The Deregulation Act of 1978 – Part Two – July 10, 2009

This week we continue with the series on Airline Deregulation and hopefully my brief explanation on what started it all will spark your interest. As always, I would like all aviators to connect with their roots and one of the ways they can do that is by using the “Third Dimension Blog” as a resource.

Quote of the Week

“Aeronautics was neither an industry nor a science. It was a miracle.”—Igor Sikorsky

Airline Deregulation

I think we talked enough last time about how deregulation came to be, so let’s consider a few of the options the legacy carriers used to stave off the competition. For those who think that the size and experience of the legacy carriers should have been sufficient to win this battle, you are wrong. The micromanaging of the trunk carriers by the CAB created an airline business model that was inefficient, top heavy with management, and union contracts that were negotiated when each carrier had protected turf. Things changed quickly and when the cash reserves and access to credit dried up, the inevitable occurred.

The legacy carriers obviously had a fare war on their hands with all the new competition entering the market place, but they also had a very important tool in their arsenal—their computerized reservation system. The airlines began to use all of the data on who flew where, what days they flew, what time they flew, and how often. The use of this data was formally titled “Yield Management Pricing.”

American Airlines pioneered this tactic, and in doing so allowed most of the legacy carriers to follow their marketing and pricing scheme, and really put the business traveler at a disadvantage. Essentially this new tactic allowed each carrier to sell different seats on the same flight for dramatic differences. Tourist who booked early could fly cheaply—business travelers who flew at the last minute paid full fare. This obviously created a public relations problem for the carriers with the business community, so to solve that problem the “Frequent Flyer Program” became a substitute for lower prices. This perception of something for nothing — most business travelers were being reimbursed by their companies — worked for a while but cost conscious corporations soon demanded better.

The two-tier pay scale was the next move by the legacy carriers. This tactic allowed the legacy carriers to pay new employees the same lower wages that the upstarts were paying. The two-tier system granted parity at some point but the real question was whether or not the carrier would survive long enough for the new hire to recover the losses incurred. Some did, but others were not as lucky.

There were other tactics employed by the legacy carriers such as the hub and spoke system, the addition of the regional carriers to control feed traffic to the hubs at a substantially lower cost, and the updating of the fleets to more fuel-efficient planes.The legacy carriers worked hard to recover from 52 years of regulation, but for many that was an impossible task.

Next week we continue the series on the Deregulation Act of 1978—bureaucracy at its best. So, until then take some time to look back, connect with your past and remember as an aviator you are a “Gatekeeper of the Third Dimension.”

Protect your profession, your future and the future of your fellow aviators.

Robert Novell

July 10, 2009