Airline Deregulation Was Originally Intended to Encourage Competition, Thereby Lowering Fares and Improving Service

The Airline Deregulation Act phased out federal control over airline  pricing and routes. The Airline Industry Has Undergone Significant Change since Deregulation

The airline industry has undergone significant change since the late 1970s. Only two  airlines still offer defined benefit pension plans. The U.S. 3). Since the industry downturn that began in 2000, there has been a shift in  the airline industry: a weakening of the financial condition of legacy  airlines and an increasing market share for low-cost carriers. Bankruptcy Has Been Used to Terminate Defined Benefit Pension Plans

In 2005, we examined the issue of airline bankruptcy and, in particular,  how some airlines were using bankruptcy to terminate their defined  benefit pension plans. Nevertheless, we expressed concern  about the use of bankruptcy to terminate defined benefit pension plans  because of the costs to the federal government as well as to employees  and beneficiaries. USAirways and United, subjected to intense cost  pressures from growing low-cost airlines like Southwest, entered  bankruptcy and terminated their labor contracts and pension plans. The  pension plan terminations cost PBGC nearly $10 billion and plan  participants lost more than $5 billion in promised benefits that are not  covered by PBGC. Real Fares Have Declined and Service Has Expanded since 1980

Airfares have fallen in real terms over time, with round-trip median fares  almost 40 percent lower since 1980. However, fares in short-distance  markets (less than 250 miles) and “thin” markets (the bottom 20 percent of  passenger traffic) have not fallen as much as those for longer distances or  in heavily traveled markets. Some studies  using this approach have used the Standard Industry Fare Level (SIFL) to  approximate the regulated fare and concluded that consumers as a whole  have benefited from lower fares resulting from deregulation. Airline Traffic Has Grown and Markets Are More Competitive, Though to a Lesser Degree in Small Markets

As predicted by deregulation, airline city-pair markets have become more  competitive since deregulation. As shown in figure 12, the average number  of effective competitors (any airline that carries at least 5 percent of the  traffic in that market) in any city pair increased from 2.2 in 1980 to 3.5 in  2005. Evidence Suggests That Reregulation of Airline Entry and Rates Would Reverse Consumer Benefits and Not Save Airline Pensions

According to our analysis of the evidence, reregulation of airline entry and  rates would not benefit consumers and the airline industry. Our analysis of fares and service since  deregulation provides evidence that consumers have benefited over the  intervening years. Reregulating the  airline industry would have ramifications reaching far beyond the fare and  service effects on airline passengers and communities. As we found in our 2005 report on airline bankruptcies  and pension problems, pension losses were attributable to market forces,  poor airline management and union decisions, and inadequate pension  funding rules—including insufficient funding requirements and the  inadequate relationship between premiums paid by plan sponsors and  PBGC’s exposure to financial risk. These factors also led to the  termination of pensions in other industries with large legacy pension  costs, such as steel. We have previously recommended  that Congress consider broad pension reform that is comprehensive in  scope and balanced in effect. We defined “service” in terms of connectivity and the number of  competitors in a market.
Why GAO Did This Study

The Airline Deregulation Act of 1978 phased out the government's control over fares and service and allowed market forces to determine the price and level of domestic airline service in the United States. The intent was to increase competition and thereby lead to lower fares and improved service. In 2005, GAO reported on the tenuous finances of some airlines that have led to bankruptcy and pension terminations, in particular among those airlines that predated deregulation (referred to as legacy airlines). The House Report accompanying the 2006 Department of Transportation (DOT) Appropriation Act expressed concern about airline pension defaults and charged GAO with analyzing the impact of reregulating the airline industry on reducing potential pension defaults by airlines. GAO subsequently agreed to address the pension issue within a broad assessment of the airline industry since deregulation. Specifically, GAO is reporting on, among other things, (1) broad airline industry changes since deregulation, (2) fare and service changes since deregulation, and (3) whether there is evidence that reregulation of entry and fares would benefit consumers or the airline industry, or save airline pensions. DOT agreed with the conclusions in this report. GAO is making no recommendations in this report.

What GAO Found

The airline industry has undergone significant change since the late 1970s. Industry capacity and passenger traffic have tripled. At the same time, the industry's profitability has become more cyclical, and the financial health of large legacy airlines has become more precarious. Legacy airlines emerged from a regulated environment with relatively high structural costs, driven in part by labor costs, including defined benefit pension plan costs. Over the last few years, facing intense cost pressures from growing low-cost airlines like Southwest, both United and US Airways entered bankruptcy, voided labor contracts, and terminated their pension plans costing the Pension Benefit Guaranty Corporation, the federal government insurer of defined benefit plans, $10 billion and beneficiaries more than $5 billion. In 2005, two other legacy airlines entered bankruptcy leaving their pension plans in doubt. Only two airlines still have active defined benefit pension plans. Airfares have fallen in real terms over time while service--as measured by industry connectivity and competitiveness--has improved slightly. Overall, the median fare has declined almost 40 percent since 1980 as measured in 2005 dollars. However, fares in shorter-distance and less-traveled markets have not fallen as much as fares in long-distance and heavily trafficked markets. Since 1980, markets have generally become more competitive; with the average number of competitors increasing from 2.2 per market in 1980 to 3.5 in 2005. The evidence suggests that reregulation of airline entry and fares would likely reverse much of the benefits that consumers have gained and would not save airline pensions. The change in fares and service since deregulation provides evidence that the vast majority of consumers have benefited, though not all to the same degree. Although a number of airlines have failed and some have terminated their pension plans, those changes resulted from the entry of more efficient competitors, poor business decisions, and inadequate pension funding rules. GAO has previously recommended that broad pension reform is needed.