Airline Deregulation, by L. Proyect
Source Louis Proyect
Date 03/08/19/15:16

Airline Deregulation

Looking back in retrospect, it is easy to see how deregulation would lead to new monopolies. Indeed, the same big business interests that took advantage of government regulation in the first place were some of the first to benefit when the 1978 Airline Deregulation Act was passed by Congress. If pigs hang around the trough long enough, they can recognize the farmer's footsteps.

Despite evoking images of the trust-busting golden age of Progressive Politics, the New Deal legislation which created the Civil Aeronautics Board catered to the needs of an infant industry and the rich white men who launched it. Juan Trippe, the founder of Pan American Airlines, was fairly typical.

He graduated from Yale in 1921 where he had forged "old school ties" with Sonny Whitney and Bill Rockefeller. In 1925 Trippe got one of his fraternity brothers, who had married into the Mellons, to set up a meeting with a Congressman representing Pittsburgh's district (home base of the millionaire family) and who served on the House Post Office Committee. In an early experiment in "privatization", Trippe and others campaigned for replacing Army mail delivery with paid contractors. In the sweepstakes that followed the changeover, World War One ace Eddie Rickenbacker won the right to transport mail through a new corporation called Eastern Airlines. A Seattle timber magnate named William Boeing launched what would become United Airlines, before moving on to airline manufacturing.

Although Trippe was awarded the lucrative New York-Boston route, he had his eyes on bigger prizes. For public relations purposes, he convinced the super-hero Charles Lindbergh to join Pan American as a "technical adviser," which was a coup similar to Nike signing Tiger Woods or Michael Jordan. Trippe also chose a new bride carefully. He wed Betty Stettinus who was the sister of Edward Stettinus, a steel executive who would become FDR's Secretary of State. With financial allies in the Mellon, Rockefeller and Whitney groups, a public relations coup, and government connections, everything promised to go well for the young, aspiring corporate chieftain.

It was Trippe's original bright idea that planes carrying mail can just as easily transport people. Putting wicker chairs in the back of each plane, he charged $100 to fly to Havana, where booze was legal. His discovery that unfilled space on a plane was unrealized profit became the cardinal rule of airline economics, thus explaining not only deregulation of years hence but the sardine conditions in which we travel nowadays.

When Roosevelt entered the White House, domestic air transport including mail and human bodies was divided up by four big corporations (United, TWA, Eastern and American), while Trippe's Pan Am owned the international routes.

During the depression, upstart airlines tried to horn in on the big four's oligopoly. This led to price wars of the kind that marked the 1980s post-deregulation period. For example, when a contract for post office airmail was offered between Houston and San Antonio, Eastern Airlines was rumored to offer a bid of less than one cents a mile! Braniff made a counter-offer of $0.00001907378 per mile. Afterwards, Eastern put a final bid of zero cents on the table.

This put the airline companies in a quandary. How could they do business in the face of debilitating price wars? Since the state tends to act as an executive committee of the capitalist class, the answer would be forthcoming in the form of government regulation of fares and routes. Needless to say, the interests of the rank-and-file flyer barely entered the picture. With guaranteed profits, it did not matter to the airlines whether those of modest means could afford a ticket. Juan Trippe instituted a marketing campaign with the slogan "Fly Now, Pay Later" which provided an installment loan through the Household Finance Corporation.

With such a cozy government-business relationship, it is perhaps difficult to see why the need for deregulation ever arose. Essentially this came about primarily as a result of overcapacity in the 1970s--to a large extent a function of investment in the ubiquitous Jumbo Jet--the Boeing 747--interacting with the energy crisis. This would necessitate full-bore competition to wring out excess investment.

In the vast literature defending the free market with its purported self-regulating supply-and-demand mechanisms, nothing can be more remote from the ideal found in those pages than the airline business. Unlike consumer goods which compete with each other on the retail shelf for customer preference, the airline industry seems to run by its own rules. Investment decisions are not carefully calibrated to consumer signals, but made by fiat in ways that might have made Stalin green with envy. A "command economy" certainly describes some of the more grandiose plans of the largest airline companies, each of which was run by hard-driving executives who relied on nobody but themselves when it came to questions of routes, fares, and most of all, the kind of airplane offered to a potential ticket-buyer.

In 1982, a book titled "The Sporty Game" appeared. Written by Brookings Institute fellow John Newhouse, it ran originally as a series of articles in the New Yorker magazine. Although the word capitalism rarely appears, Newhouse's study is about as graphic a demonstration as you are going to find of the irrationality of the system. Unlike the well-ordered world of Adam Smith where an "invisible hand" prevails, the airline industry has more in common with Matthew Arnold's "Dover Beach" in which "ignorant armies clash by night."

The years 1958 through 1968 were banner years for airline manufacturers and their customers. Assuming that the profits would flow forever, they decided to invest steeply in a new generation of airplanes, including the Concorde and the 747 jumbo jet. Keep in mind that such decisions are always made jointly. Boeing does not decide to build a 747 without having orders lined up in advance.

Pan Am was the perfect customer for the jumbo jet, since it was more profitable than any other airline. International routes were extremely lucrative and Trippe's fiefdom enjoyed a virtual monopoly. On December 22, 1965 Boeing's chairman William Allen and Trippe signed a letter of intent which committed Pan Am to purchasing 25 of the planes.

Key to the acceptance of the wide-body architecture of the 747 was the belief that the plane could serve double-duty as a freight carrier. Two standard-sized cargo containers could sit by side in the plane's midsection. This approach seemed prudent at the time, since long distance passenger travel was assumed to be dominated by supersonic jets in the future rather than conventional planes like the 747. With everybody bouncing back and forth across the Atlantic on Concordes, the 747 would be guaranteed a second life as a freighter. As we now know, neither the Concorde nor the 747 was economically viable.

Once Pan Am declared for the 747, other airlines like British Airways, Japan Air Lines and TWA had to follow suit. They did not even have the freedom to see how the market would respond to the jumbo. In the airline business, the only corrective appears to be bankruptcy. Each of the airlines justified the investment on the basis of an expected 15 percent annual growth in passenger traffic. They might as well have thrown darts at a board to come up with a sensible figure.

Other factors arose that made the 747 jets an even riskier investment. Thinking as always in grandiose terms, Trippe felt that eighty inches should be added to the fuselage to allow two extra rows of seats, another toilet compartment and other paraphernalia to accommodate passengers. However, the original engines designed to propel the jet proved inadequate to the task. Sometimes they shut down in mid-flight. When more powerful engines were substituted, the plane remained airborne but with considerable more consumption of jet fuel. Of course, as everybody knew in 1970, petroleum was as cheap and plentiful as water and would remain so for all eternity.

Newhouse's final chapter, written just on the cusp of deregulation, is an attempt to anticipate the airline industry's likelihood of returning to the kind of profitability enjoyed in the fat years. He was glum:

"Little, if anything, of significance that has occurred in the wide-body era figured in earlier plans of America?s commercial aircraft and airline industries. The bright prophecy of the 1960?s was mocked by successive reversals, a few serious shocks and generally hard going. With very few exceptions, the major companies have had a thin time since 1970, and their current prospects range from uncertain to very poor. The fortunes of these companies depend partly on their own actions and partly on forces which they cannot influence any more than the rest of us can. Curiously, they have behaved as if capricious economic trends and the uncongenial policies of foreign governments were problems for other industries, but not their own. (The same could be said of the auto industry.) The boldness of the aircraft suppliers was matched by their innocence of the world and its uncertainties. This unworldliness harmed their interests.

"Any lingering hope for an outbreak of good times was dissolved by the dramatic rise in fuel prices. The oil crisis shocked the airlines and their suppliers, even though events had clearly foreshadowed it. A Boeing executive who directs the company?s forecasting remarks that 'Nobody in the airline industry saw it coming, and the airlines still dislike looking ahead. They don?t look beyond next month?s fuel supply.' As for his own company, he says: 'Boeing hadn?t the least idea that a fuel crisis was coming. We had spent hundreds of man-hours studying the economics of the SST burning fuel at ten cents a gallon and not a penny more. Boeing planned for the SST to be operated forever at ten cents per gallon.'" (p. 227)

In the same year that Newhouse's book appeared, a report on "Competition and the Airlines: An Evaluation of Deregulation" was submitted by staff economists David R. Graham and Daniel P. Kaplan to their superiors at the Civil Aeronautics Board. Given its internal character, the authors make no effort to depict deregulation as progressive legislation motivated to make air travel affordable. Instead it is declining profits that occupies center stage. In fact they openly admit that air travel had become a mass consumer phenomenon without the help of Senator Kennedy's trust-busters. They state that between 1949 and 1969, air traffic grew by more than 14 percent a year. During this same period, average air fares actually fell by 2 percent while the consumer price index rose by 50 percent. In other words, air travel was cheap relative to other consumer goods.

What concerned the economists was the fortunes of the airline companies rather than those of the consumers. With all the money spent on 747s and other oversized jets, empty seats became a much more serious problem given the economies of scale. The way they describe the problem is refreshingly frank:

"This imbalance between fares and costs encouraged the airlines to engage in inefficient service competition, particularly by offering high quality, high convenience service. This was especially true in long-haul markets; because costs fell nest rapidly in these markets, the CAB did not substantially alter the fare structure. Consequently, the percentage of seats the airlines filled (load factor) fell through most of the 1950s and the 1960s.

"By the end of the 1960s, the economy and air traffic growth faltered. In addition to the cyclical downturn, the long-term growth rate of air travel demand slowed, because the cost savings and added convenience from the switch to jet equipment .had largely been achieved. The carriers, however, had ordered many new aircraft in the mid-1960s. Excess capacity grew and the industry?s profitability declined. Consequently, the carriers asked the CAB for relief." (p. 11)

This is quite a mouthful. They identify "high quality, high convenience service" as an obstacle to realizing corporate profits. Anybody who has flown on a plane lately can tell how that problem was resolved. By the end of the 1960s, when the downturn began, the solution would evidently take the form of getting rid of this kind of service and turning the airlines into what they have become today: cattle-cars with inedible food that are chronically late.

Besides putting more bodies in the seats, the only other way the airlines could increase profits was through slashing wages. Graham and Kaplan try to explain how the employees, especially the pilots, had become fat and pampered. During the post-WWII years advances in technologies, most especially jet engines, had made it possible to transport ever larger numbers of passengers in shorter times. In other sectors of the labor market, such as coal and long-shore, productivity advances had made it possible to reduce the work force. But the pilots were tightly organized and resisted such cuts. Not only that, they insisted on maintaining generous work rules that were wrested from management in 1934, at the height of labor militancy during the depression. Although the pilots never occupied factories or fought the national guard, it was such battles that gave them the leverage to win an 85 hour per month limit on flights. Obviously, if jets are moving people to their destinations in half the time, the bosses sought ways to extend the number of hours pilots were in the air. If you could get them to work longer hours at lower pay, so much the better.

To put the pilots in a weaker bargaining position, the first step would be increasing the number of airline companies, an automatic outcome of deregulation. Prior to deregulation, pilots could maximize their work actions by facing a relatively limited number of companies. By shutting down two airlines, you could effectively bring the industry to its knees. By the same token, if you doubled or tripled the number of airlines, and made them non-union shops, the bosses would have the leverage to drive down wages. This is exactly what happened.

It is no accident that the primary business model for post-deregulation airlines came from Texas, a notorious "right to work" state. Prior to the passage of the 1978 legislation, Southwest Airlines had pioneered the kind of "no frills" approach that would be adopted by major carriers. In exchange for low-cost connections between major Texas cities, customers would forfeit hot meals and other amenities. The whole idea behind deregulation was to generalize this type of transportation for the entire country.

Texas Air was another "no frills" company, but the corporate culture was nothing like the sort of "good old boy" paternalism fostered by Southwest chairman Charlie Kelleher who liked to drink Jack Daniels out of a bottle at staff meetings. Texas Air was owned by Frank Lorenzo, a Queens, NY native who grew up near the local airports. In the course of building a holding company that eventually would include Continental and Eastern, he became the labor movement's most hated figure since the days of Henry Ford.

In contradistinction to Ford, Lorenzo ruled through methods more appropriate to the Reagan-Bush years than the FDR era. Rather than using open violence, he made use of complex financial machinations that always put the trade unions on the defensive. His main tactic was to take on enormous debts while financing his expansion through junk bonds arranged by Drexel-Burhnam, the investment bank Michael Milken made infamous.

Lorenzo, a graduate of the Harvard Business School, was a master of the leveraged buyout. When he decided to challenge the big boys from his established base at Texas Air, he knew that he was at a disadvantage. To become a big-time player on a national scale, he would have take over on of the existing companies like United, American or TWA, which were many times his size. He decided to go after National Airlines, the tenth largest carrier. Although the term "leveraged buyout" had not be coined yet, this is exactly what Lorenzo had in mind for his take-over. Since National Airlines had virtually no debt, Texas International (the new name of Lorenzo's expanding empire) could borrow enough money against National's own assets to finance the entire acquisition, essentially buying a company for free.

Once the buyout is complete, the new bosses are able to present the ocean of red ink as a 'fait accompli' to the workers. Unless they agreed to wage cuts, and longer hours, bankruptcy would be the consequence. Blackmail rather than gun thugs would be the choice of the new corporate bosses. Using the same leveraged buy-out techniques, Lorenzo eventually became the owner of Continental Airlines, which like National had not only been one of the top-ten airlines but a financially stable one as well.

In the course of driving down wages in the light of the new realities of deregulated hyper-competition, Lorenzo found himself facing a mechanics strikes at Continental in 1983, and then one by the pilots. In a pattern all-too depressingly familiar during those years, the pilots crossed mechanics' picket-lines. Sitting in consultation with his vice-president Phil Bakes, a "liberal" attorney who had used his stellar performance on Senator Kennedy's deregulation hearings as a launching pad into the corporate world, the two men came up with a preemptive strike against the Continental pilots who were planning their own strike.

Bakes had read about a New Jersey building supply company that had repudiated its labor contracts along with its debts while declaring bankruptcy. An appellate court had upheld the company. Richard Adams, Continental's senior vice president of flight operations, wrote a memo to his bosses, "I don't believe we can get these concessions on a voluntary, persuasive basis. . . We must get an awfully big stick. . . Most effective stick would be chapter eleven." (Petzinger, p. 209)

Lorenzo's success with Continental served as an example for a long succession of class war bankruptcies, including Greyhound. But it wasn't always necessary to go this full route. Other bosses were just as perversely creative. Perhaps it would only be necessary to get newer employees to accept lower wages. If the senior employees could retain existing wage and benefits, they might be persuaded to sell out new hires. When pilots crossed mechanics picket lines, and vice versa, any airline boss would be stupid not to think in these divide-and-conquer terms.

Robert Crandall, the fang-toothed CEO of American Airlines, cooked up just such a two-tier wage system in 1981. Just as Continental's bankruptcy was emulated by a host of corporations, so was the two-tier wage system. It should come as no surprise that many of the newer hires tended to be minorities and women, against whom traditional prejudices by white workers blended well with official compensation policies. Crandall put it this way, "If we can't create a new airline outside of American, we'll create one inside." (Petzinger, p. 130)

Since the early years of deregulation were marked by rapid expansion, it benefited American to hire from this pool. Not only would the old-time employees be bribed into passivity, the newer workers would be happy to have a job in a time of declining expectations, the bitter fruit of Reaganomics.

How did the unions respond to Crandall's innovation? The first union contract to come up was that of the Transport Workers Union, whose 10,000 members represented mechanics and ground employees. They knew that scabs were being rounded up by American all around the country, being paid $25 per day just to lie in wait for the green light. The TWU caved in.

Pilots, who are truly the aristocrats of labor, were easier to convince. Since American intended to expand rapidly, American's co-pilots could move upward into a pilot's seat and get a big raise in the process.

The flight attendants were going to be a tougher sell. Tom Plaskett, American's typically sexist marketing chief, was assigned this task. He reported later, "Flight attendants deal with everything on a more emotional, visible level." When they wept at meetings, he observed, "It dawned on me: What was coming to the fore in their minds was, 'I'm not worth I'm paid.' . . . We're telling them, 'There's someone out there who's willing to do your job at half the price.'" (Petzinger, p. 132)

After caving in, the flight attendants decided that keeping their $30,000 per year was a poor but acceptable reward for agreeing to allow newcomers to work for $15,000 per year. An added incentive was the knowledge that American was training every secretary in corporate headquarters to take their jobs in case they struck.

In the first few years of deregulation, the American public thought that they were winners. Price wars made it possible to fly anywhere in the United States for $99. Who could possibly care that food, when provided, was inedible or that you were squeezed into uncomfortable seats? Little did this same public understand that this was only a passing phenomenon. Eventually, they would end up paying the same old prices, but without the premium service of regulation days. The top players in the airline industry would find ways to defend their oligarchic interests in ways that were radically disjoined from the free market ideology they paid lip-service to.

About a year ago I made travel arrangements to go to Browning, Montana, which is the home of the Blackfoot reservation near the Canadian border. To get there involves a circuitous route that requires lengthy stays in various airports. A direct route to Montana would require something like 4 to 5 hours in the air, but my trip took a total of 12 hours. This is the experience nearly everybody suffers, unless you are willing to go to Miami, Los Angeles, Atlanta or Chicago. These sorts of cities constitute "hubs", which more often than not are corporate headquarters for a particular airline. Atlanta, for example, is Delta territory.

When the airlines were regulated, there was a certain commitment to providing air transport even though the route was not profitable. Airlines, like railroads or the highway system, were seen as a social asset. After deregulation, all that went by the wayside. With the hub system, air traffic is concentrated in major cities from which arteries of local air transport flow. The only problem is that you are at the mercy of the major airlines who can effectively dictate to the local service providers. Under the hub system, 70 communities receiving service lost all of it, while 260 cities suffered some deterioration in air service. (Dempsey-Goetz, p. 269)

The shift to commuter aircraft as local service providers also represents a degradation of quality. Smaller, unpressurized aircraft are less comfortable and less safe. Speaking from the experience of flying one such plane from Calgary to Lethbridge, it is an experience that rates somewhere between a roller coaster ride and root canal work.

Another aspect of hub-based air transportation is the degradation in on-time performance. With a limited capacity for takeoffs and landings, the only recourse is for airplanes to circle around in the air or wait on the ground until they can squeeze in. These frustrating delays, along with airline food and in-flight showings of "The Jetsons go to Las Vegas", are mostly responsible for periodic outbursts of "air rage" which are manifested by altercations with flight attendants or passengers defecating on their food trays.

Airline monopolies also circumvent free market pricing through their control of computerized reservation systems, which is to this industry as Bill Gates control of MS Windows is to his. When you go to a travel agency to book a flight, the agent will use a proprietary system developed by one or another airline that favors his own company. In the post-deregulation epoch you have had fierce competition over whose anti-competitive reservation system would sit on the agent's desk. Not only would this assure whose airline got the most reservations, it would also serve as a cash cow since it cost the travel agent a fee every time a transaction was logged.

American Airlines was the first to hit the market with SABRE back in 1962, which--like the Internet--emerged from military technology, specifically a system called SAGE that stood for Semi-Automatic Ground Environment. It was used to monitor incoming missiles and allowed Dr. Strangelove types to sit around and play nuclear warfare simulation games.

When American Airlines decided to wipe competitors off the face of the earth, they deployed SABRE as a major offensive weapon. It was feared by everybody, including Braniff Airlines who alleged that the system was being used to cancel their reservations outright. Although the Justice Department investigated, no evidence turned up.

Considering the documented record of American Airline's attitude toward its competition, it might not seem like paranoia to have these suspicions. Tom Plaskett, the highest-ranking executive under American's Bob Crandall, declared his intentions with respect to Braniff: "We've got to make them go away." Later he would recall, "It was not good-spirited competition." Crandall himself was even blunter. When Braniff's president Howard Putnam set up a meeting with Crandall to discuss his worries, he secretly taped the conversation.

Crandall: I think it's dumb as hell, for Christ's sale all right, to sit here and pound the shit out of each other and neither one of us making a fucking dime.

Putnam: Well...

Crandall: I mean, goddamn! What the fuck is the point of it?

Putnam: Nobody asked American to serve Harlingen. Nobody asked American to serve Kansas City. . .If you're going to overlay every route of American's on top of every route that Braniff has, I can't just sit here and allow you to bury us without giving you our best effort.

Crandall: Oh, sure, but Eastern and Delta do the same thing in Atlanta and have for years.

Putnam: Do you have a suggestion for me?

Crandall: Yes, I have a suggestion for you. Raise your god-damn fares twenty percent. I'll raise mine the next morning. You'll make money and I will too.

Putnam: Robert, we can't talk about pricing.

Crandall: Oh, bullshit, Howard. We can talk about any goddamn thing we want to talk about.

(Petzinger, 150-151)

So this was how business took place under the free market reforms unleashed by the deregulation act of 1978: sharks would eat sardines as they always had. Braniff eventually went out of business, just the way that Bill Gates's competitors would, one after another.

We should finally say a word or two about safety. One would suspect that the pressures of the marketplace might lead to shortcuts that affect the reliability of air transportation. There is immense pressure to keep pilots flying as many hours as possible. To maximize profits, one would expect the schedule of maintenance to be lengthened and mechanics to receive less expensive training. When you add the heavy traffic in and out of hubs, the prospects are less than optimum.

While accidents have generally been on the decrease as airplanes themselves are better engineered, there are undeniably some fatal mishaps that can be attributed to conditions produced by deregulation.

On May 11, 1996, a Valujet airplane caught fire and crashed into the Florida Everglades killing all 100 people on board. The fire was nourished by oxygen generators that were not identified or packed properly. Valujet was a typical "no frills" airline spawned by deregulation.

The NY Times reported on August 20, 1997:

"Most of the technicians who first mishandled the generators, as they were removed from other planes, were not Valujet employees or even employees of Sabretech; they were contractors hired by Sabretech. Two-thirds of them were unlicensed.

"Valujet had only one employee to check the work of the technicians, so it hired two other individuals on temporary contracts to help monitor the technicians. A more well-established airline, board experts said, would have had three company employees monitoring each shift."

"A single licensed Sabretech mechanic, who probably worked not much more than eight hours a day, signed off on the work of 72 people who worked around the clock, the board's investigators said. One board member suggested that it was not possible for one mechanic to have overseen all such work."

On January 31, 2000, an Alaskan Airlines jet crashed, killing all 88 people on board. The airline culture was hostile to "interference" from the beginning but its standards dropped even lower when deregulation set in. Its in-house newsletter touted an executive who ordered 25 bottles of vodka in Siberia to de-ice a plane's wings - something the Federal Aviation Administration would never approve.

A July 15, 2000 Montreal Gazette article reported: ''They see themselves as being above any moral or ethical code. 'And they're used to making their own rules.'' So stated Deby Bradford, a 10-year Alaska flight attendant who recently left to become an instructor pilot.

An FBI and the National Transportation Safety Board examined whether negligence by Alaska contributed to the crash of flight 261. They discovered, according to the Gazette report:

-- "In an emergency nationwide inspection ordered by the FAA in February, Alaska turned up with the highest percentage by far of MD-80s flying with worn stabilizer jackscrews, the part suspected as a cause of the crash. Six of Alaska's 34 planes failed the check (17.6 per cent), while only 16 of the other 1,073 inspected at 20 other carriers (1.5 per cent) failed."

-- "In March, 64 Alaska mechanics delivered a letter to Chief Executive Officer John Kelly saying they had been 'pressured, threatened and intimidated' by a supervisor to cut corners on repairs."

-- "In April, a veteran, respected Alaska pilot told a company vice president in a widely circulated letter that he was concerned about Alaska's approach to safety and maintenance. 'I feel that at some point our company needs to strive for a higher level than this,' Capt. David Crawley wrote."

The total number of dead in these two crashes is 188, which begins to approach the kind of mass murder level of Timothy McVeigh who sits awaiting capital punishment. Of course, it is in the nature of American society not to punish corporate chieftains whose blood on their hands comes as a unintended byproduct of the pursuit of profit. Some day a different kind of society will sit in judgement on them and the punishment will fit the crime.


Aaron Bernstein, "Grounded: Frank Lorenzo and the Destruction of Eastern Airlines", Simon and Schuster, 1990

Paul Dempsey & Andrew Goetz, "Airline Deregulation and Laissez-Faire Mythology", Quorum, 1992

David Graham & Daniel Kaplan, "Competition and the Airlines: An Evaluation of Deregulation", CAB, December, 1982

John Newhouse, "The Sporty Game," Alfred Knopf, 1982

Thomas Petzinger, "Hard Landing", Random House, 1995

Anthony Sampson, "Empires of the Sky", Random House, 1984

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