Cronyism in the Air




By Billy Culleton

Without needing federal approval, on December 17, 1903, two bicycle mechanics from Ohio made history by flying the first powered aircraft over the beaches of Kitty Hawk, marking the start of modern aviation. In the decades following the Wright Brothers’ breakthrough, commercial airline carriers emerged across the United States, saving people from the hassles of boarding dirty rail road cars and avoiding deadly automobile accidents. Recognizing the increased popularity in air travel, the federal government quickly established the Civil Aeronautics Board (CAB) in 1938 to set safety standards, flight routes, fare prices and guarantees for capital returns on flights with returns as high as twelve percent on flights that were fifty-five percent full.1 Major carriers, referred to as trunk lines, succeeded in driving out market entry by holding monopolies over routes like New York-Los Angeles or Miami-Chicago. While airports tried to charm the CAB into approving new services and routes, airlines were busy transferring regulator approved higher fares to customers, liberating carriers from worrying about reducing operational costs.2 Labor union members, who often protested managers’ wealth, enjoyed higher wages courtesy of CAB’s usage of operating ratios that compensated airlines for wage increases.3 Although the airline industry experienced rapid growth during the mid-twentieth century, the regulated market incentivized airlines to please regulators, crippling their ability to respond to the demands of their customers.

As rising fuel prices coincided with a national economic downturn in the early 1970s, pressure to reform the regulatory environment escalated when the CAB responded by allowing carriers to increase fares and approved request to limit capacity on major routes.4 The Ford administration’s failure to tackle reform paved the way for President Jimmy Carter to make deregulation a priority with the appointment of regulatory economist Alfred E. Kahn to chair the CAB in 1977. Kahn, skeptical of the unexpected outcomes with deregulation, recognized that the industry’s restrictive rules and exuberant pay could not coexist with competitive market prices.5 When signed in December 1978, consumers and politicians from both sides of the aisle championed Carter’s Airline Deregulation Act as a rational solution towards allowing market forces to provide more air routes, lower prices, and better customer service, but those operating in the regulated market refused to give up their privileges.

Whether airline carriers and unions believed their reasons were justifiable, lobbying Congress to keep directing benefits to one’s company is a prime example of regulatory capture, an act of crony capitalism. Major carriers like TWA, American Airlines, and Eastern Airlines argued that deregulation would produce the same level of competition, encourage the organization of new airlines free of bargaining agreements, and leave companies out to dry. The Air Line Pilots Association, the leading labor union arguing for regulation, realized its survival depended on expanding its lobbying operations and spent considerable resources to political action. Jerry Baker, commenting on ALPA’s president Capt. J.J. O’Donnell’s proactive position on influencing policy makers, said, “the first thing I remember working on when I came here (ALPA) was writing congressional testimony for Capt. O’Donnell against deregulation. Deregulation was the all-consuming legislative focus of the Association for the first couple of years that I was here”.6 Looking to strengthen their numbers in lobbying Congress, labor unions joined forces with the airline carriers to form the Labor Air Carriers Committee.7 However, while the Labor Air Carrier’s Committee focused lobbying Congress, the CAB quietly implemented reform within their organization; the same type of reform the committee was trying to prevent Congress from legislating.8 One by one, airline carriers defected from the movement as they saw supporting deregulation as an opportunity to increase their public image and further their profitability.

Regardless of your view on the role of government, airline deregulation exposed the real dangers of how regulations can show favoritism to a select group of private entities, harming individual choice. Between 1975 and 2000, the average airfare of a U.S. domestic flight dropped from $140 to below $60 (1983 USD) while the number of domestic airline passengers flying grew by 225%.9 More air traffic also led to a 35 to 40 percent increase in the number of scheduled departures in small towns and rural communities.10 Less regulation in the private market, the better off individuals are influencing the prices and controlling the quality of what they buy.

 


Footnotes

 

1. http://www.nytimes.com/2008/04/17/business/17air.html?_r=1

2. http://cei.org/pdf/1451.pdf

3. http://www.thefreemanonline.org/columns/the-effects-of-airline-regulation/

4. http://www.avjobs.com/history/airline-deregulation.asp

5. http://www.cato.org/pubs/regulation/regv34n1/regv34n1-2.pdf

6. Gavin Francis, “Pilots, Politicians, and the Art of Influencing Policy: ALPA’s lobbying efforts over the last 30 years,” Air Line Pilot, June/July 2004, p. 28

7. Ogu, Charles Chima (1985). REGULATORY POLITICS AND POLICY CHANGE: THE CASE OF THE AIRLINE INDUSTRY. Ph.D. dissertation, Fordham University, United States — New York. Retrieved May 23, 2012, from Dissertations & Theses: Full Text. p.145

8. p. 152

9. http://www.frbsf.org/publications/economics/letter/2002/el2002-01.html

10. http://www.econlib.org/library/Enc1/AirlineDeregulation.html


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