Mar 08, 2022

Chapter 3

The First Major Challenge - Deregulation

“A ‘good’ landing is one from which you can walk away. A ‘great’ landing is one after which another can use the aircraft.” – Anonymous 

When the government - primarily in the USA - from the late 1930s, came to the conclusion that greater oversight and regulations are needed for a growing commercial aviation industry, it felt it needed to act. From the government's viewpoint, there was a laissez-faire attitude in the industry which led to some unethical and inequitable practices as well as significant safety and accident events.

Therefore, the government went ahead and started providing the kind of regulations - that they believed were needed -  that would lead to a smoother, equitable, and safe Aviation airline industry.

According to the Federal Aviation Administration (2017), aviation industry leaders believed the airplane could not reach its full commercial potential without federal action to improve and maintain safety standards. At their urging, the Air Commerce Act was passed in 1926. This landmark legislation charged the Secretary of Commerce with fostering air commerce, issuing and enforcing air traffic rules, licensing pilots, certifying aircraft, establishing airways, and operating and maintaining aids to air navigation. A new Aeronautics Branch in the Department of Commerce assumed primary responsibility for aviation oversight, and William P. MacCracken, Jr., became its first director.

In 1934, the Department of Commerce renamed the Aeronautics Branch the Bureau of Air Commerce to reflect the growing importance of aviation to the nation. In one of its first acts, the Bureau encouraged a group of airlines to establish the first air traffic control centers (Newark, New Jersey; Cleveland, Ohio; and Chicago, Illinois) to provide en route air traffic control. In 1936, the Bureau took over these centers. Early en route controllers tracked the position of planes using maps and blackboards and little boat-shaped weights that came to be called "shrimp boats". They had no direct radio link with aircraft but used telephones to stay in touch with airline dispatchers, airway radio operators, and airport traffic controllers. Although en route ATC became a federal responsibility, local government authorities continued to operate airport towers. While the Department of Commerce worked to improve aviation safety, a number of high-profile accidents called the department's oversight responsibilities into question. A 1931 crash that killed all on board, including popular University of Notre Dame football coach Knute Rockne, elicited public calls for greater federal oversight of aviation safety. Four years later, a DC-2 crash killed U.S. Senator Bronson Cutting of New Mexico.1

While regulating the aviation industry provided some benefits, there were also side effects as well. The regulations allow for greater safety with the airline industry, however, foster greater inefficiencies in cost of operations and further development in the technologies. This is one of the main reasons why deregulation of the airline industry causes such a big problem for those who were already well adopted and spoiled by the managed system. With The advent of free-market operations within the airline industry many of the larger players actually went out of business because they could not compete efficiently.

Deregulation could be considered the first major challenge of the airline industry. According to Alfred E Kahn, in the library of economics and liberty (2002), The United States Airline Deregulation Act of 1978 was a dramatic event in the history of economic policy. It was the first thorough dismantling of a comprehensive system of government control since the Supreme Court declared the National Recovery Act unconstitutional in 1935. It also was part of a broader movement that, with varying degrees of thoroughness, transformed such industries as trucking, railroads, buses, cable television, stock exchange brokerage, oil and gas, telecommunications, financial markets, and even local electric and gas utilities.

Most disinterested observers agree that airline deregulation has been a success. The overwhelming majority of travelers have enjoyed the benefits that its proponents expected. Deregulation also has given rise to a number of problems, including congestion and a limited reemergence of monopoly power and, with it, the exploitation of a minority of customers. It would be a mistake, however, to regard these developments merely as failures of deregulation: in the important measure they are manifestations of its success.

These problems drive home the lesson that the dismantling of comprehensive regulations should not be understood as synonymous with total government laissez-faire. The principal failures over the last fifteen years have been failures on the part of the government to vigorously and imaginatively fulfill responsibilities that we, in deregulating the industry, never intended it to abdicate.2

As a corollary to the aforementioned, the “oil shock” of the 1970s was pretty significant in its impact on the airline industry. With the increased oil prices which caused an increase in the price of fuel for airlines, those players that were already protected by a regulated industry were not able to adapt while there was a significant cost increase in operations as higher fuel prices were thrown out of the market.

This is how it has been since the 1970s to today, it is clear that deregulation, what at the time seemed like a big mistake, has proven to be a wise approach as much as we were vastly allowing free-market forces, and not government controls to dictate development of the airline industry.

“Airline deregulation has worked. It would be ironic if, by misdiagnosing our present discontents, we were to return to policies of protectionism and centralized planning at the very time when countries as dissimilar as China, the Soviet Union, Chile, Australia, France, Spain, and Poland are all discovering the superiority of the free-market”. (Alfred E. Kahn 2002)

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 1. A Brief History of the FAA - https://www.faa.gov/about/history/brief_history/

 2. Airline Deregulation - https://www.econlib.org/library/Enc1/AirlineDeregulation.html

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