Air Wars: Deregulating the U.S. Airline Industry

In the early decades of the twentieth century, the U.S. government assisted in the development of an airline industry by subsidizing the delivery of mail and allowing mail carriers to also fly passengers. Because the government awarded mail routes to the lowest bidders, the emerging airline companies struggled to make money. In the 1930s, leading airline companies advocated for the government to regulate the industry to reduce competition and enable the development of a profitable industry. The government responded by creating a regulatory system that assigned routes and set ticket prices. Under regulation, the industry grew, became safer, and enjoyed high wages, but passengers paid high ticket prices and only the wealthy could afford to fly. In the 1970s, pressure from politicians and the public led to the deregulation of the industry in 1978, which left airlines free to compete on routes and prices. Between then and the mid-1990s, new low cost airlines entered the market while incumbent airlines cut costs and improved labor efficiencies, changed route structures, introduced new ticket pricing technologies and frequent flier programs, and competed more directly with each other in an effort to remain in business. Some airlines failed and others merged. The case highlights prominent airline CEOs (Bob Crandall, Herb Kelleher, Richard Ferris, Frank Lorenzo, and Ed Acker) during the period of deregulation and the steps each took to remain competitive.