BPEA | 1989: Microeconomics

Enhancing the Performance of the Deregulated Air Transportation System

Microeconomics 1989

IN A DRAMATIC BREAK with past policy, the U.S. commercial air transportation system was deregulated in 1978. Although deregulation was initially popular, primarily because it led to lower fares, public uneasiness has recently set in. Airport congestion and flight delays, increased concerns with safety, and rising fares in less competitive markets have all been attributed to the change in the regulatory environment. But, as illustrated in figure 1, deregulation is only one among many influences on the air transportation system. Equally influential are technological change, macroeconomic performance, and public policies besides those having to do with economic regulation. Because all these influences are interdependent, each must operate in accord with the others or the system can become disrupted. This paper focuses on improving the air system by aligning public policy regarding mergers, airport pricing and investment, and safety with the traffic volumes and patterns that exist under deregulation. We argue that the failure to bring these policies into line with the air system as it has evolved over the past ten years has generated the current dissatisfaction with the system and hampered the long-run performance of deregulation. Using an empirical model of air travelers’ preferences, we analyze both the economic effects of recent airline mergers and the effects of efficient pricing and optimal runway investment at airports. We then evaluate air safety management in the deregulated environment. We conclude that the mismanagement of the regulatory transition in air transportation should motivate architects of deregulation in other industries to establish transitional advisory bodies. The cost of establishing such bodies is small; the benefits could amount to preventing the return of regulation.