Airline Deregulation Act - History of Airline Regulation and The CAB

History of Airline Regulation and The CAB

Since 1937, the federal Civil Aeronautics Board (CAB) had regulated all domestic interstate air transport routes as a public utility, setting fares, routes, and schedules. Airlines that flew only intrastate routes, however, were not regulated by the CAB. Those airlines were regulated by the governments of the states in which they operated. The CAB promoted air travel, for instance by generally attempting to hold fares down in the short-haul market, to be subsidized by higher fares in the long-haul market. The CAB also was obliged to ensure that the airlines had a reasonable rate of return.

The CAB earned a reputation for bureaucratic complacency; airlines were subject to lengthy delays when applying for new routes or fare changes, which were not often approved. For example, World Airways applied to begin a low-fare New York City to Los Angeles route in 1967; the CAB studied the request for over six years only to dismiss it because the record was "stale." Continental Airlines began service between Denver and San Diego after eight years only because a United States Court of Appeals ordered the CAB to approve the application.

This rigid system encountered tremendous pressure in the 1970s. The 1973 oil crisis and stagflation radically changed the economic environment, and technological advances such as the jumbo jet did the same thing. Most of the major airlines, whose profits were virtually guaranteed, favored the rigid system, but passengers forced to pay escalating fares were against it and were joined by communities that subsidized air service at ever-higher rates. Congress became concerned that air transport in the long run might follow the nation's railroads into trouble. In 1970 the Penn Central Railroad had collapsed in what was then the largest bankruptcy in history, resulting in a huge taxpayer bailout in 1976.

Leading economists had argued for several decades that this sort of regulation led to inefficiency and higher costs. The Carter administration argued that the industry and its customers would benefit from new entrants, the end of price regulation, and reduced control over routes and hub cities

In 1970 and 1971, the Council of Economic Advisers in the Richard Nixon administration, along with the Antitrust Division of the Department of Justice and other agencies, proposed legislation to diminish price collusion and entry barriers in rail and truck transportation. While this initiative was in process in the Gerald Ford administration, the United States Senate Judiciary Committee, which had jurisdiction over antitrust law, began hearings on airline deregulation in 1975. Senator Ted Kennedy took the lead in these hearings.

The committee was deemed a more friendly forum than what likely would have been the more appropriate venue, the Aviation Subcommittee of the Commerce Committee. The Gerald Ford administration supported the Judiciary Committee initiative.

In 1977, President Jimmy Carter appointed Alfred E. Kahn, a professor of economics at Cornell University, to be chair of the CAB. A concerted push for the legislation had developed, drawing on leading economists, leading think tanks in Washington, a civil society coalition advocating the reform (patterned on a coalition earlier developed for the truck-and-rail-reform efforts), the head of the regulatory agency, Senate leadership, the Carter administration, and even some in the airline industry. This coalition swiftly gained legislative results in 1978.

Dan McKinnon would be the last chairman of the CAB and would oversee its final closure on January 1, 1985.