Dividends from Deregulation

A benefit, on balance, for travelers and traffic

Almost exactly a year ago, Congress passed the Airline Deregulation Act, which in the name of free market economics all but stripped away the bureaucracy that had controlled and coddled the U.S. air travel industry for 40 years. Generally, the skies were opened to many new carriers, and operators were given unprecedented freedom to change routes, flight schedules and even their fares. Result after twelve months: a spurt of competition that has brought benefits for travelers as well as some headaches, but that may be cut short by new financial woes afflicting the industry.

On balance, deregulation has led to improved service. Scheduled carriers have added flights at more than 100 cities, and 35 carriers began serving 231 routes that had not previously been flown by lines that had permission to use them. In addition, 32 carriers have taken advantage of a rule that allows each line to begin flying one new route each year without having to get the Civil Aeronautics Board's assent. Insists United Airlines Chairman Richard Ferris: "About 98% of the traveling public has as much or more service available today than a year ago."

The big gainers have been hub cities such as Los Angeles, Houston, Chicago and New York and recreation meccas like Hawaii and Florida. But there have been losers too. Some 60 cities have been stripped of all scheduled airline service. In Chattanooga, which lost much of its service when United and Eastern pulled out this year, James Hunt, a Chamber of Commerce executive, says unhappily of deregulation: "Count us as one of the minuses."

The hope was that in places where service was curtailed or ended altogether, commuter airlines flying small planes and endowed with subsidies would fill the gap. Indeed, in the past twelve months more than 60 such lines have started up. But as a group they are plagued by a shortage of suitable aircraft and a poor safety record. So far in 1979, crashes involving commuter planes have killed 61 persons, vs. 42 in all of 1978.

The increased competition brought on by deregulation has cut average air travel costs. Traffic is up by 13.5% for the first nine months of this year, on top of a 17% increase in 1978, and about half of all air travelers now pay discount fares. The flood of flights has overstrained airports, creating booking, check-in and departure delays. Planes are packed, and even first-class seats can be difficult to get because more and more passengers are paying the premium rates to avoid the crowding and hassle of cabin class. But despite this booming business and a 32% increase in basic fares, the airlines are encountering profit problems, chiefly as a result of higher fuel prices. Says Marvin Cohen, chairman of the CAB: "Fuel has been a real bitch."

Jet fuel, which cost 25-c- per gal. in 1970, is now 70-c- and rising fast; today fuel accounts for about 30% of an airline's operating costs, up from 16% only two years ago. Having earned more than $1 billion in the first nine months of 1978, the industry cleared only $580 million in the same period this year, and all carriers are scrambling to cut costs. TWA has laid off 2,500 employees; and United, which was grounded by a long strike last spring and is now being hurt by passengers cashing in and flying on half-fare coupons, has furloughed 195 pilots and 400 other employees. Braniff has pulled out of 23 of the 40 markets it entered a year ago. Pan Am, which last week got CAB approval for its plan to merge with National, has dropped some overseas routes.

Some airline executives argue that deregulation has helped the carriers cope with runaway costs. Insists John Zeeman, vice president of passenger marketing at United: "If we did not have deregulation we would have been hurt worse. We have problems catching costs but we are now more flexible and can better respond to the market." The real test of that will come next year, when air travel is expected to drop as the recession begins to bite deeper. "The jury is still out," says Edwin Colodny, chairman of USAir (formerly Allegheny). "There will be no full answer on deregulation until the industry has gone through a full economic cycle, up and down."

For now, however, the carriers seem eager to exercise their new freedom to fight for business. At present, the hottest battleground is Florida, where National, Delta and Eastern are all facing new competition on routes in and out of the Sunshine State. Since deregulation, American, Ozark and Republic have all launched runs between Florida and points in the Midwest and other areas, while Braniff has increased its service from Texas and Western states. TWA and United plan to invade Florida this winter.

One beneficiary of all this competition has been the traveling public. Sun seekers can now fly more nonstops to Florida than ever before, and for a multitude of discount fares. As a result, traffic is booming; in the year ending last July, the number of passengers passing through Miami airport was up 21%.

Another beneficiary has been Air Florida, one of the many smaller carriers across the country that have been able to spread their wings under deregulation. Two years ago, it was just another rickety one-state airline, linking six Florida cities with half a dozen planes. Today it is an aggressive regional carrier that serves 23 cities, including Washington, D.C., Philadelphia and New York, with a fleet of jets. This fiscal year it turned its first real profit: $2.4 million. Says Chairman C. Edward Acker: "Without deregulation we'd still be tiny. It has given us the ability to move fast into markets."

When Air Florida expanded to New York and Washington, it undercut its bigger competitors by offering one-way fares of just over $50 (since raised to $70). In a kind of backhanded salute to its aggressiveness, Eastern and other carriers struck back with lower fares on instate routes. They forced Air Florida to reduce sharply its Miami-Tampa flights and all but abandon the Miami-Orlando run, but the airline retaliated, charging Eastern with "predatory pricing" before the CAB. Eastern spokesmen denied the Air Florida challenge, saying, "They're a gnat. We didn't even know they were there." As a result of deregulation, that may change.

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