Transportation was the first target of deregulation. Under President Jimmy Carter (1977-1981), Congress enacted a series of laws that removed most of the regulatory shields around aviation, trucking, and railroads. Companies were allowed to compete by utilizing any air, road, or rail route they chose, while more freely setting the rates for their services. In the process of transportation deregulation, Congress eventually abolished two major economic regulators: the 109-year-old Interstate Commerce Commission and the 45-year-old Civil Aeronautics Board.
Although the exact impact of deregulation is difficult to assess, it clearly created enormous upheaval in affected industries. Consider airlines. After government controls were lifted, airline companies scrambled to find their way in a new, far less certain environment. New competitors emerged, often employing lower-wage nonunion pilots and workers and offering cheap, "no-frills" services. Large companies, which had grown accustomed to government-set fares that guaranteed they could cover all their costs, found themselves hard-pressed to meet the competition. Some -- including Pan American World Airways, which to many Americans was synonymous with the era of passenger airline travel, and Eastern Airlines, which carried more passengers per year than any other American airline -- failed. United Airlines, the nation's largest single airline, ran into trouble and was rescued when its own workers agreed to buy it.
Customers also were affected. Many found the emergence of new companies and new service options bewildering. Changes in fares also were confusing -- and not always to the liking of some customers. Monopolies and regulated companies generally set rates to ensure that they meet their overall revenue needs, without worrying much about whether each individual service recovers enough revenue to pay for itself. When airlines were regulated, rates for cross-country and other long-distance routes, and for service to large metropolitan areas, generally were set considerably higher than the actual cost of flying those routes, while rates for costlier shorter-distance routes and for flights to less-populated regions were set below the cost of providing the service. With deregulation, such rate schemes fell apart, as small competitors realized they could win business by concentrating on the more lucrative high-volume markets, where rates were artificially high.
As established airlines cut fares to meet this challenge, they often decided to cut back or even drop service to smaller, less-profitable markets. Some of this service later was restored as new "commuter" airlines, often divisions of larger carriers, sprang up. These smaller airlines may have offered less frequent and less convenient service (using older propeller planes instead of jets), but for the most part, markets that feared loss of airline service altogether still had at least some service.
Most transportation companies initially opposed deregulation, but they later came to accept, if not favor, it. For consumers, the record has been mixed. Many of the low-cost airlines that emerged in the early days of deregulation have disappeared, and a wave of mergers among other airlines may have decreased competition in certain markets. Nevertheless, analysts generally agree that air fares are lower than they would have been had regulation continued. And airline travel is booming. In 1978, the year airline deregulation began, passengers flew a total of 226,800 million miles (362,800 million kilometers) on U.S. airlines. By 1997, that figure had nearly tripled, to 605,400 million passenger miles (968,640 kilometers).
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This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.