Airline Deregulation

No policy change has shaped modern commercial aviation more profoundly than deregulation. By removing government control over routes, fares, and market entry, deregulation unleashed competitive forces that created entirely new categories of airlines, drove fares to historic lows for many travelers, and ultimately consolidated the industry into a small number of very large competitors.

What Is Airline Deregulation?

Airline deregulation refers to the removal or substantial reduction of government controls over the commercial aspects of airline operations, primarily fares, route networks, and market entry. Before deregulation, airlines in most countries were required to obtain government permission to fly any route, charge any fare, and often to operate at all. The Civil Aeronautics Board (CAB) in the United States, for example, set fares, allocated routes, and controlled entry so tightly that no new major airline had entered the domestic U.S. market since the 1930s. Prices were uniform across carriers on any given route. Deregulation, most famously enacted in the United States through the Airline Deregulation Act of 1978, ended this system, allowing any U.S. citizen to start an airline and fly any route at any price.

How It Works in Practice

Deregulation does not mean absence of all regulation. Safety regulation — airworthiness certification, pilot licensing, maintenance requirements — remained firmly in government hands after economic deregulation and has been continuously strengthened. What changed was the commercial framework. After 1978 in the United States, new carriers entered rapidly: People Express, Midway Airlines, Muse Air, and dozens of others launched with low costs and low fares on routes the incumbents had ignored. Incumbents responded with the hub-and-spoke network, which allowed them to offer connections that point-to-point new entrants could not match, and with frequent-flyer programs designed to lock in high-value travelers. Computer reservations systems gave incumbents a distribution advantage. Fares fell sharply on competitive routes while remaining high on monopoly routes. Over the following two decades, the initial burst of new entry was followed by brutal competition, multiple bankruptcies, and consolidation until the industry structure stabilized around a smaller number of large carriers and a persistent tier of low-cost specialists.

Why It Matters

Deregulation democratized air travel. The percentage of Americans who had never flown fell from roughly 75 percent in 1975 to under 50 percent by the mid-1980s, as lower fares brought aviation within reach of travelers who had previously viewed it as unaffordable. The average inflation-adjusted fare per mile fell by approximately 40 percent between 1978 and 2000. Southwest Airlines, which had pioneered intrastate low-cost flying before federal deregulation, became the template for a global movement: Ryanair in Europe, AirAsia in Southeast Asia, IndiGo in India, and dozens of others applied deregulatory principles to build the low-cost carrier sector. The model has not been universally beneficial: service to small communities declined, consolidation reduced competition on many routes, and labor conditions in the industry deteriorated as competitive pressure drove down wages and benefits for airline workers.

Key Facts and Figures

• The U.S. Airline Deregulation Act was signed by President Jimmy Carter on October 24, 1978, and the Civil Aeronautics Board was formally abolished on January 1, 1985.
• The number of U.S. airlines roughly doubled in the five years following deregulation, from approximately 36 certified carriers to over 70.
• Average inflation-adjusted domestic fares in the United States fell approximately 44 percent between 1978 and 2011, according to Bureau of Transportation Statistics analysis.
• European aviation deregulation was completed in three packages between 1987 and 1997, creating a single aviation market across EU member states.
• Australia deregulated domestic aviation in 1990 (the "Two Airlines Policy" era ended), leading to the entry of Compass Airlines and a brief period of intense competition before the market consolidated.

Related Concepts

Airline Deregulation Act, Open Skies Agreement, Low-Cost Carrier, Legacy Carrier, Hub-and-Spoke Network