Airline Deregulation at 35: Is foreign ownership the next step?

Attention, '70s passengers: Put your hands up if you want lower fares. (From BraniffPages.com; click for source)

Attention, ’70s passengers: Put your hands up if you want lower fares. (From BraniffPages.com; click for source)

Last Wednesday, Feb. 6, quietly marked a couple of notable anniversaries for Canada. One was the 61st anniversary of Queen Elizabeth II’s reign, which began upon the death of her father, King George VI, on Feb. 6, 1952.

The other was Stephen Harper’s seventh anniversary as Prime Minister of Canada, which officially began with his swearing in on Feb. 6, 2006. Although he is the country’s 22nd prime minister, he is only the ninth to make it to that milestone.

Yet Feb. 6 also marked the 35th anniversary of an event that didn’t actually take place in Canada, but nevertheless had a profound effect on how Canadians live today: the introduction of airline deregulation in the United States.

On Feb. 6, 1978, Nevada Sen. Howard Cannon introduced the Air Transportation Regulatory Reform Act in the Senate. The bill’s intention was to do away with a regulatory system that required airlines to apply for permission to add or delete destinations on their route maps or to offer seat sales below the prescribed price for a given route.

The regulations on airlines in the ’50s, ’60s and ’70s were so restrictive that the Civil Aeronautics Board, which then regulated America’s skies, was forced to intervene in a series of disputes over the minutiae of the airline business, such as the 1970 Elbow Room War (a.k.a. the “Inch War”), the 1971 Lounge War and the 1974 Booze War.

The regulations were no less absurd elsewhere. In Britain, affinity groups were allowed to charter their own aircraft and offer their members fares well below those charged by scheduled airlines. Regulators, however, became suspicious of how easily the so-called “Left Hand Club” had managed to fill a U.S.-bound Laker Airways jet exclusively with left-handed passengers. When officials arrived at the airport for a spot check, they found that 46 passengers were not left-handed, and slapped the airline with penalties.

Cannon’s goal of eliminating regulatory absurdities was not universally appreciated, however, as Thomas Petzinger, Jr. described in the book, Hard Landing:

As [American Airlines president Al] Casey spoke, Phil Bakes, sitting with the Cannon staffers at the front of the hearing chamber, noticed a member of the American delegation, a mean-looking fellow with pointed teeth and slicked-back hair who was turning the pages of Casey’s flip chart. At a distance the man struck Bakes as the kind of hoodlum he had always been instructed to stay away from growing up on the South Side of Chicago. A bodyguard, perhaps, Bakes thought.

When the day’s testimony was concluded and the hearing room began to clear, Bakes noticed the mean-looking guy stalking toward him with a scowl, as if he was getting ready to throw a punch. The man stopped in front of him, scowling.

“You fucking academic eggheads! You’re going to wreck this industry!” The man turned and left.

Who was that? Bakes asked.

It was Bob Crandall, someone said, the head of marketing at American.

Two years later, American promoted the sharp-tongued Crandall to president.

Despite Crandall’s hostility, the deregulation bill eventually wound its way through the American legislative process, and was signed into law by President Jimmy Carter in October, 1978.

With deregulation came a slew of cheap fares. A seat on a flight, the analogy goes, is a perishable product. Once the cabin door closes, every empty seat is a waste, a missed opportunity to make a sale. Under regulation, the airlines had been prohibited from disposing of their empty seats by selling them off for whatever they could get for them. With price controls gone, however, fares dropped and the skies opened up to a wide range of people who previously found flying unaffordable.

Canadians could only look on with envy. Canada’s airline industry was stable, but highly regulated and expensive. Air travel was for the business traveler, those who had saved diligently for a special holiday, or for family emergencies. If price was an issue, you either drove or endured a very long train or bus trip.

But by the ’80s, Canadian politicians were under phenomenal pressure to deregulate the industry by a public that desperately craved the new-found freedom to travel affordably that Americans had been granted.

Finally in 1984, in the twilight weeks of the Trudeau government and with an election just months away, federal Liberal transport minister Lloyd Axworthy announced the first stage in the deregulation of the Canadian airline industry. It wasn’t enough to get his government re-elected that September, but the incoming Progressive Conservative government was keen on deregulation as well, and passed the necessary legislation in 1987.

Years of chaos followed deregulation on both sides of the border, as start-ups came and went (sometimes shutting down within weeks or months) and traditional full-service carriers like Canadian Airlines, Pan Am and TWA struggled with unsustainably high costs and crushing debt loads for years before finally losing the fight.

Some came to believe that Crandall had been right about deregulation ruining the industry; even though Crandall had done quite well under deregulation by succeeding Al Casey as American’s president in 1980 and then growing the airline amid the chaos by being ferociously frugal and by buying valuable assets off cash-strapped competitors at bargain prices.

To be sure, the deregulation era was a disaster for those who entered the industry expecting that it would be not just a job, but a career until retirement. Over the past 30 years, they have repeatedly been through pay cuts, layoffs and job concessions. The years were unkind to shareholders, too, who saw their investments lose their value or even be wiped out entirely.

For travelers, it has been a mixed blessing. Planes and airports are more crowded than ever, and many are irked by the new “all the extras cost extra” pricing model adopted by formerly all-inclusive carriers. Yet deregulation has also opened new options for people to travel further from home than ever: between 2000 and 2009, the amount spent by non-American foreign visitors to Canada rose 29 percent, while the amount spent by Canadians visiting foreign countries other than the U.S. skyrocketed 72 percent; both figures being well above the 18.72 percent inflation over the course of the decade.

From a safety point of view, though, things have turned out well. ICAO/Boeing statistics show a total of 6,158 onboard fatalities in accidents involving U.S. or Canadian commercial jetliners between 1959 and 2010. Only 265 of those fatalities — or a mere four percent — happened during the last 10 of those 52 calendar years. (This presumably excludes the 9/11 terrorist attacks, which were criminal acts as opposed to accidents.)

As deregulation turns 35 this year, it might lead to calls to take the next logical step in the reorganization of the industry by allowing more airlines to merge across borders. This has been allowed in Europe for a number of years, which has permitted discount operators easyJet and Ryanair to grow as multinationals, Air France and KLM and British Airways and Iberia to merge while retaining separate national sub-brands, and Lufthansa to buy the national airlines of neighbouring Austria and Switzerland.

Similar mergers have taken place in Latin America, with most of Central America flying under the banner of Salvadoran-based TACA Airlines, and the Brazilian-Chilean LATAM Airlines Group now owning or having significant minority stakes in airlines in eight different countries.

Even Australia has opened the door to foreign ownership by allowing the Singaporean-owned Tiger Airways to compete with domestic carriers, though this might not last much longer as the once British-owned Virgin Australia is poised to take over Tiger’s money-losing Australian division.

Such a move toward foreign ownership of airlines would be controversial in Canada, particularly as a foreign owner would be more interested in taking over Air Canada or WestJet outright than in launching a third national airline.

Yet the difficulties that the airlines have had in finding the efficiencies they hoped to gain through membership in the three large global airline alliances — Star, Oneworld and Skyteam — suggest that North America’s relatively parochial airlines might soon start to press politicians for the right to purchase foreign carriers or, more likely, to sell themselves to foreign owners as a way out of financial trouble.

One can only wonder what Bob Crandall might think of that.

Related video: The 1979 BBC documentary series Diamonds in the Sky looks at deregulation’s first chaotic year in the United States. (50 mins.)

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About theviewfromseven
A lone wolf and a bit of a contrarian who sometimes has something to share.

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