But there's no cause for alarm.
It's time to take another look at airline deregulation, for a major restructuring seems to be under way. Airlines struggling to obtain labor cost savings and improve profitability have resorted to big mergers, with the acquisition of Eastern by Texas Air being the most prominent recent example. Such developments raise some questions: Has airline deregulation really produced the good results with which it has been credited? If so, are they only temporary?
The most important promise of deregulation was lower passenger fares in a more competitive and efficent airline industry. This has also been its most dramatic achievement. Consumers are now paying about $10 billion less per year for airline travel than they would have under the old regulatory pricing formulas. Only a tiny fraction of air travel takes places on routes where fares have increased.
The remarkable reduction in airline ticket prices has not come at the expense of service or safety, and perhaps not even at the expense of profitability. Overall service has expanded greatly since deregulation, and while service patterns have changed, the great majority of passengers have shared in these fare and service benefits. Even in small communities, many more pasengers have been benefited than harmed.
Safety and financial performance have often been linked in public discussion, the idea being that hard-pressed firms might skimp on safety even though safety has remained fully subject to regulation. Airline profits were poor after the fuel price surge in 1979 and during the recession that followed. But airlines have always been a highly cyclical industry, and profits would have followed a broadly similar pattern under regulation. In any case, the record shows that safety has not been impaired.
Although airline fatalities in 1985 were unusually high, only about 10 percent of the total was accounted for by domestic scheduled airlines that were deregulated. Well over half the deaths were accounted for by three incidents on international and charter flights that were essentially unaffected by domestic economic deregulation. Over the longer term, the safety record has been exemplary. According to former Civil Aeronautics Board chairman John Robson, the domestic fatality rate since deregulation for scheduled carriers operating large aircraft has been only half that of the five years before.
Deregulation did, however, produce a wide range of adjustments, some of which are not yet complete. Not only have ticket prices been brought more in line with costs, but costs have also been reduced. Airlines cut costs by restructuring route systems, matching aircraft fleets with markets, and developing pricing arrangements to fill empty seats. Competition from new airlines also spurred efforts by older airlines to reduce labor costs.
Most of the older airlines that operated in the previously regulated environment have put pay cuts into effect, at least temporarily. Several have established two-tier pay scales that pay new workers lower wages than those already employed. But lower fares have not come at the expense of employees' pay. Compensation of airline employees has on average declined in real terms by 2.7 percent since 1977. This is about in line with what happened to the pay of the average worker in the economy.
Labor cost differences, however, have been an important factor influencing the competitive positions of different airlines. Fare competition and pressures to realign labor costs have been strong because differences in compensation costs between older airlines and those more recently established are too large to be sustainable. Although precise comparisons are difficult, compensation for some classes of employees is 20 to 50 percent higher for the older carriers than for new entrants. For the more highly paid pilots and cockpit crew members, the difference may be much larger.
Labor cost differences between the newer and older airlines are already narrowing, and they will narrow further as seniority rises in the new firms and new employees are hired at lower pay scales in the older firms. Although pressures for labor cost savings are clearly evident in recent pay disputes, airline jobs remain good jobs, and fewer would surely be available under higher regulated fares.
The recent restructuring of major air carriers is another way air carriers are still adjusting to deregulation. The consolidation reflected by Texas Air's acquiring Eastern, TWA's acquiring Ozark, and Northwest's acquiring Republic involves mainly mergers between carriers with complementary route systems, combining regional with national systems or carriers with different regional strengths. Despite the consolidation that has been occurring, competition will remain strong. Airlines are free to adjust rates, flexibility for rapid route and fare adjust- ments has been growing, and new entry can occur if profitable opportunities arise. Effec- tive competition depends more on the alterna- tive services available to consumers than on the number of firms in the industry. Besides, there are more firms now than when deregulation began.
Recent developments should not be viewed with alarm. The adjustments already brought about by competition have produced large savings for consumers while expanding their choices. Still further adjustments are under way, but consumer fares will continue to be set competitively and airline profitability and stability in a competitive operating environment should improve as the industry adjusts more fully to deregulation.