July 5, 2024 • 25min
How flying got so bad (or did it?)
Planet Money
Key Takeaways
- The airline industry was heavily regulated by the government until 1978, when the Airline Deregulation Act was passed
- Deregulation led to lower fares and more people being able to afford air travel, but also resulted in a more bare-bones flying experience with fewer amenities
- New budget airlines like People Express emerged after deregulation, forcing legacy carriers to cut costs and become more efficient
- Consolidation in the 1980s reduced competition, but a second wave of low-cost carriers in the 2000s has helped keep prices down
- Today, airfares are about 50% lower than in 1980 when adjusted for inflation, and nearly 90% of Americans have flown
- The tradeoff for lower fares has been reduced amenities, more crowded planes, and a less luxurious flying experience overall
Introduction
This episode of Planet Money explores how the airline industry has evolved over the past century, particularly since deregulation in 1978. It examines whether flying is truly worse today than in the past, or if it's actually better in some ways. The hosts visit a museum exhibit showcasing a "golden age" airplane from the 1950s-60s to compare it to modern flying experiences. They then trace the history of airline deregulation and its impacts on the industry and passenger experience.
Topics Discussed
The Regulated Era of Air Travel (05:37)
In the late 1940s as commercial flight became common, the U.S. government heavily regulated the airline industry:
- The government controlled how many national airlines could exist
- It regulated where airlines were allowed to fly
- It set the prices airlines could charge passengers
- The government subsidized some flights
Because prices were regulated, airlines competed on services and amenities:
- Planes had spacious seating, lounges, fancy meals
- Some airlines even had piano bars and meat carving stations on board
However, flying was very expensive and only accessible to wealthy people during this era. As Don Burr, a former airline executive, noted: "It was very enamoring, and it was exotic...it was kind of the jet set type stuff."
The Push for Deregulation (07:26)
In the 1970s, some airline executives like Don Burr began lobbying for deregulation, arguing it would allow them to provide better transportation without government interference.
However, major airlines opposed deregulation, fearing increased competition. American Airlines executive Bob Crandall was particularly outspoken, reportedly saying to a Senate staffer: "You [expletive] academic pinhead. You don't know [expletive]. You can't deregulate this industry. You're gonna wreck it."
Deregulation became framed as a consumer rights issue, with advocates arguing it would democratize flying by lowering fares. In 1978, Congress passed the Airline Deregulation Act, ending government control of fares and routes while still regulating safety standards.
The Rise of Budget Airlines (10:41)
After deregulation, new budget airlines emerged to take advantage of the open market. Don Burr founded People Express with the goal of making flying affordable for everyone.
People Express kept costs low by:
- Operating out of Newark's unused north terminal
- Buying used planes and adding more seats
- Reducing legroom
- Charging separately for food, checked bags, and other services
The airline was an immediate hit, growing to become the 5th largest carrier. As Burr noted: "People were excited because now, all of a sudden, people that rode buses, drove cars, et cetera, could get on a plane and go have dinner somewhere."
Legacy Airlines Fight Back (14:25)
Established airlines like American soon realized they needed to compete with the new budget carriers. Under CEO Bob Crandall, American Airlines:
- Matched People Express fares on half their seats
- Cut costs by eliminating small amenities (like one olive from salads)
- Implemented hub-and-spoke routing for efficiency
- Created the first successful frequent flyer program
- Introduced variable pricing based on demand and booking time
Crandall said of the frequent flyer program: "The purpose was to induce everybody that took a trip to take every trip on American because they wanted the miles."
These changes allowed American to offer low fares while still providing some amenities, putting pressure on People Express.
Consolidation and the Modern Era (21:00)
By the mid-1980s, many new airlines were struggling to compete with established carriers. A wave of mergers and acquisitions followed:
- Over a dozen mergers occurred in a few years
- People Express was acquired by Continental, which later merged with United
- Today, just 4 airlines (American, United, Delta, Southwest) control nearly 70% of the market
MIT economist Nancy Rose notes this consolidation reduced competition: "It's this understanding of our mutual interdependence and this sense that if I soften my competition, you'll soften in yours, and we'll all be able to charge higher prices."
However, a second wave of budget airlines in the 2000s (like Spirit and JetBlue) has helped keep prices low. Rose explains: "We need these kind of smaller carriers who want to grow, who want to go in and take share from the majors because they're the ones that are keeping the price pressure on."
The Modern Flying Experience (21:08)
Today's flying experience often involves frustrations like delays, crowded planes, and extra fees. However, airfares are about 50% lower than in 1980 when adjusted for inflation.
The tradeoffs of deregulation include:
- Lower fares and more people able to fly (nearly 90% of Americans have flown)
- Fewer amenities and a less luxurious experience
- More crowded planes and airports
- Environmental concerns due to increased air travel
As Don Burr reflected: "In terms of the care and feeding of you when you're trying to make a very complicated, difficult, stressful trip? It's nowhere near what it used to be, but I think in terms of the cost of the ticket, between A and B, you never had it so good because you can get all over the world for People Express prices now."
Conclusion
The deregulation of the airline industry in 1978 fundamentally changed air travel in America. While it achieved the goal of making flying more affordable and accessible to the masses, it also led to a more bare-bones, less comfortable flying experience. The episode highlights the complex trade-offs involved in deregulation and market competition.
On one hand, deregulation succeeded in dramatically lowering airfares and democratizing air travel. Nearly 90% of Americans have now flown, compared to flying being limited to the wealthy elite in the regulated era. Budget airlines and price competition have kept fares low.
On the other hand, the luxury and comfort of the "golden age" of air travel has largely disappeared. Planes are more crowded, amenities have been reduced, and the overall experience feels more stressful for many passengers. Consolidation in the industry has also reduced competition in some ways.
Ultimately, the episode suggests that whether flying is "better" or "worse" today depends on one's priorities and perspective. For those who value affordability and access above all, today's air travel market delivers. For those who long for the luxury of the past, the modern flying experience may feel like a downgrade. The airline industry's evolution reflects broader economic trends of deregulation, market competition, and the constant balance between price and quality in consumer services.
