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The Stages of US Airline Deregulation
Although US airline deregulation was initially envisioned as leading to an increased number of carriers whose divergent service concepts, market segments, fleets, and route structures would have produced new competition, stimulated traffic, and lowered fares, it ultimately came full cycle and only resulted in virtual monopoly. Three distinct stages occurred during its evolution.
The regulation itself traces its origin to 1938 when Congress adopted the Civil Aeronautics Act. Its resultant five-member Civil Aeronautics Board (CAB), formed two years later in 1940, regulated fares, authorized routes, awarded subsidies, and approved interline agreements, among other functions.
“Regulation, by definition, substitutes the judgment of the regulator for that of the marketplace,” according to Elizabeth E. Bailey, David R. Graham, and Daniel P. Kaplan in their book, Deregulating the Airlines (The MIT Press, 1985, p. 96).
So regulated had the environment been, in fact, that an airline often had to resort to the purchase of another carrier just to obtain its route authority. Delta Air Lines, for example, long interested in providing nonstop service between New York and Florida, continually petitioned the CAB for the rights. But the regulatory agency felt that Northeast, a small local service carrier often plagued by low traffic, financial loss, and bad weather because of its route system, needed the lucrative Florida route’s revenue potential to boost it back to health and granted it the authority instead.
Undaunted, Delta ultimately resorted to acquiring the regional carrier and subsequently received approval for the merger on April 24, 1972. But these extremes would shortly no longer be needed.
A glimpse of the future could already be had in California and Texas. Devoid of jurisdiction over local air transportation, the CAB could neither exercise fare nor route authority over intrastate airlines and these carriers, usually offering high-frequency, single-class, no-frills service at half the fares the regulated “trunk” airlines were forced to charge, consistently recorded both profit and traffic growth.
Air California and PSA Pacific Southwest Airlines, for example, operating in the Los Angeles-San Francisco market, saw yearly traffic figures increase from 1.5 million passengers in 1960 to 3.2 million in 1965. Texas-based Southwest Airlines similarly provided low-fare service between Dallas and Houston and other Texas points. These airlines demonstrated that true deregulation could yield fares accessible to average-income passengers, provide greater airline and service concept choice, and stimulate traffic.
Passengers and government alike increasingly decried regulation during the mid-1970s, citing the examples set by Air California, PSA, Southwest, and other intrastate airlines as demonstrable proof that deregulation could produce mutual airline- and passenger-benefit. At least that was the theory.
Ultimately conceding to reason and democratic rule, President Jimmy Carter signed the Airline Deregulation Act on October 28, 1978, in the process eliminating the need for CAB approval of route entrance and exit and reducing most of the current fare restrictions. Even those would eventually be eliminated when the Civil Aeronautics Board, in its now famous “sunset,” was disbanded in 1985.
At the time of the event, eleven then-designated “trunk” carriers collectively controlled 87.2 percent of the domestic revenue passenger miles (RPMs), while 12 regionals, 258 commuters, five supplemental, and four intrastates provided the balance of the RPM distribution. Which would still ply the skies when deregulation’s dust settled?
Stage One: New Generation Airlines:
Like the California and Texas intrastate airlines, an increasing number of nontraditional, deregulation-spawned carriers initially infiltrated the US market. The first of these, Midway Airlines, was the first to receive certification after the passage of the Airline Deregulation Act and the first to actually inaugurate service, in 1979.
Founded three years earlier by Irwing Tague, a former Hughes Airwest executive, Midway inaugurated low-fare, high-frequency, no-frills “Rainbow Jet” service in November of that year from Chicago’s underutilized Midway Airport-which was once the city’s only airfield until O’Hare was built and which Midway hoped to resurrect the same way Southwest had at Dallas’s Love Field–with five single-class, 86-passenger, former TWA DC-9-10s, initially to Cleveland, Detroit, and Kansas City. Its low fare structure fostered rapid growth and it strategically hoped to penetrate the Chicago market without attracting O’Hare competition from the established carriers.
But, having been employed by Midway, the author can attest that it quickly learned three vital lessons, which indicated that it would have to remain tremendously flexible in order to survive under prevailing competitive market conditions:
Although it served a secondary Chicago-area airport, it first and foremost still competed in the Chicago market.
Secondly, once the incumbent airlines lowered their fares, its load factors declined.
Finally, the high-density, low-fare strategy, which had become the principle characteristics of deregulation-spawned upstarts, was ineffective when an airline attempted to cater to a specific market segment, such as the higher yield business one, where increased comfort and service were expected.
Resultantly, Midway modified its strategy by introducing a conservative cream-colored livery; single-class, four-abreast business cabin seating with increased legroom; additional carry-on luggage space; and upgraded, complimentary-wine in-flight service in exchange for higher than Rainbow Jet fares, but those which were still below the major carriers’ unrestricted coach tariffs.
The newly implemented strategy, dubbed “Midway Metrolink,” significantly reduced the number of seats per aircraft. While its DC-9-10s and -30s had respectively accommodated 86 and 115 passengers, for example, they were reconfigured for only 60 and 84 under the new Metrolink strategy.
Apparently successful, it sparked explosive growth, from an initial 56,040 passengers in 1979 to almost 1.2 million in 1983.
Capitol Air, another deregulation-transformed carrier of which the author had equally been a part, also experienced initial, rapid expansion. Formed in 1946 as Capitol Airways, it had commenced domestic charter service with Curtiss C-46 Commandos and DC-4s, eventually acquiring larger L-049 Constellations, and by 1950 became the fifth largest US supplemental carrier after World Airways, Overseas National (ONA), Trans International (TIA), and Universal. It acquired the first of what was to become one of the largest used-Super Constellation fleets in January of 1960, eventually operating 17 L-749s, L-1049Gs, and L-1049Hs during the 14-year period from 1955 to 1968.
Redesignated Capitol International Airways, the charter airline took delivery of its first pure-jet in September of 1963, a DC-8-30, and subsequently operated four versions of the McDonnell-Douglas design, inclusive of the -30, -50, -61, and -63 series, which replaced the Lockheed Constellation as the workhorse of its fleet.
Receiving scheduled authority in September of 1978, Capitol inaugurated New York-Brussels service on May 5 of the following year and a second, Chicago/Boston-Brussels transatlantic sector on June 19. Like PSA and Southwest, Capitol Air, a former supplemental carrier, was not regulated by the CAB and therefore conducted its own “deregulation experiment” by sublimating proven charter economics of single-class, high-density, low unrestricted and even standby fares to scheduled service in order to attain low seat-mile costs and profitability.
The scheduled concept, branded “Sky Saver Service,” consistently attracted capacity-exceeding demand and sparked considerable fleet and route system expansion. Operating six DC-8-61s, five DC-8-63s, and five DC-10-10s to seven US domestic, three Caribbean, and three European destinations from a New York-JFK hub by 1982, it attracted an ever-increasing passenger base: 611,400 passengers in 1980, 1,150,000 in 1981, and 1,824,000 in 1982.
Passengers, unaware of deregulation-molded carriers whose low fares could only attain profitability with used aircraft, high-density seating, and lower-wage nonunion employees, often voiced criticism about Capitol Air’s non-interline policy and refusal to provide meals and hotel rooms during delays and compensation during missed, other-airline connections. Nevertheless, its fares in the New York-Los Angeles market ranged from an unrestricted $149 based upon a round-trip purchase to a one-way $189, while the majors’ unrestricted tariffs in the market hovered at the $450 mark. As a result, Capitol Air’s load factors exceeded 90 percent.
By September of 1981 ten new carriers received operating certificates and inaugurated service.
“The first effects of deregulation were dramatic,” wrote Anthony Sampson in Empires of the Sky: The Politics, Contests, and Cartels of World Airlines (Random House, 1984, p. 136). “A new breed of air entrepreneurs saw the chance to expand small companies or to establish ‘instant airlines’ which could undercut fares on local routes; they could dispense with much of the superstructure and bureaucracy of the big airlines and could use their flexibility to hit the giants at their weakest points where they could make quick returns.”
Four types of airline types emerged and exerted considerable initial impact on the traditionally regulated airline industry.
The first were the deregulation-spawned upstarts, such as Air Atlanta, Air Florida, Air One, Altair, America West, Best, Carnival, Empire, Florida Express, Frontier Horizon, Jet America, Midway, Midwest Express, MGM Grand Air, Morris Air, Muse Air, New York Air, Northeastern International, Pacific East Air, Pacific Express, PEOPLExpress, Presidential, Reno Air, SunJet International, The Hawaii Express, and ValuJet.
The second were the deregulation-matured local service carriers, including Allegheny, Frontier, Hughes Airwest, North Central, Ozark, Piedmont, Southern, and Texas International, which quickly outgrew their former, regulation-imposed geographic concentrations.
The third, the boundary-crossing intrastate airlines, encompassed companies such as Air California (later AirCal), Alaska, Aloha, Hawaiian, PSA, Southwest, and Wien Air Alaska.
The fourth were the deregulation-transformed charters, such as Capitol Air, Trans International (later Transamerica), and World Airways.
Although some of these carriers, particularly Air One and MGM Grand Air, targeted very specific market niches by offering premium seating and service, the vast majority, whether spawned, raised, or matured by deregulative parenting, attained (or attempted to attain) profitability by means of several core operating characteristics, including, of course, low, unrestricted fares, single-hub, short- to medium-range route systems, high-density seating, limited onboard service, lower wage nonunion work forces, and medium-range, medium-capacity trijets, such as the 727, and short-range, low-capacity twinjets, such as the BAC-111, the DC-9, the 737, and the F.28.
All achieved high load factors, generated tremendous traffic in existing and emerging markets, and created considerable competition.
“In this respect,” wrote Barbara Sturken Peterson and James Glab in their book, Rapid Descent: Deregulation and the Shakeout in the Airlines (Simon and Schuster, 1994, p. 307), “deregulation worked like a charm.”
Stage Two: Monopoly:
Although the established, traditionally regulated major carriers temporarily lowered their fares in selected high deregulation airline-concentrated markets in order to retain their passenger bases, the established airlines, long nurtured and protected by regulation, were not structured for profitable operation with them. Yet even in those cases where they managed to eliminate competition from the market, another low-fare upstart seemed waiting in the wings to fill the void.
The incumbent carriers were thus faced with the choice of relinquishing painstakingly developed markets or dwindle financial resources to retain passengers until they themselves slipped into bankruptcy. It quickly became apparent that the deregulation-sparked fare reductions would become permanent elements of the “new” unregulated airline industry and the major carriers eventually discovered that they had to fundamentally restructure themselves or succumb to the new breed of airlines. Almost every aspect of their operations would, in the end, be transformed.
The first aspect targeted was the route system. Traditionally comprised of point-to-point, nonstop service, which had its origins in 1940 and 1950 CAB route authorizations, these route systems actually contained no inherent “system” at all, and consisted instead of unbalanced geographical encompassments that resulted in lost revenue to other carriers and inefficient, uneconomical use of existing fleets. What was really needed was a centralized “collecting point” for self-feed.
Because of bilateral agreements, European carriers actually operated the first “hubs,” channeling passengers from, say, Copenhagen to Athens by means of an intermediate connecting point such as Dusseldorf. Any passenger flying either the Copenhagen-Dusseldorf or Athens-Dusseldorf sector could theoretically transfer to any of the airline’s outward-radiating flight spokes, vastly increasing the number of markets potentially served. These European capital hubs also demonstrated increased aircraft utilization, improved traffic flow, a larger market base than traditional point-to-point service relying only on origin-and-destination traffic could have supported, and retention of the connecting passenger.
“Although passengers prefer frequent nonstop service, such service can be quite costly,” according to Bailey, Graham, and Kaplan (p. 74). “Airlines thus face strong incentives to establish hub-and-spoke operations… By combining passengers with different origins and destinations, a carrier can increase the average number of passengers per flight and thereby reduce costs. Essentially the broader scope of operation lets the carrier take advantage of the economies of scale in aircraft. At the same time a hub-and-spoke operation provides more convenient service for travelers in less heavily traveled markets.”
The first US hub had its origins in the 1940s when the government, attempting to develop the south, awarded Delta some profitable, long-range routes in exchange for its agreement to serve several small communities from Atlanta.
“All of these routes became the ‘spokes’ leading into a Delta ‘hub’ at Atlanta,” said Peterson and Glab (p. 120). “With it came the compelling benefit of passenger retention.”
Allegheny, formerly a Pittsburgh-based local service carrier without a distinctive long-range development plan, recorded considerable success on its eastern and mid-Atlantic state route network, which had progressively “evolved” because of its Pennsylvania funneling point. Increasing the balance of its predominantly business and small community route system with longer-range sectors to leisure-oriented destinations, it was further able to nurture this evolution and by 1978 73 percent of its passengers connected. By 1981 this figure rose to 89 percent-meaning that 89 percent of those flying to Philadelphia and Pittsburgh were not flying to Philadelphia and Pittsburgh.
The Delta and Allegheny hubs were only the beginning of the phenomenon, since the concept did more than create airline concentration in a particular city. Instead, it resulted in an ultimate monopolistic strangulation that precluded any competition.
At four of the major US hubs (Atlanta, Chicago-O’Hare, Dallas-Ft. Worth, and Denver), for example, “the two largest carriers have simply squeezed out or have made it virtually impossible for other airlines to expand and gain market share,” wrote Julius Maldutis in Airline Competition at the 50 Largest US Airports since Deregulation (Salomon Brothers, Inc., 1987, p. 4).
In Atlanta, where both Delta and Eastern once had hubs, the possibility of any significant third-carrier competition was eliminated. In 1978, for instance, Delta’s and Eastern’s hub traffic percentages were respectively 49.65- and 39.17-percent, while nine years later these figures had increased to 52.51- and 42.24-percent.
Analysis of the 50 largest airports (which represented 81.1 percent of US scheduled passenger enplanements) indicated that only ten of these airports could have been considered less than highly concentrated. On the other hand, 40 (or 80 percent) of the airports had excessive amounts of concentration. The ten most concentrated airports had one airline that had more than a 66-percent market share of passenger enplanements.
In St. Louis, where both TWA and Ozark operated hubs, the former enjoyed a 39.06- percent market share, while the latter had a 20.21-percent of it in 1978. In 1986 these corresponding figures respectively increased to 63.16 and 19.68 percent. The following year, after TWA acquired Ozark, its only other significant competitor, it parlayed this share into 82.34 percent with nine other US domestic airlines sharing the remaining 17.66 percent. An airline computer listing, reflecting all carriers operating between New York’s three major airports and St. Louis on December 1, 1995, revealed 27 flights on this day. Not one of them was operated by a carrier other than TWA! This was power.
Similarly, deregulation-matured Piedmont, which only captured a 10.19-percent market share in Charlotte, North Carolina, in 1977, parlayed this into a monopolistic 87.87-percent a decade later after having established a hub there. The same transformation occurred in Pittsburgh with Allegheny/USAir/US Airways-43.65 percent in 1977 and 82.83 percent in 1987.
“Since a large proportion of city-pair markets cannot support convenient nonstop service, hub-and-spoke operations have proved to be the dominant strategy of air carriers since deregulation,” wrote Bailey, Graham, and Kaplan (p. 196). “There has been a significant shift away from the regulatory vision of linear systems and toward sunbursts of routes.”
Aside from the hubbing concept, the major carriers experienced several other fundamental changes. Aircraft, for example, were reconfigured for higher-density-and, in some cases, single-class-seating, while business cabins augmented first class and coach sections on selected routes; first class cabins were later altogether replaced by those of business class in a trend-following pattern sparked by some special-niche deregulation airlines.
Fuel-inefficient aircraft types were gradually replaced by new-generation designs and daily utilization increased-from 8.6 hours in 1971 to 10.3 hours in 1979. During the 1970s and early 1980s average aircraft size increased on long-range sectors, while during the late-1980s the size increased in all categories. During the early 1990s pure-jet technology for the first time penetrated all markets-from the 50-passenger regional to the 500-passenger intercontinental.
Employment was also metamorphosed. According to Robert Crandall, former chairman and chief executive officer of American Airlines, “deregulation is profoundly anti-labor… there has been a massive transfer of wealth from airline employees to airline passengers.”
The deregulation-spawned airlines’ fare reductions produced a lower revenue and profit base from which funding could be rechanneled into traditionally high employment salaries and benefit packages, thus necessitating increased employee productivity, cross-utilization, part-time, nonunion, profit-sharing measures. In some cases, employment was actually provided by contracted ground service companies in order to reduce benefit compensation. The author was involved in the initial ground service company experiment at JFK International Airport between Triangle Aviation Services and Royal Jordanian Airlines.
“A relatively new, but quickly developing concept, the service company provides the personnel on a contractual basis to the particular carrier for which a certain amount per daily turn-around is assessed, according to Airport-Based Airline Careers (Hicksville, New York, 1995, p. 9). “The service company then hires the personnel, conducts the training programs (if any), and determines the hourly wage and benefit package.”
Having worn Royal Jordanian’s uniform and provided all ground operations functions, I often felt “caught in the middle,” simultaneously attempting to please both the passenger and the airline. After all, they were both my customer, revealing the concept’s inherent conflict.
Reduced airline employment wages and benefits actually trace their origins to Crandall himself who devised a plan to reduce employment costs with a “B-scale” payment scheme that initially offered lower salaries to newly-hired employees and required them to accrue greater longevity before they could attain the higher “A-scale” levels.
“American (itself) was poised to increase enormously in size, and it had a strong incentive to so,” said Peterson and Glab (p. 136). “The more it expanded, the more workers it would hire-all at lower B-scale wages-and the more its average costs would drop.”
According to Bailey, Graham, and Kaplan in their work, Deregulating the Airlines, regulation created above-industry standard monetary and benefit compensation. “It is now clear that inflexible work rules and higher than competitive pay flourished during regulation. Airline employees appear to have benefited substantially from CAB’s protective regulation.” (p. 197)
Yet another deregulation-sparked necessity was the increasing reliance on automation. American Airlines, again led by Crandall, created the first computerized airline reservation system, SABRE, which was immediately followed by United’s Apollo System. As powerful sales tools, these automated systems were purchased by travel agents who paid a varying fee to their owners for each booking made while smaller carriers had to negotiate for representation.
So sophisticated and multifaceted did these systems become that their information was progressively sublimated through each aspect of the airline’s operation with their “reservation modes” providing reservations, itineraries, fares, hotel, tour, and ground transportation bookings, frequent flier mile tracking, and ticketing; their “departure control systems” (DCS) providing passenger check-in and boarding pass issuance; and their “controller modes” utilizing this information for aircraft weight and balance and load plan and load sheet generation.
It is only through these sophisticated airline reservation systems that carriers were able to implement “yield management” programs-that is, the determination of the optimized balance of passenger-attracting low fares and profit-generating high fares based upon seasonality, departure time, demand, convenience, capacity, and competition to produce an ultimately profitable flight. An airline reservation system consultation, for instance, listed 27 separate fares between New York and Los Angeles on December 1, 1995 just with American Airlines, ranging from an unrestricted $1,741.82 one-way first class fare to a highly restricted $226.36 round-trip coach fare. The codes in the “Fare Basis” column, such as “KPE7HOLN,” were accessed in order to reveal the restrictions attached to each–the printout of which spanned several pages!
Another fundamental change to the deregulated industry was both the structure of and relationship of the regional and commuter carriers to the majors. Because history is sometimes cyclic, the pattern once demonstrated by the local service airlines of abandoning small community, low-density routes when they acquired pure-jet aircraft once again occurred, but now with two primary differences: (1). The present-day regionals were never, by regulation, restricted to these routes, and (2). Although rapidly-expanding with pure-jet fleets of their own, they attempted to coexist, rather than compete, with the majors through code-share agreements in which their aircraft appeared in major-resembling liveries and their flights carried the affiliated airline’s two-letter codes.
Of the 300 destinations served by Delta during the latter part of 1995, for example, 85 of these were actually reached by one of its four “Delta Connection” code-share carriers, including Atlantic Southeast Airlines (ASA), Business Express, Comair, and Skywest-only the first of which had yet to acquire pure-jet equipment at that time. American outwardly purchased its own commuter-feed airlines and collectively designated them “American Eagle.”
Nevertheless, the major carriers’ deregulation-necessitated restructuring was complete.
When TWA matched Capitol Air’s unrestricted transcontinental coach fares, the former supplemental recorded 30-passenger bookings on DC-8-61 aircraft otherwise able to accommodate 252 and canceled its flights. In a similar situation, when established USAir’s and upstart’s PEOPLExpress’s load factors were analyzed in the Buffalo-Newark market between August of 1981 and June of 1982, the latter consistently reported those that were at least 20 points lower.
“The data thus suggests that many consumers chose to travel on the carrier with the greater name recognition and amenities when the fare is the same,” continued Bailey, Graham, and Kaplan (p. 106).
Competition ultimately forced Capitol Air to realign its route system to include an increasing number of ethnic and un- and underserved markets until the majors also encroached on this territory and the carrier was left with little choice but to file for Chapter 11 bankruptcy protection, ceasing operations on November 25, 1984.
Midway equally encountered major-carrier opposition. Indeed, whatever strategy it implemented to define its optimum niche, it was always counteracted by the aggressive majors. Acquiring Air Florida in 1984, for example, it reconfigured its aircraft with dual-class seating, but riding on both sides of a seesaw, it soon swung back to the single-class concept and in November of 1989 once again to the dual-class one, by which time it operated an 82-strong fleet with its “Midway Connection” affiliation and carried 5.2 million yearly passengers.
But over-expansion and an attempt to replace Eastern at its Philadelphia hub during poor economic times in direct competition with USAir resulted in its own demise two years later, on November 13.
“Although these numerous strategies indicated a constant reassessment of its proper course, they also indicated the instability of market conditions in deregulated skies and the airline’s determination to remain in them and its resiliency to navigate them with a juxtaposition of service concepts, cabin configurations, seating densities, and marketing strategies,” according to The McDonnell-Douglas DC-9 (Hicksville, New York, 1991, p. 59).
Capitol Air and Midway were only two examples of deregulation-matured carriers that succumbed to the radically restructured majors. Indeed, of the approximately 100 airlines that had been certified since the passage of the Airline Deregulation Act, only one, America West, was still in operation at the end of 1995.
“(The major airlines) implemented a strategy with which they could beat the lower-fare competition at its own game by aggressively expanding and charging comparable fares, despite high losses on certain routes, all in an effort to maintain-or, in some cases, to regain-market share… The major carriers grew mighty and monopolistic by eliminating competition wherever it was encountered,” according to the Austrian Airlines Passenger Handling Manual-JFK (Hicksville, New York, 1990, pp. 10-11).
Stage Three: Megacarrier:
Airline expansion, once set in motion, seemed self-propelled and resisted inertia. Monopolies, by definition, know no boundaries. The logical next step was foreign market penetration.
Unlike US domestic growth, however, “it was a lot tougher for a US airline to gain access to a new foreign market than to a new domestic one, because international air services were still tightly regulated by bilateral agreements between the United States and foreign governments,” wrote Peterson and Glab (p. 283). “… To win immediate operating rights to a foreign country, a US carrier had to buy the route authority from another US airline.”
The phenomenon, it will be recalled, was a virtual repetition of the US domestic governmental structure prior to deregulation. Such a purchase in the latter case was usually only granted if the route-authorized airline was in financial difficulty and needed the revenue generated by the sale to remain viable.
Pan Am, particularly hammered by deregulation’s effects, was forced to sell its lucrative Pacific division, along with aircraft and ground facilities, to United for $750 million to remain afloat. United, already then a large, financially sound airline, now had a global route network with proper domestic feed.
More important than the sale, however, was its far-reaching implications. “The United Airlines purchase of Pan Am’s Pacific division was to set off a domino effect,” continued Peterson and Glab (p. 148) “Many airlines were alarmed at the new competition they faced, especially Northwest, which objected to the nation’s largest airline moving onto its Pacific turf. Northwest knew it would need a substantially bigger domestic network of its own, and the fastest way to get one would be through a merger.”
By the end of 1986 it had done just that, acquiring Republic, which itself had been formed by the North Central-Southern merger in 1979 and the secondary Hughes Airwest acquisition in 1980, and the strategy rewarded Northwest with monopolistic status at all of its hubs, such as Minneapolis, with an 81.55-percent market share.
Delta, fearing it would be unable to compete with airlines of such magnitude, acquired Western Airlines for $860 million in September of 1986, in the process obtaining a coast-to-coast route structure and new hubs in Salt Lake City and Los Angeles.
The already described TWA-Ozark merger produced such a lock on St. Louis that it controlled three-quarters of all gates and was able to assess much higher fares in those markets where there was no competition.
In fact, these mergers only served to tighten a carrier’s already almost unrelenting grip on a particular hub. Deregulation-spawned Empire, for instance-a rapidly-expanding New York State Fokker F.28 Fellowship operator-adopted a Syracuse hub and recorded an initial 1979 market share of just.75 percent, but this exponentially increased to 27.36 percent in 1985 when Piedmont acquired the growing regional. Two years later, its market share climbed to 39.82 percent. However, when USAir in turn purchased Piedmont, the Syracuse hub lock skyrocketed to over 61 percent.
Perhaps the most encompassing (and disjointed) merger was that between PEOPLExpress and Continental, which itself had already been the result of an amalgamation between the original, pre-deregulation Continental, Texas International, and New York Air. PEOPLExpress had equally already absorbed Denver-based Frontier. Texas Air, owner of the new conglomerate, also acquired Eastern, but retained its separate identity.
All these mergers, consummated during the latter half of 1986, unequivocally produced the “megacarrier.”
“Deregulation’s theme, echoing Darwinian philosophy, clearly demonstrated itself to be ‘survival of the fittest,’ which, for the airlines, translated as ‘survival of the largest,’ according to the Austrian Airlines Passenger Service Manual-JFK (p. 10). “If the long-established major carriers… wished to survive and maintain the markets they had so carefully nurtured during regulation, they would somehow have to implement a strategy which would ensure that they would remain ‘large.'”
The major airlines’ fundamental restructuring, beginning with monopoly and ending with megacarrier, constituted that strategy, as carriers tracing their origins to the infantile days of aviation and bearing names virtually synonymous with the industry fell like a string of acquisition-induced dominoes. By 1995 only seven US megacarriers remained, including American, Continental, Delta, Northwest, TWA, United, and USAir, along with two significant majors-America West and Southwest-a few “niche” airlines, and the regional-commuters which were almost exclusively aligned with one of the megacarriers or majors through code-share agreements.
Even these names disappeared early in the 21st century. Like brides and grooms walking down a monopoly-destined aisle, Delta married Northwest, United took Continental as its lawfully wedded, American joined arms with US Airways, and Southwest tied the knot with AirTran.
Although the examples set by Air California, PSA, and Southwest had indicated that a deregulated environment would ultimately prove to be mutually advantageous to both the operating airline and the passenger, these experiments failed to approximate actual conditions, since the rest of the US airline industry was still regulated and these fledgling airlines had therefore been insulated from major-carrier competition. Lacking the authority, cost structure, and equipment, they had been unable to launch comparable service of their own.
The initial proliferation of small, low-fare, no-frills, non-unionized deregulation-spawned, -bred, and -transformed airlines provided tremendous airline-, fare-, and service concept-choice only until the major carriers implemented their fundamental route system, aircraft, employment, computerized reservation system, and regional airline affiliation restructuring, reversing the expansion phase into one of buyout, merger, bankruptcy, retrenchment, consolidation, monopoly, and, ultimately, megacarrier. The upstarts, having lacked the majors’ name recognition, financial strength, frequent flier marketing tools, and size, invariably succumbed, leaving most of the original dominant airlines, although in greatly modified form, until even these surrendered to prevailing forces. US airline deregulation had thus come full cycle.
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