Airlines for America (A4A) industry summit CEO Nicholas Calio says the world had entered a “golden age of air travel,” citing record passenger volumes, route offerings and historically low fares, thanks to the deregulation of the US airline industry in 1978 and the competition that massive overhaul produced in its wake.

As it happens, the 40th anniversary of deregulation also coincides with an increased push by governments in the US and elsewhere to re-regulate aspects of airlines’ business models. These impulses undermine the spirit of the 1978 act, and taken together, amount to a troubling shift away from the kind of hands-off regulatory approach that has proved so successful for passengers and industry alike over the past four decades. 

In the US, the most controversial proposal to gain traction during Congress’ deliberations over a bill to reauthorize the FAA was an amendment from Senator Ed Markey (D-Massachusetts) that would regulate the fees carriers charge passengers for ticket change, cancellation and baggage (see interview, page 39). That proposal, which was left out of the final version of the bill, was fiercely opposed by industry players who warned it would force them to raise airfares. 

“The good news is that the most problematic proposal failed to be included in the bill,” A4A SVP-legislative and regulatory policy Sharon Pinkertons said. “On the other hand, that step toward regulating pricing would have had the potential to reverse part of that 40 percent real decline in fares we’ve seen through deregulation, so it’s definitely a worrying sign for airlines.” 

The bill to reauthorize the FAA did include a number of regulations on airline business models, including measures that could lead to setting minimum dimensions for seat pitch and lavatory space in the main cabin, as well as a prohibition on involuntary denied boardings. 

Industry watchers worry that the seat size provision, in particular, could lead to a reduction in competition among the low-end of the price spectrum, and impede carriers’ ability to offer greater choice and customization. 

Pinkerton said she thinks the relative stability of the industry in recent years may have caused lawmakers to consider regulating in ways they would not have done while airlines were struggling with industry-wide challenges, including the aftermath of 9/11, bankruptcies, recessions and high jet fuel prices. 

“I think there’s more of a willingness when things are going well in an industry to regulate, and we have turned an incredible corner compared with the difficult times we’ve faced,” Pinkerton said. “Policy makers forget about the challenges we’ve had, and the things airlines had to do to be able to buy new planes, compensate our employees better or improve customer service—all of which benefits the passengers.” 

IATA general counsel Jeffrey Shane, who negotiated numerous bilateral aviation agreements on behalf of the US during his career as a high-ranking public servant, called the developments “unsettling,” and said they arise in large part from an “unfortunate attitude toward the unbundling of the services airlines provide.”

“Unbundling was invented by regulators, and the fact it’s become a pejorative for some people is really surprising to me, because it is good policy,” Shane said. “It is bad policy to tell any provider of a service what it should charge for different elements of service when legislators simply cannot understand how the markets work to the same extent as the providers themselves.” 

In Europe, Flight Compensation Regulation 261/04, which requires carriers to compensate passengers in the event of denied boardings, flight cancellations and delays, presents a significant challenge for domestic and international carriers flying in and out of the continent. Under the rule, carriers must pay passengers between €250 ($284) and €600 ($681), depending on the distance of the flight and length of the delay, which forces them to raise fares.

“Airlines simply have to write checks every time there’s a delay whether it’s their fault or not, and nobody seems to understand that is damaging passengers enormously because the cost of that regulation is astronomical,” Shane said. “The European airline companies and even some of the outside airlines have set up departments just for the purpose of making these payments, so it’s a huge drain on revenues, and of course, it’s the passengers who have to pay for that in the form of higher fares.”

While carriers can take solace in the fact that the most intrusive attempt at regulation in the US was defeated, the willingness of lawmakers there to backtrack on deregulation after 40 years of success should be taken as a sign of caution. How governments move forward, and whether they will continue a light-handed approach toward airlines or veer to more intrusive regulation, could determine not just the future shape of the industry, but could stifle innovation and competition (see op-ed, page 32).

“IATA is not opposed to sensible regulation of the airline industry—in fact, we think it’s a good thing and provides predictability,” Shane said. “What we oppose is regulation where the costs clearly exceed any benefit you could possibly discern to users or passengers, and we are seeing that a lot more now. Whether that amounts to a real trend, it’s hard to say. But, these developments we’ve seen have certainly been worrisome.”