemption was intentional. The whole point of deregulation was to create a unified national market. If each state could impose its own rules, airlines would face a patchwork of regulations nearly as complex as what the Civil Aeronautics Board had administered.

But it means passengers have fewer legal remedies than customers in other industries. When an airline cancels your flight and leaves you stranded, your options are mostly limited to whatever the airline's contract of carriage specifies and whatever minimal federal requirements exist.

The Essential Air Service Compromise

One provision of the 1978 law was supposed to be temporary. The Essential Air Service program would subsidize flights to small communities for ten years, giving them time to adjust to the new reality. After that, the subsidies would end.

It's 2025. The Essential Air Service program still exists. It serves over 150 communities across the United States, places where commercial airlines wouldn't fly without government money.

This isn't a failure of deregulation so much as an acknowledgment of its limits. Some routes will never be profitable. If society decides those communities deserve air service anyway, someone has to pay for it. The question is whether that payment comes through hidden cross-subsidies (the old system) or explicit government programs (the current approach).

A Natural Experiment

Airline deregulation provides one of the cleanest natural experiments in economic policy. We can compare the forty-plus years since 1978 to the forty years before. We can look at how American aviation evolved compared to countries that maintained stricter regulation longer.

The evidence is reasonably clear on the main points. Fares are dramatically lower than they would have been under continued regulation. Far more people fly. The industry went through painful consolidation, with many carriers failing and workers suffering disruption. Service quality, at least by traditional metrics like seat pitch and meal service, declined. Efficiency improved. The hub-and-spoke system created new forms of market power even as it made the overall network more comprehensive.

Whether you consider deregulation a success depends heavily on whether you weight consumer prices or worker welfare more heavily, whether you care about the median passenger or the passenger flying from a small city, whether you think the old system could have survived the oil shocks and technological changes that transformed aviation regardless of regulation.

What's harder to argue is that the old system was working well by the 1970s. Something had to change. The question was what.

The Broader Movement

Airline deregulation didn't happen in isolation. The same intellectual movement, the same political coalition, pushed for deregulation across transportation. Trucking was deregulated in 1980. Railroads saw substantial deregulation the same year. The pattern extended beyond transportation: telecommunications, finance, energy.

The 1978 law was an early and influential example of what would become a much larger shift in American economic policy—a move away from detailed government management of industry structure and pricing, toward reliance on market competition disciplined by antitrust enforcement.

That shift has its own critics and defenders, its own complicated legacy of benefits and costs. But for aviation specifically, the Airline Deregulation Act marked a decisive break. The world of regulated fares and route certificates, of bureaucrats deciding which airlines could fly where, ended.

What replaced it is the aviation system we have today: chaotic, competitive, often frustrating, and cheap enough that flying went from a luxury to an ordinary part of American life.

Whether you're reading this in a cramped middle seat, delayed on the tarmac, wondering why the snack costs eight dollars—or whether you're simply grateful to visit family across the country for less than a day's wages—you're living with the consequences of that 1978 law.