Feature Stories

The Price of Deregulation

Passengers across the nation carp as this summer’s increase in jet fuel prices forces airlines to add on various charges to the ultimate cost of flying. But, there was once a time, more than 30 years ago, when flying was much more expensive -- and more exclusive. Some may argue that today’s airfares are still a relative bargain. To figure this out, one must take deregulation, inflation, and jet fuel costs into consideration; given that these factors are affecting not only the cost of airfares but also the type of “free” amenities that are provided.

Thirty years ago, Congress and President Jimmy Carter passed the United States Airline Deregulation Act. The Act freed the airline industry from governmental control, allowing airlines to choose which cities to provide service to, and what they would charge for these services.

Before deregulation, the Civil Aeronautics Board (CAB) regulated air carriers, treating airlines as public utilities. The CAB had the power to approve routes, fares, schedules, and essentially which new air carriers would be added to the short list of 16 already-established carriers that dominated the then-airline industry.

Despite the recent fare increases, when airfare costs of 1977 (before deregulation) are compared to the cost of today’s airfares, it is safe to say that most of today’s airfares are less expensive -- when factoring for inflation.

Prior to deregulation, the CAB set airfare prices by calculating that air carriers could make a 12% profit if they were to fill 55% of their seats at the full fare rate. Airlines believed that by only filling their planes to about 60% capacity they would provide better service which, since pricing was regulated, was a major way to differentiate themselves from competing airlines. Anyone who wanted to catch a flight could often do so without worrying whether or not the flight would be overbooked.

Of course, the 55% rule was not perfect. It did not take into consideration aircraft modifications, where seats may have been taken out, or added by the airlines themselves.

Inflation is a factor that needs to be included when comparing airfare costs of 1977 with present day prices. The rate of inflation from June 1977 to June 2008 is 260.5%. The 2008 round-trip flight prices were obtained from Farecompare.com. The prices were for flights booked two weeks in advance, returning two weeks after the departure. (All fares include taxes).

The table below provides you with three different destinations and costs for each trip. The second and fourth columns on the table represent the actual prices of airfares in the specified year. The third column represents what the 1977 airfare cost would be in 2008 (adjusted for inflation). The fifth column represents what the cost of a 2008 airfare would be in 1977 (also adjusted for inflation).

[The airfare costs do not include fees for luggage, nor food or beverage service.]


Overall, today’s airfares are generally lower than they were in 1977-- if you don’t take into consideration extra fees such as $15-$25 for the first checked bag (each-way of the trip), fees for seat selection, fees for beverages/snacks, meals, alcohol, etc. Even when these fees are added on to the cost of today’s airfares, it appears that today’s airfares (on shorter trips) would cost about the same amount that they did in 1977.

Deregulation has allowed air travelers to find airfares at lower costs which led to record numbers of people flying. The airlines claim, and the popularity of no-frills airlines such as Southwest shows, that consumers often consider price more important than amenities. Even the multi-channel entertainment systems, arguably a benefit of deregulation related competition, many have come to love are no longer sacred on some flights as airlines remove them to save weight. But what about the customer willing to pay for food and amenities on a long flight? In many cases, there are now more choices, but are they better choices?

Susan Levine, of CTS Travel in New York, has been an agent since the early 1970’s and says, “In pre-deregulation days, airlines knew they were in a SERVICE business and you were assured that flight attendants were friendly and pleasant, food was served, in many cases, by gourmet chefs; flights were mostly on time; maintenance was done in the US with our high standards of quality, to mention but a few things that come to mind. Today the flying public often suffers with dirty aircraft, while airline employees have watched their perks disappear and salaries decrease - leading to lower morale and, often, lesser service."

But according to David Castelveter, Vice President of Communications for the Air Transport Association, a trade group representing the nation’s airlines, these are difficult economic times for the airlines, and they’re doing what they can to survive.

“In 2002, the industry lost 11 billion dollars,” said Castelveter, “and if the economics don’t change, it could be worse this year. Customers are not used to paying for things they didn’t have to in the past. But we have to adjust.”

Yet another factor affecting the cost of airfares is the cost of jet fuel. Even with the increased cost and consumption of jet fuel over the years, today’s air travelers still enjoy lower ticket prices, when adjusted for inflation, than did travelers in 1977. From January to December of that year, the airline industry used 8.2 billion gallons of jet fuel, which was bought at $0.35 per gallon.

This year, from January to May the industry has already used more than half the amount of jet fuel used in ’77-- amounting to 5.4 billion gallons of jet fuel selling at an average of $3/gallon. Consider that during the week of July 11, 2008, jet fuel was being sold at $4.26 per gallon, and you can see how costs have risen.

Levine says that due to the high costs of fuel, the "legend" carriers are “lowering service, outsourcing telephone agents to foreign countries and depending on the public's use of the internet - the nameless, faceless and ever more complicated system of arranging travel.” She added. “In 1995 the airlines decided that, in order to save money, they denied agencies the commissions which had always been part of the agent-airline structure and by so doing decimated the agency community."

But while some are calling for a re-regulation of the air travel industry, it remains a non-starter for the airlines.

“No -- it’s not even under consideration,” Castelveter said flatly.

Despite the recent price hikes that have come since fuel costs began to skyrocket, he says things are much better now for consumers.

“Deregulation has netted wonderful benefits -- lower fares, more competition, and more service,” he added. “And at the end of the day, there has remained a pretty robust industry, despite the ups and downs.”

Overall, the relative cost of airfares today are cheaper than what they were prior to deregulation. Competitive pricing pressures coupled with increased fuel costs has certainly affected the basic level of service that we get nowadays when we fly most North American airlines. The Deregulation Act was passed as a means to bring travelers a balance of both worlds: lower airfare prices, and good service. Perhaps, this is too much to ask for, especially when jet fuel prices are so high.

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