Airline Regulation and Market Performance

Abstract

In order to determine the effects of domestic airline regulation on the fares and market efficiency of the American air transport industry, it is necessary to know what fares would be if air travel markets were unregulated. To answer this question, a long-run airline cost model is developed and estimated, and it is used to predict hypothetical unregulated (or cost-based) fares for 30 major domestic air travel markets. As a test, the model is used to predict fares on the relatively unregulated California intrastate routes, which it does quite accurately, though the number of such routes observed is small. The results of the study indicate that as of 1968, regulated routes had markups over the estimated unregulated fare ranging from 20 to 95 percent, with a distinct tendency for markups to rise with distance. Crudely updated to 1972, the results indicate current markups of 48 to 84 percent, with less correlation between markup and distance.

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