When the first commercial airlines appeared after WORLD WAR I, fewer than six thousand passengers a year traveled by air. By the 1930s, the Big Four—Eastern Air Lines, United Air Lines, American Airlines, and Trans World Airlines (TWA)—dominated commercial air transport. These companies had garnered exclusive rights from the federal government to fly domestic airmail routes, and Pan American (Pan Am) held the rights to international routes. The hold of these four airlines on their lucrative contracts went virtually unchallenged until deregulation in 1978. Even after the formation of the Civil Aeronautics Board (CAB) in 1938, formed to license new airlines, grant new routes, approve mergers, and investigate accidents, the Big Four and Pan Am continued to be guaranteed permanent rights to these routes. In fact, no new major scheduled airline was licensed for the next four decades.
In October 1978, Congress passed the Airline Deregulation Act (49 U.S.C.A. § 334 et seq.), ending the virtual MONOPOLY held by the Big
Four and Pan Am. The government's goal was to promote competition within the industry. The act gave airlines essentially unrestricted rights to enter new routes without CAB approval. The companies could also exit any market and raise and lower fares at will.
The immediate effect of deregulation was a drop in fares and an increase in passengers. New cut-rate, no-frills airlines, such as People Express Airlines and New York Air, offered travelers the lowest fares ever seen in the industry. Forced to compete to fill their planes, the larger companies lowered their prices as well. Then the oil-producing countries in the Middle East formed a cartel and raised the price of jet fuel 88 percent in 1979 and an additional 23 percent in 1980. Combined with tumbling fares and increased passenger loads, the higher cost of jet fuel caused airline profits to drop.
Labor strife also affected the industry in the early days following deregulation. In 1981, after years of working under stressful conditions made worse by deregulation, the Professional Air Traffic Controllers Organization (PATCO) called a strike, demanding shorter working hours and higher pay. The union expected support and cooperation from the Reagan administration because of a sympathetic letter President RONALD REAGAN had sent to PATCO when he was campaigning for the presidency. In the letter, he pledged to do whatever was necessary to meet PATCO's needs and to ensure the public's safety. But Reagan ordered the strikers to return to work within three days or be fired. Most did not return. The FEDERAL AVIATION ADMINISTRATION (FAA) ordered all carriers to temporarily reduce their number of flights by one-third. Newer and smaller carriers found themselves increasingly unable to gain access to lucrative routes. Rebuilding the air traffic controller force took years, during which landing slots at the largest airports remained restricted, and small carriers, unable to compete, simply abandoned their attempts to break into the larger markets.
To some extent, competitive pricing actually had the opposite effect of what the deregulators intended. When the small "upstart" companies offered extremely low fares, the larger companies responded aggressively. For example, in 1983, People Express announced a $99 round-trip fare between Newark, New Jersey, and Minneapolis–St. Paul. Northwest Airlines, which had always dominated the Twin Cities market, undercut People by instituting a $95 fare for the same destination and scheduling extra departures. As a result, People decided it could not compete and withdrew from the market. Passengers enjoyed the benefit of lower fares, but only for a short time before the competitive effect faded and high fares returned.
When deregulation brought competitive pricing, the large carriers began to realize that it was not profitable for them to do business the way they had in the past. The first major change they made was to abandon the practice of crisscrossing the continent with nonstop flights to many different cities. Instead, the major airlines scheduled most of their flights into and out of a central point, or hub, where passengers might need to change to a different flight to complete their journey. One airline controlled most of the reservation desks and gates at a particular hub—for instance, United in Chicago, Northwest in Minneapolis–St. Paul, American in Dallas–Fort Worth, and Delta in Atlanta. For this reason, and because passengers tend to dislike changing carriers in the middle of a trip, the dominant company in a hub had a tremendous advantage over the competition in influencing what carrier a passenger would choose. By 1990, two-thirds of all domestic passengers traveled through a hub city before arriving at their final destination. Of those passengers, eight out of ten remained on the same airline throughout their journey. By 1992, there were at least twelve "fortress hubs," or airports where one airline controlled more than 60 percent of the traffic. Passengers who flew out of these hubs paid over 20 percent more than they would have for a comparable trip out of an airport that was not a hub.
After deregulation, the airlines also came to realize that they needed a more efficient way to book reservations and issue tickets. It is difficult to imagine, in these days of highly sophisticated computers and split-second communications, that until the late 1970s and early 1980s, airline schedules were contained in large printed volumes, reservations were taken over the telephone and tallied manually at the end of each day, and tickets were written by hand. To streamline this process the large companies initially proposed a joint computer system, listing schedules and fares. The JUSTICE DEPARTMENT objected on the grounds that such a system would be anticompetitive and would violate the SHERMAN ANTI-TRUST ACT (15 U.S.C.A. § 1 et seq. ). Instead, each airline developed its own computer system and entered data in a manner that unfairly biased travel agents' choices in favor of the carrier that owned the system. Through skillful manipulation of the data, the airlines were able to put competitors at a disadvantage. For example, the airline that owned the system might enter the data so that all its flights to a particular destination appear on the screen before any flights of a competitor.
In a further attempt to win loyalty from passengers, the large airlines instituted frequent-flyer programs, which awarded free tickets to travelers after they logged a certain number of miles flown with the company. The combination of hubs, central computer reservation systems, and frequent-flier programs made the major airlines almost invulnerable in large markets.
Deregulation also brought a period of financial upheaval and an epidemic of "merger fever." A number of companies ceased doing business between 1989 and 1992, and still others merged with stronger, more aggressive companies. Among the companies that disappeared from the skies were Eastern, Pan Am, Piedmont, and Midway Airlines. Continental and TWA sought the shelter of Chapter Eleven BANKRUPTCY reorganization. USAir and Northwest required cash infusions through cooperative arrangements with foreign airlines. Even financially strong carriers such as United and American laid off employees and abandoned plans to purchase new aircraft, which added to the woes of the depressed aerospace industry.
The mergers and buyouts of the 1980s were often accomplished in an atmosphere of hostility and distrust. Charges of predatory pricing and other unfair business practices were leveled by one carrier against another. During the 1980s, the Justice Department's Antitrust Division made a number of GRAND JURY investigations into alleged anticompetitive activity by the major airlines, but no indictments were handed down. However, the companies that survived did not emerge unscathed. Many of the acquisitions were highly leveraged buyouts that left the reconstituted companies heavily in debt. With profits insufficient to cover their enormous debt loads, the companies frantically competed for business, engaging in fare wars that produced a dizzying array of pricing plans with equally numerous and confusing restrictions. Some of the tactics were questionable, but, again, not clearly illegal. In 1993, American Airlines was sued by Continental and Northwest for alleged predatory pricing during a 1992 fare war. The jury took just over two hours to return a verdict in favor of American.
By 1993, the industry began to rebound. Continental Airlines and TWA emerged from bankruptcy, and a few small carriers, such as Kiwi International, formed by former Eastern pilots, responded to the public's demand for low
fares and began to make incursions into the established markets, although they generally shied away from directly challenging the giants. Older carriers for the most part chose to stay with their hub-and-spoke systems, while several, including Northwest and United, came up with a creative new solution to their financial woes.
Northwest avoided bankruptcy when its unions agreed to wage concessions in return for part ownership of the airline. Then, in 1994, after seven years of negotiating, employees of United gained majority control of their company in return for deep pay and benefits cuts. Secretary of Labor Robert B. Reich commented that other financially troubled companies would undoubtedly follow suit: "From here on in, it will be impossible for a board of directors to not consider employee ownership as one potential business strategy." However, some industry analysts doubted that employee ownership would be effective in the long run because of inherent conflicts between labor and management, or between different labor groups. "It can't work," declared former Chrysler chairman Lee A. Iacocca. "What do you think will happen when it's a choice between employee benefits and capital investment?"
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