Regulation of the Airline Industry

From the beginning of the airline industry until 1978, the Civil Aeronautics Board (CAB) controlled an artificial cartelization of the airline industry. It limited competition, kept fares far above the free-market price, and allowed politically favored airlines to obtain profitable routes. Competitors were prevented from entering the industry or literally put out of business when the CAB prevented their operations from continuing. In 1978 the government abolished the CAB and allowed airlines to more freely compete, after which, new airlines cropped up, and inefficient ones left the industry. The result was fares that were 40 percent lower, a 50 percent increase in flights, and a 112 percent increase in passenger boardings over the next 20 years.¹⁴³

But in place of the CAB we now have the FAA controlling much of the industry. Instead of allowing free-market prices to dictate the cost of “slot” fees (takeoff and landing spots on runways), which would equate supply with demand, the FAA rations slots, and charges a below-the-free-market-price that causes congestion on airport runways. A free-market pricing system (whereby prices are determined based on competitors buying and selling) would raise prices during peak hours, limiting flight privileges to those who could most afford it, such as large airlines carrying business travelers. Most smaller corporate jets and delivery service jets would then not take up runway space during rush hour. The FAA, absent competition and the need for profits, has no incentive to keep traffic flowing efficiently.

Air traffic control is a monopoly run by the FAA. While the number of flights was increased through the years, the number of air traffic controllers has not kept pace. Even though private industry builds and operates the planes, the government supposes that private industry should not run traffic control services. But there is no reason why it shouldn’t. Privatized air traffic control and runway slot control would increase the number of flights per hour and reduce the overcrowding and shortages of runways, preventing planes circling for hours waiting to land (or, waiting on the tarmac — an occurrence the media blames on airlines, who are simply following FAA rules).

Another problem with airline service is that every single commercial airport in this country is owned and operated by local governments (except for two airports run by the federal government), who don’t have the incentive, or the skill, to provide the services needed for smooth operations. Worse, airport security is handled by the federal government. Is it any wonder, therefore, that we stand in line for hours sometimes to check in or to go through security? The Feds are also responsible for baggage handling. Do you think as many bags would be mishandled and lost by profit-seeking companies? More importantly, local governments don’t build enough gates, runways, and even airports to satisfy demand. Thus, airports often selectively assign a limited number of gates to politically favored airlines. In many cities, the arrival of new and competing airlines is prevented due to economically powerful airlines that hold sway over local city councils preventing gates from being made available to competitors.

Anyone who is not aware of the previous facts should still have known that the airline industry is highly regulated because they don’t’ see foreign airlines compete with domestic ones. Foreign carriers are allowed to fly into and out of a particular destination in the U.S., but not from city to city. Were Lufthansa, for example, allowed to fly from, say, Salt Lake City to Nashville, competition would intensify and prices would fall.

One reason this has not taken place, besides the fact that our government attempts to protect domestic carriers from competition, is that here again, government economists, have their feeble theories about how capital should be efficiently allocated in the industry. It is argued that due to the high fixed costs of operating, it is more efficient to allow only a few carriers manage the load. Such irrationality, or more specifically, political wrangling, probably does not need to be addressed at this point — there are many companies and would-be companies ready and willing to compete. We should let them.

With all the protection, government control, and regulation in the airline industry, taking even an hour’s flight is a stressful, exhausting, four-hour challenge. And inefficient, loss-making airlines need taxpayer bailouts every decade. We should demand of our government that it privatize the entire industry and abolish all regulation. Lines would disappear, costs would decline, quality would improve, and safety would increase.