By Laura Taylor, Public Affairs Staff
Whether for business, vacation or a family visit, many of us have experienced air travel at one point or another. Chances are, if you’ve flown more than a few times over the past 15 years, you’ve seen how much the airline industry has evolved. Which got us thinking—what’s behind the drastic change in seat size, complimentary meals, routes and more?
In a recent Page One Economics article, authors Scott Wolla and Carolyn Backus explored the airline market. They noted how before 1978, the Civil Aeronautics Board regulated ticket prices and routes. Since these two main aspects of competition—how much airlines charged and where they flew—were set by the government, airlines had to find a different way of attracting customers. Enter non-price competition strategies like better meals and more frequent flights, which are associated with a more luxurious form of travel.
Wolla and Backus said that eventually, the board started to recognize that regulated ticket prices prevented the airlines from:
This led to fewer people traveling by air and more empty seats on planes.
In October 1978, President Jimmy Carter signed the Airline Deregulation Act, which allowed airlines to set their own airfares and choose their own routes. The Page One Economics authors said this freedom spurred competition among airlines, which now compete for the lowest fares to attract customers. In fact, after adjusting for inflation, airfares declined 30 percent between 1976 and 1990. This is according to an analysis by Alfred E. Kahn, a former economic adviser to President Carter and former chairman of the Civil Aeronautics Board.
After deregulation comes the law of demand. As ticket prices fell, consumer demand increased—demand for more seats and even lower prices. All of which contribute to a decline in the quality of the flying experience.
However, some airlines have responded to customer demand to bring back the positive attributes of the pre-regulation era: think bigger seats, in-flight meals, more legroom and more. This has resulted in business class, first class and upgraded ticket levels outside of a standard “economy” fare.
After deregulation, competition pushed fares so low that many airlines were unable to cover costs. This, of course, led to bankruptcies and mergers in the airline industry. Wolla and Backus said that between 2005 and 2015, the U.S. saw a decrease in major airlines, from nine to four: American, Delta, Southwest, and United.
This decrease in major carriers caused concern for consumers—what if airlines raised prices due to less competition? Were we right back where we started in the era of regulation?
Let’s start with the bad news: According to the authors, airfares rose in the wake of these mergers as some airlines were attempting to pull themselves out of bankruptcy. Wolla and Backus also noted how in an “oligopoly”—a market where a few companies have a lot of power—the players have less incentive to keep prices down.
Here’s the good news: Consumers typically favor lower fares in exchange for a lower-quality flying experience. So airlines cut costs, and consumers were still relatively satisfied. In addition, the industry started to see new competition from low-cost carriers like Spirit Airlines and Frontier Airlines. Wolla and Backus said that this new competition (along with airlines like Southwest that are known for low-cost flights) caused the industry to remain in a competitive environment benefitting consumers.
So as you get ready to book that next plane ticket, consider all the ways the economics of flying factor into your airfare. And here’s hoping you still get that free bag of pretzels.