Anyone who has recently traveled for business, read the business section of the local newspaper, or watched CNN knows that the airline industry is in dire economic straits.  Pundits typically attribute that weakness to increased fuel prices.  But the reality is that the deterioration began at almost the same time as the passage of the Airline Deregulation Act in 1978 and results from at least two major factors:  (1) predatory competition pitting legacy carriers against startups; and (2) the airlines’ flawed business model which depends on "hubbing," an expensive process of concentrating resources in a few locations to aggregate as much demand as possible (versus "point to point" operations, a model used consistently and successfully for the entire period since the advent of deregulation).

The Airline Deregulation Act was Congress’ test of the viability of transforming the airline industry, an industry that had, until that time, been considered in the nature of a regulated utility, into a model of the benefits of economic competition.  Specifically, the ADA eliminated Federal control over airline routes and pricing, and prohibited any local or state government from exercising that control.  Its intended purpose was to increase competition thus expanding service and lowering prices to the public.

The fundamental problem with this conversion from utility to free market is that is ignores the fundamental reality that airlines like other transportation industry components have never been able to survive for long without government subsidies.  They are continuously subsidized out of the taxpayers’ pockets in at least two ways:  (1) construction and improvement of airports upon which airlines operate are paid for 80-90% by grants from the Federal Aviation Administration ("FAA"), to which development airlines contribute through landing fees and other charges; and (2) in times of economic upheaval such as the aftermath of 9/11, they received direct gifts from the government to keep them afloat.  Until September/October, 2008, when banks began getting Federal government handouts, airlines were among the principal U.S. businesses relying upon such taxpayer largesse.

A debate has now arisen within the airline industry cncerning the wisdom of some form of re-regulatoin.  On the one hand, Robert Crandall, former President of American Airlines, argues, in his article of June 16, 2008, in Aviation Week and Space Technology, that "unfettered competition does not work.  Airlines are more like utilities," and that "a fundamental problem is how the industry prices its product.  The instant perishability of empty seats and the impossibility of quickly reducing fixed costs when demand falters, create a temptation to sell seats too cheaply."  He suggest, among other things, some combination of "modest price regulation," and "capacity controls at congested airports, revised bankruptcy and labor laws, and a more accommodating stance toward industry collaboration."  Id., see also, Aviation Week and Space Technology, October 27, 2008.

On the other hand, those who disagree contend that deregulation should be extended to "completing the move to deregulation in areas as foreign investment [in U.S. airlines] laws, security mandates, bankruptcy reform, and operational restrictions."  Id.

Whichever way it goes in the future, the traveler is being squeezed now.  Aircraft operations are being cut back, services are being eliminated, delays are increasing, baggage incurs additional charges, and, adding insult to injury, travelers are paying "fuel surcharges."  Ironically, however, deregulation has also allowed airlines to consolidate, thus freezing out startups, and raising prices to the public, the opposite of the effect deregulation was supposed to have had.  No one argues that airlines are not an indispensable part of the nation’s transportation system.  It is, therefore, clear tha they will have to continue to survice and, hopefully, to thrive.  However, the question raised by Bob Crandall, i.e., whether a heavily subsidized airline industry can survive in the guise of free market enterprises, still hangs in the air.

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