How Airline Deregulation Left a Captive Market in Place

The airline industry illustrates this arrangement. Without government intervention, carriers could not sustain a cartel. Members would have incentives to undercut agreed-upon prices, improve service, expand output, and attract one another's customers, while outside entrepreneurs remained free to challenge them. A durable cartel depends on the state to restrict entry and enforce cartelizing rules.

State enforcement of this cartel has shifted from explicit control to a subtle form. The Civil Aeronautics Board (CAB) replaced market competition with administrative control over airline entry, routes, and fares. The CAB and the Civil Aeronautics Administration (now the FAA) were created when the original Civil Aeronautics Authority was divided in 1940. Although deregulation in 1978 dismantled direct fare and route controls, federal certification, public airports, landing slots, air traffic control, security screening, and safety inspections preserved the government-organized structure. Airlines now appear to compete while operating within a state-controlled system that restricts entry and sets minimum standards of service.

Within this system, regulatory minimums become service maximums. Presented as floors for safety, quality, and service, they become common benchmarks for approved carriers. Once airlines comply, thin profit margins and restrictions on competition weaken incentives to exceed them. Passengers seeking fast long-distance travel also lack close substitutes. Cars, buses, trains, horses, and walking may eventually reach the same destination, but none can match the airline system's essential promise: "We will get you there faster."

Airlines need not ask how well they must treat passengers to win their business. They need only ask what the law requires. If poor communication, long delays, and hours of confinement remain within the government-approved framework, carriers have little reason to improve. The state need not order airlines to provide poor service. It need only prevent the competition that would make such service unprofitable.

Ticket non-transferability provides another form of protection. The strategy originated with railroads, which campaigned for local and state restrictions on ticket brokers. Airlines later imposed contractual restrictions, but limited identity checks allowed tickets to be resold through newspaper classifieds into the early 1990s. Government-mandated photo identification, adopted in the name of national security, made these restrictions enforceable industry-wide and eliminated the resale market. Security does not require non-transferability. Airlines can transfer reservations, identify replacement passengers, and screen them before departure. Non-transferability instead protects price discrimination by preventing resellers from undercutting higher last-minute fares. Similar restrictions have proven less successful in sporting events, concerts, and bus travel because they cannot be defended as readily on national-security grounds.

The supporting services underlying air travel are similarly insulated from profit-and-loss discipline. Neither passengers nor airlines can replace an inefficient security provider, air traffic-control agency, or government inspector. These institutions answer to political authorities rather than travelers, allowing airport security workers to become political pawns in periodic federal budget battles while agencies shift blame among themselves. In a free market, airlines would bear the full cost of transporting passengers safely, either directly or through contracts with competing service providers. Those costs would be reflected in fares, insurance, reputations, and contractual obligations, while revenues would depend on satisfying passengers. Instead, responsibility is dispersed and accountability disappears.

Supporters of the regulatory state can point to falling airfares as evidence that intervention protects competition and consumers from firms driven by greed to monopolize the industry. This claim ignores socialized supporting costs, charges for formerly included services, losses caused by non-transferability and price discrimination, and the time and discomfort imposed by deteriorating service. The rising effective cost of reaching a destination, relative to declining service quality, allows monopoly pricing to lurk behind falling advertised fares.

Neither the airline I flew nor the industry's more recent entrants created this state-organized system. Each responds to the incentives and moral hazards of a market cartelized by the state, while taxpayers bear the socialized costs of functions it provides. Airlines retain the revenues and navigate tight margins by adjusting fares, routes, baggage policies, seating, and service quality. My experience was not merely the failure of one airline but the predictable result of a system that protects incumbents, separates fares from the full cost of air travel, and weakens market discipline.