Airline deregulation may be off course Top air fares on many routes have risen at a rate greater than inflation.

October 23, 1998|By Tom Belden

IF YOU like to take long-distance vacations, President Jimmy Carter signed a piece of legislation 20 years ago this month that changed your life for the better.

The Airline Deregulation Act is not only widely regarded as an unqualified success for consumers, but it is also credited with pumping fresh blood into a sluggish airline industry and starting a revolution in the federal regulation of business.

But two decades into the journey, there is an overcast on the horizon. A growing group of critics are asking whether America's experiment with deregulation isn't flying off course and poorly serving millions of travelers.

Increasingly, business travelers are paying record fares to a handful of big airlines that hold a powerful grip on scores of airports. Though new low-fare airlines spawned by deregulation were expected to provide vigorous competition, more small carriers have been driven out of business than the number still in the air.

Over the past 20 years, the average cost of a ticket -- something affordable mostly to the affluent in 1978 -- has dropped by more than a third, adjusted for inflation.

A successful run

One early prediction that did not come true is that airline safety would suffer in a deregulated environment. Thanks mostly to improved jet-airplane technology and better pilot training, the fatal accident rate for scheduled U.S. airlines in the late 1990s is half what it was in the 1970s.

Today, most aviation executives, academics and financial analysts say that after 20 years, airline deregulation is one of the great business triumphs in history. Leisure travelers tend to agree, because reasonable fares mean they are able to travel by air far more than ever before.

At the same time, a vocal group of business travelers, government regulators and political leaders point to what they call "pockets of problems."

The six largest U.S. airlines carry more than 80 percent of U.S. airline traffic, enabling those carriers to control all or most of the service and the fares between numerous cities. Over the past three years, the unrestricted fares charged to business travelers who book at the last minute have increased by a third on many routes.

After waves of small, low-fare airlines entered the industry, first in the early 1980s and again in the mid-1990s, today there are virtually no start-up airlines. Rather than every air route in the country being up for grabs by a new carrier -- one of the economic theories upon which deregulation was based -- most start-ups have not been able to attract enough business to gain a toehold.

And government studies of the industry have reached a disturbing conclusion: Air fares are consistently lower on routes that have competition from a low-fare airline such as Airtran or Southwest.

"We're beginning to see cracks in the positive face of deregulation," said Rep. James Oberstar, a Minnesota Democrat.

Take this example: A business traveler or someone making an emergency trip to visit a sick relative, who can't plan in advance and doesn't stay over a weekend, may have to pay the full coach fare of $1,438 roundtrip between Philadelphia and Dallas/Fort Worth, compared with $346 in 1978.

Because there are numerous ways to get discounts, only 6 percent of passengers pay that full coach fare. But the top fares on many routes, used mainly by business travelers, have risen at a rate greater than inflation.

Trying to make sure small airlines have a chance to compete on new routes is behind legislation pending in Congress this year and rules that could be adopted next year by the Department of Transportation -- activity that federal regulators call fine-tuning of a system that isn't working perfectly.

But the proposed competition rules are opposed by the major airlines as a form of re-regulation -- opposed in the same way that most airlines of the 1970s thought deregulation was a bad idea.

The six big airlines that coped most successfully with deregulation -- American, Continental, Delta, Northwest, United and US Airways -- have several things in common. They have popular frequent-flier programs that keep customers loyal, good computerized reservation systems used by most travel agents in a carrier's primary markets and sprawling hub-and-spoke networks that keep passengers traveling on the same airline throughout a journey.

Money-making hubs

The big airlines each operate three or four connecting hubs, where several times a day passengers change planes.

Southwest, the seventh-largest airline, with just 5 percent of the U.S. market, specializes in low fares and has more of a point-to-point route system than a hub-and-spoke network.

A hub-and-spoke network can give a major airline control of 60 percent to 90 percent of the traffic at an airport. That enables the big carrier to offer multiple flights a day to many cities while controlling fares and being strong enough to prevent meaningful competition from smaller airlines, federal regulators say.

The success of the domestic networks is behind efforts of the six largest airlines to get even larger, by forming alliances with each other and with major foreign airlines that call for marketing and operating flights as if the carriers had merged.

High fare worries

While critics of airlines worry that the alliances will lead to higher fares, industry executives contend that customers will be served well by being able to go to more cities worldwide on a single group of cooperating carriers.

"We don't believe alliances are anticompetitive," Cyril Murphy, United's vice president for international affairs, said recently. "We think it will give consumers greater choice."

Columnist Tom Belden wrote this for the Philadelphia Inquirer.

Pub Date: 10/23/98

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