In 1978 the US Airline Deregulation Act was signed into law by President Carter. The intent was revolutionary and the impact has changed the world—well beyond the US—by making it a far more connected place.
This was not complete deregulation, however. International traffic rights continued to be governed bilaterally. And safety was firmly in the hands of the regulator—the Federal Aviation Administration (FAA). But, the underlying principle was that airlines should no longer be treated as if they were public utilities, but rather be subject to market forces.
From the consumer perspective, it was a major success. In 1978, US airlines carried 278 million passengers. Last year, the figure was around 770 million. As the success of the US experiment became undeniable, other countries began to follow suit. Globally, 679 million people took to the skies in 1978. By 2016 we expect that number will be 3.8 billion. Adjusted for inflation, US domestic ticket prices are 40% below 1980 levels, while on a global level real yields have fallen 56% over the same period.
In recent years, however, we have seen a worrying trend of governments wanting to step back into the business of regulating the commercial activities of the industry. Much of this is being done under the guise of protecting consumers by penalizing airlines for delays, cancellations and other service breakdowns. Yet, the result is to create a regime of restrictive and punitive regulations that raise airline costs—that inevitably must be passed on to consumers—while doing little to address the underlying factors that led to the breakdowns in the first place. The EU’s passenger rights regulation 261, for example, shows how damaging this can be.
Part of the problem is the process, which is highly politicized. Even in those rare instances in which regulators may come up with something entirely reasonable after careful consideration and consultation, politicians often intervene—usually without consultation—and often make it worse. And the final blow to the original well-intentioned regulation is dealt by the courts, which more often than not broaden its application. That’s exactly the nightmare that we are living with EU 261, which is becoming ever more onerous at the expense of those it seeks to protect.
The FAA re-authorization process has been a startling reminder that the temptation to re-regulate is strong. During the Congressional legislative process to fund the agency for the coming fiscal year, proposals were introduced to mandate a minimum seat size, ban “pay toilets” onboard aircraft (that don’t exist and likely never will), and require airline service fees to be linked to input costs. Fortunately, all these measures eventually disappeared from the proposed regulation.
What other industry faces such issues? Can you imagine politicians putting price caps on Apple accessory products? Or a hotel being required to provide a minimum room size? Or a movie theater being told that the price of the popcorn had to be linked to the cost of its production? Market forces do this much more effectively than any regulation could.
Attacks on deregulation seem to increase as the industry’s financial prospects improve. In 2015 airlines—for the first time in history—recovered their cost of capital on an industry basis. A safe, profitable industry should not be a reason for governments to regulate; it should be something that our political leaders celebrate!