United States Government Accountability Office

GAO Report to Congressional Committees

AIRLINE 

DEREGULATION 

Reregulating the 

Airline Industry Would 

Likely Reverse 

Consumer Benefits 

and Not Save Airline 

Pensions 

June 2006 

 

GAO-06-630 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2006

AIRLINE DEREGULATION 

Reregulating the Airline Industry Would 

Likely Reverse Consumer Benefits and 

Not Save Airline Pensions 

Highlights of GAO-06-630, a report to 

congressional committees 

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. 

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 (see fig. below). However, fares in shorter-distance and lesstraveled 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. 

Median Fare, 1980-2005 

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. 

www.gao.gov/cgi-bin/getrpt?GAO-06-630.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact JayEtta Z. 

Hecker at (202) 512-2834 or 

heckerj@gao.gov. 
Contents 

Letter 1

Results in Brief 3 

Background 6

Airline Deregulation Was Originally Intended to Encourage 

Competition, Thereby Lowering Fares and Improving Service 8 

The Airline Industry Has Undergone Significant Change since 

Deregulation 9

Real Fares Have Declined and Service Has Expanded since 1980 18 

Evidence Suggests That Reregulation of Airline Entry and Rates 

Would Reverse Consumer Benefits and Not Save Airline 

Pensions 36

Agency Comments 38 

Appendix I Scope and Methodology 39 

Appendix II GAO Contact and Staff Acknowledgments 44

Figures 

Figure 1: Western Airlines (1962) and Eastern Airlines (1948) Route 

Map 7

Figure 2: Air Travel Capacity and Consumption, ASM and RPM 

growth 1968–2005 11 

Figure 3: U.S. Airline Operating Revenue, Expenses, and Profits, 

1968–2005 12

Figure 4: Airline Salaries and Benefits per Employee, 1968–2004 14 

Figure 5: Airline Employee Compensation as a Share of Total 

Operating Expenses, 1968–2005 15 

Figure 6: Airline Industry Employment and Capacity (ASM) Per 

Employee, 1977–2005 16 

Figure 7: Median Round-Trip Fare, 1980–2005 20 

Figure 8: Round-Trip Median Fares, 1980–2005 21 

Figure 9: Mean Fares by Market Size, 1980–2005 22 

Figure 10: Dispersion of Yields within Routes (Coefficient of 

Variation), 1980–2005 23 

Figure 11: Real Yield Trends, 1950–2004 26 

Figure 12: Average Number of Effective Competitors, 1980–2005 27 

Figure 13: Percentage of Markets by Number of Effective 

Competitors, 1980–2005 28 

Page i GAO-06-630 Airline Deregulation
Figure 14: Average Number of Effective Competitors by Distance 

Traveled, 1980–2005 29 

Figure 15: Percentage of Airline City-Pair Markets with 80 Percent 

of Passengers, 1980–2005 30 

Figure 16: Number of City-Pair Markets with at Least 130

Passengers per Quarter, 1980–2005 31 

Figure 17: Percentage of Markets and the Minimum Number of 

Connections, 1980–2005 34 

Figure 18: Flight Distance Ratio, 1980–2005 35 

Abbreviations 

ASM available seat miles 

CAB Civil Aeronautics Board 

DOT Department of Transportation 

DPFI Domestic Passenger Fare Investigation 

EAS Essential Air Service 

EPP Employee Protection Program 

FAA Federal Aviation Administration 

FTE full-time equivalent

PBGC Pension Benefit Guaranty Corporation 

RPM revenue passenger miles 

SIFL Standard Industry Fare Level 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-06-630 Airline Deregulation
United States Government Accountability Office

Washington, DC 20548 

June 9, 2006

The Honorable Jerry Lewis 

Chairman 

The Honorable David R. Obey 

Ranking Minority Member 

Committee on Appropriations 

United States House of Representatives 

The Honorable Thad Cochran 

Chairman 

The Honorable Robert C. Byrd 

Ranking Minority Member 

Committee on Appropriations 

United States Senate 

In 1978, Congress deregulated the airline industry. 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. We have previously reported 

that overall fares have declined and service has increased since 

deregulation, but that these benefits have not been evenly distributed 

throughout all markets. More recently, we reported on the tenuous 

finances of some airlines that have led to bankruptcy and pension 

terminations,1

 in particular among those airlines whose operations 

predated deregulation, referred to as legacy airlines. Critics of 

deregulation, including some academics and some in Congress, have 

pointed to industry instability that has resulted in industry layoffs and 

pension terminations along with declining service and high fares for some 

communities as evidence of negative effects of deregulation.

The House report accompanying the 2006 Department of Transportation 

(DOT) appropriations legislation expressed concern about airline pension 

defaults and charged us with analyzing the impact of reregulating the 

 1

GAO, Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of 

Underlying Structural Issues, GAO-05-945 (Washington, D.C.: Sept. 30, 2005). 

Page 1 GAO-06-630 Airline Deregulation
airline industry on reducing potential pension defaults by airlines.2

 In 

subsequent discussion with House appropriations offices, following our indepth report on airline pensions and bankruptcy, we agreed to more 

broadly assess the airline industry since deregulation. Specifically, we 

agreed to report on (1) the original rationale for deregulating the airline 

industry in 1978, (2) broad airline industry changes since deregulation, (3) 

fare and service changes since deregulation, and (4) whether there is 

evidence that reregulation of airline entry and rates would benefit 

consumers and the airline industry, or save airline pensions. 

To address these objectives, we relied on historical documents, our past 

studies, and our analysis of DOT passenger ticket data. To assess the 

original intent of Congress in passing the Airline Deregulation Act, we 

reviewed the act and accompanying legislative materials and various other 

documents and studies. To evaluate past changes in the airline industry, 

we reviewed our past studies, reviewed DOT studies, analyzed financial

and operational data, and interviewed industry experts. To analyze fare 

and service changes since deregulation, we used the DOT’s Origin and 

Destination Survey, a database containing information on every tenth 

airline ticket sold. The survey includes the fare paid (including taxes) and 

itinerary, including flight segments. The survey does not provide 

information on frequency, type of aircraft, or operational performance. We 

excluded tickets with international, Hawaiian, or Alaskan destinations or 

origins so that we could examine changes within continental U.S. 

domestic markets. To simplify the analysis, we examined only tickets for 

flights during the second quarter of each year—generally considered 

neither the busiest nor the slowest quarter of the year. We limited our 

analysis of service measures to only those city-pairs with at least thirteen

passengers in our sample (or about 130 actual flying passengers) in every 

quarter in order to ensure that the changes in service we observed in our 

sample reflected actual flow routes and were not due to sampling or data 

error. Even so, the vast majority of passengers were included in our 

analysis—for example, in 2005, excluding city-pair markets with less than 

13 passengers per quarter excluded only one percent of passengers. In 

addition, for our analysis of competition in city pairs, to ensure the 

sampling confidence in each competitor airline, we limited our analysis to 

city pairs with at least 118 passengers in the sample (or about 1180 actual 

 2

House Report 109-153 accompanying P.L. 109-115, Departments of Transportation, 

Treasury, and Housing and Urban Development, The Judiciary, District of Columbia, and

Independent Agencies Appropriations Act, 2006. 

Page 2 GAO-06-630 Airline Deregulation
flying passengers) per quarter. No minimum passenger levels were 

imposed for our analysis of fares. Because the survey does not identify the 

destination airport, to ensure city-pair accuracy, we eliminated 

nonsymmetrical roundtrip tickets. We reviewed our methods and results 

with DOT and academic experts from the Massachusetts Institute of 

Technology’s Global Airline Industry Program. To determine whether 

there is sufficient evidence to reregulate the airline industry, we 

considered our findings under the prior questions of this report, especially 

the changes in fares and service since deregulation. We also considered 

the findings of our earlier reports, especially those relating to small 

community air service and defined benefit pension terminations and 

regulation. We performed our work between September 2005 and May 

2006 in accordance with generally accepted government auditing 

standards. 

Airline deregulation was premised on an expectation that an unregulated 

industry would attract new airlines and increase competition, thereby 

benefiting consumers with lower fares and improved service. The intent of 

Congress was to allow new and existing airlines to enter and serve any 

market they wanted (and provide service at whatever price they wanted) 

in order to boost competition, thereby lowering fares and expanding 

service. The framers of the act recognized that this approach could cause 

some airlines to fail and could lead to some communities losing some 

levels of service. As a result, the act created the Essential Air Service 

(EAS) program which subsidizes air service to small communities. The act 

also established the Employee Protection Program (EPP), which was 

ultimately repealed and never provided any assistance, but was intended 

to provide displaced airline employees with compensation and the right to

be rehired by airlines before any other potential applicants. Even with 

deregulation, the federal government continues to play a role in air 

commerce in a variety of other ways—from the Federal Aviation 

Administration (FAA), which oversees air navigation, safety, and airport 

investment; to the Department of Homeland Security, which oversees 

passenger security; to DOT, which oversees international agreements and

has a mandate to protect consumers from unfair and deceptive practices 

in air transportation and its sale. 

Results in Brief 

The airline industry has undergone significant change since the late 1970s. 

Passenger traffic and, with it, industry revenues, have expanded. However, 

expenses have grown just as fast and profits have become increasingly 

cyclical. Airlines that predated deregulation, called legacy airlines, 

emerged from regulation with significant structural costs, including labor 

Page 3 GAO-06-630 Airline Deregulation
contracts that funded defined benefit pension plans. Legacy airlines 

dominated the industry during the 1980s and 1990s because of their size 

and a variety of business practices that made it difficult for new entrant 

airlines to compete. Industry employment, compensation, and efficiency 

have all grown since deregulation. However, with the major industry 

downturn that began in 2000, new entrant airlines—unburdened by many 

of the structural costs of legacy airlines—were better able to compete for 

passengers with low fares and have gained market share. By 2003, we 

found that low-cost airlines served 2,304 out of the top 5,000 city-pair 

domestic markets, representing a presence in markets available to almost 

85 percent of all passengers. In response to sizeable financial losses after 

2000, both United and US Airways entered bankruptcy and terminated 

their pension plans, costing the Pension Benefit Guaranty Corporation 

(PBGC) nearly $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, American and Continental, still have active 

defined benefit pension plans in place. 

As predicted by the framers of deregulation, airline markets have become 

more competitive and fares have fallen since deregulation. For consumers, 

airfares have fallen in real terms since 1980 while service has generally

improved. Overall, median fares have declined in real terms by nearly 40 

percent since 1980. However, fares in shorter-distance and less-traveled 

city-pair markets (e.g., those between smaller cities) have not fallen as 

much as fares in longer-distance and heavily-trafficked markets. While the

competition brought about by deregulation likely played a significant role 

in bringing down fares, the extent to which these changes are directly 

attributable to deregulation as opposed to other factors, such as advances 

in technology or economic factors, is difficult to isolate. Various studies 

have attributed substantial consumer benefits to deregulation, but 

estimating the size of this benefit requires making several assumptions 

about what fares would be if they were still regulated. Furthermore, our 

analysis of airline service indicates that more passengers are flying 

between more city-pair markets, but that, on average, passengers are 

making more connections to reach their destinations. Service 

improvements have not been as evident in smaller markets as in larger 

ones. Since 1980, city-pair markets have generally become more 

competitive even while passenger traffic became more concentrated. 

Longer-distance and more heavily traveled markets in particular have 

become more competitive, with the average number of competitors 

growing from 2.2 per market in 1980 to 3.5 in 2005. Some DOT indicators 

of other aspects of service quality, such as rates of on-time arrival or lost 

luggage, suggest that service quality may have eroded somewhat over the

Page 4 GAO-06-630 Airline Deregulation
past few years; however, we did not evaluate these measures or other 

indicators of service quality, such as flight frequency, type of aircraft used, 

or in-flight amenities. 

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. Our analysis of fares and service since 

deregulation provides evidence that consumers have benefited from lower 

fares since the airlines were deregulated. Since deregulation, competition 

has generally increased, traffic has expanded, and fares have declined. The 

primary dislocations that have occurred since deregulation—loss of 

service to some communities and the decline of legacy airlines’ finances 

and pensions—are the result of competitive market forces. Therefore, 

attempting to resolve the dislocations that have occurred for some small 

communities or the loss of pension benefits for some airline workers by 

restraining these same forces could reverse some of the gains that have

accrued. If Congress determines that service to small communities is 

inadequate, then direct subsidies—such as the Essential Air Service 

program provides—might be a more efficient solution than reregulating

the industry and diminishing the benefits gained by a majority of 

consumers. The financial distress of some legacy airlines, while 

regrettable (especially for airline employees), was not unanticipated, and 

is evidence of a functioning market in which lower-cost airlines have 

emerged, generally benefiting consumers with lower fares. These financial 

problems also caused several legacy airlines to freeze or terminate their 

defined benefit pension plans, leaving only two airlines with active plans.

The airlines’ pension problems are no different from the pension problems 

occurring throughout the economy and, as we previously reported,3

 can be

traced to broad economic factors, poor management decisions, and 

inadequate pension regulation. Therefore, broad pension reform that is 

comprehensive in scope and balanced in effect, such as we previously 

recommended, would more logically address problems with airline 

pensions than more sweeping airline industry regulation, which could 

undo the benefits that deregulation has achieved. DOT generally agreed 

with this report’s facts and conclusions, but did not provide written 

comments. DOT provided technical comments and suggestions that we 

incorporated as appropriate. 

 3

GAO-05-945. 

Page 5 GAO-06-630 Airline Deregulation
Industrywide regulation of the U.S. airline industry began in 1938 in 

response to congressional concern over safety, airlines’ financial health, 

and perceived inequities between airlines and other regulated forms of 

transportation. The Civil Aeronautics Act of 1938 (P.L. 706) applied to 

interstate operations of U.S. airlines and gave the Civil Aeronautics 

Authority, redesignated as the Civil Aeronautics Board (CAB) in 1940, 

authority to regulate which airlines operated on each route and what fares 

they could charge. Airlines could not add or abandon routes or change 

fares without CAB approval. 

Background 

CAB also limited the number of airlines in the industry. In 1938, the 

interstate U.S. airline industry consisted of 16 “trunk” airlines, but this 

number contracted to 10 by 1974, despite 79 applications from new 

airlines to initiate service. Competition was limited on a route to one 

airline unless the CAB determined that demand was sufficient to support 

an additional airline. Airfares were based on a complex cost-based formula 

used by the CAB, though the exact formulas and process varied over the 

life of the CAB. Generally, though, airlines during this time had little 

incentive to reduce costs, since each was assured a fixed rate of return. As 

a result, the competition that existed among airlines was largely based on 

the quality of service. Airlines operated largely a point-to-point system, 

more similar to railroads than the airline networks that we know today. 

For example, as shown in figure 1, the route-maps of Eastern Airlines 

(1948) and Western Airlines (1962) show a system vastly different from 

today’s hub-and-spoke networks. 

Page 6 GAO-06-630 Airline Deregulation
Figure 1: Western Airlines (1962) and Eastern Airlines (1948) Route Map

Source: Western Airlines and Eastern Airlines.

Airlines have traditionally relied on union labor, and labor relations have 

been covered by the Railway Labor Act since 1936. The union bargaining

structure that developed within the airline industry has been highly 

decentralized and separated by craft (e.g., pilots, mechanics, etc.). Before

deregulation, unions and airline management engaged in carrier-by-carrier 

bargaining whereby the last contract signed by one carrier generally 

served as the starting point for the next airline (known as “pattern 

bargaining”). During regulation, labor relations were generally good 

because CAB’s fare-setting allowed airlines to pass increased labor costs 

on to passengers. Airlines’ bargaining power was enhanced by the Mutual 

Aid Pact, a strike insurance plan created in 1958, through which a struck 

airline was compensated by nonstruck airlines based on increases in 

traffic the latter received during a strike. The Mutual Aid Pact was 

eliminated with deregulation, thereby enhancing airline labor’s power in 

contract negotiations. 

Page 7 GAO-06-630 Airline Deregulation
The Airline Deregulation Act phased out federal control over airline 

pricing and routes. Airline deregulation was premised on an expectation 

that an unregulated industry would attract entry and increase competition 

among airlines, thereby benefiting consumers with lower fares and 

improved service. The experience of unregulated (i.e., state-regulated) 

intrastate service in Texas and California provided support for this 

expectation. Moreover, prior to deregulation, industry analysts—on the 

basis of conventional economic reasoning—expected that opportunities 

for increased competition would increase the number of airlines operating

in many markets, thereby lowering fares and expanding service. 

Airline Deregulation 

Was Originally 

Intended to 

Encourage 

Competition, Thereby 

Lowering Fares and 

Improving Service 

The Airline Deregulation Act established specific goals of encouraging 

competition by attracting new entrant airlines and allowing existing 

airlines to expand. According to the act, competition was expected to 

lower fares and expand service, the chief aims of deregulation.

4

 At the 

same time, Congress recognized that deregulation could lead to economic

dislocations for some communities and workers as service patterns 

adjusted and airlines entered and exited markets and the industry overall.

As a result, the EAS program and the EPP were established. 

• The EAS program was put into place to guarantee that small communities 

served by commercial airlines before deregulation would maintain a 

minimal level of scheduled air service. DOT currently subsidizes 

commuter airlines to serve approximately 150 rural communities across 

the country that otherwise would not receive any scheduled air service. 

According to DOT, EAS subsidizes 39 communities in Alaska and 115 more 

in the rest of the United States. The EAS budget ranged from about $100 

million early in the program down to about $25 million, before rising in 

recent years to $100 million. In Fiscal Year 2006, EAS was funded at $109 

million. 

• EPP was created, first, to compensate airline workers who lost their jobs 

or received lower pay as a result of bankruptcies or major contractions 

whose major cause was airline deregulation and, second, to grant such 

workers first-hire rights. However, the Department of Labor delayed the 

 4

Along with the airline industry, Congress deregulated rail, trucking, and

telecommunications. Overseas, similar efforts to deregulate major industries have taken 

place in the world’s major market economies. Generally, the intent in each case has been 

similar—to induce competition and thereby lower fares. In only a few cases, and in fairly

narrow circumstances, has a deregulated industry been reregulated. For example, 

following cable television’s deregulation, Congress established rate ceilings in cities that 

lacked sufficient competition. 

Page 8 GAO-06-630 Airline Deregulation
establishment of regulations to administer these rights, Congress did not 

appropriate funds to compensate displaced employees, and airlines fought 

the requirements in court. On August 7, 1998, the statute authorizing the 

EPP was repealed.5 No compensation was ever provided to displaced 

employees, and the first-hire right was never enforced. 

While the practice of setting of airline entry and rates was deregulated, the 

federal government is still involved in many facets of the airline industry, 

including many aspects that affect the economics of the industry. For 

example, the federal government still influences financing and investment 

decisions affecting the nation’s aviation infrastructure, including airports 

and air navigation systems. In addition to the various taxes and user fees 

on commercial airline tickets, which averaged 15.5 percent of the base fare

in 2002, the federal government also provides support from its general 

fund for FAA operations.6 In 2007, the Airport and Airways Trust Fund, 

which finances the nation’s aviation infrastructure, will be up for renewal. 

The federal government also provided commercial airlines with $7.4

billion in financial assistance and $1.6 billion in loan guarantees for six 

airlines as a result of the September 11, 2001, terrorist attacks. Finally,

PBGC has assumed almost $12 billion in net airline pension obligations 

since 1991.7

The airline industry has undergone significant change since the late 1970s. 

Air travel, and along with it industry revenues and expenses, have tripled

since 1978. However, industry profits have become increasingly cyclic, 

with the most recent downturn leading to almost $28 billion in operating 

losses since 2001. Airline employee compensation grew following 

deregulation, even though many studies have found that employees earned 

a premium under regulation. Nevertheless, employee compensation as a 

share of total expenses has declined, especially in recent years. During 

The Airline Industry 

Has Undergone 

Significant Change 

since Deregulation 

 5

Section 199(a)(6) of the Workforce Investment Act of 1998, P.L. 105-220, 112 Stat. 1059. 

6

GAO, Summary Analysis of Federal Commercial Aviation Taxes and Fees, GAO-04-406R 

(Washington, D.C.: March 12, 2004). 

7

PBGC was established to encourage the continuation and maintenance of voluntary 

private pension plans and to insure the benefits of workers and retirees in defined benefit 

plans should plan sponsors fail to pay benefits. However, if a pension plan’s assets are 

insufficient to pay accrued benefits, the plan can be terminated under certain conditions, 

and PBGC then assumes responsibility for paying retiree pensions. Airlines have used 

provisions of chapter 11 of the bankruptcy code to terminate labor contracts, including

their defined benefit pension plans.

Page 9 GAO-06-630 Airline Deregulation
regulation, airlines operated almost as regulated monopolies, encountering 

little competition and facing little pressure to restrain costs because fares 

were based on the airlines’ costs plus a fixed rate of return. Following 

deregulation, legacy airlines were able to stave off new entrant 

competition through various operating barriers, such as FAA-imposed 

take-off and landing times at congested airports (slot controls), perimeter 

rules at Washington Reagan National Airport, and airlines’ exclusive-use 

control of gate leases; and business practices, such as frequent flyer 

programs and ticket distribution systems. The market downturn that 

began in 2000 exposed legacy airlines’ precarious financial condition, 

allowing low-cost airlines the opportunity to compete more aggressively.

Owing to financial instability since deregulation, airlines operating in 

bankruptcy have become more common, but we found that bankruptcy 

protection has not adversely affected nonbankrupt airlines. More troubling 

has been the use of bankruptcy to terminate defined-benefit pension plans, 

costing the PBGC and airline employees billions of dollars. Only two 

airlines still offer defined benefit pension plans. 

The U.S. airline industry has expanded threefold since deregulation. 

Figure 2 shows that the consumption of airline travel as measured by 

revenue passenger miles (RPM) grew from 188 billion RPMs in 1978 to 584 

billion RPMs in 2005, while airline capacity grew at a similar pace—from 

306 billion available seat miles (ASM) in 1978 to 758 billion ASMs in 2005.

Over the same period, revenue passenger enplanements8

 increased from 

254 million in 1978 to 670 million in 2005. 

The U.S. Airline Industry 

Has Expanded since 

Deregulation 

 8

“Enplanement” is defined as one fare-paying passenger—originating or connecting—

boarding an aircraft with a unique flight coupon. 

Page 10 GAO-06-630 Airline Deregulation
Figure 2: Air Travel Capacity and Consumption, ASM and RPM growth 1968–2005 

Passenger miles (in billions) 

Source: GAO analysis of DOT Form 41 data.

Year 

Total ASM

Total RPM

0 

100 

200 

300 

400 

500 

600 

700 

800 

199

1999 

2000 

2001 

2002 

2003 

2004 

2005 

8

19

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

89 

1988

1987 

1986 

1985 

1984 

1983 

1982 

1981 

1980 

197

1979 

8

196

1969 

1970 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

8

Note: U.S. domestic airlines, excluding cargo. 

Owing to the growth of air travel, U.S. airlines’ revenues grew almost 

fourfold in real terms (see fig. 3). However, expenses also grew at a similar 

pace, sometimes outpacing industry revenues. While profits were 

relatively stable under regulation, earnings have been increasingly cyclical

since deregulation. One explanation for this cyclicality is that, with 

revenues closely tied to the business cycle, high fixed costs for aircraft, 

and a rigid and costly labor structure, outside shocks—such as the 

September 11, 2001, attacks or high fuel prices—make it difficult for the 

industry to adjust its capacity. The industry has incurred operating losses 

of nearly $28 billion since 2001, most of this by legacy airlines.

9

 These 

airlines have compensated by taking on additional debt, using all (or 

nearly all) of their assets as collateral and limiting future access to capital.

 9

Legacy airlines are generally considered to be those that predated deregulation, while lowcost airlines generally entered interstate service following deregulation. 

Page 11 GAO-06-630 Airline Deregulation
Figure 3: U.S. Airline Operating Revenue, Expenses, and Profits, 1968–2005 

-20 

0 

20 

40 

60 

80 

100 

Dollars (in billions, 2005 dollars) 

Source: GAO analysis of DOT Form 41 data.

Year 

Total operating revenue

Total operating expenses

Operating profit or loss

199

1999 

2000 

2001 2002 

2003 

2004 

2005 

8

19

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

89 

1988

1987 1986 

1985 

1984 

1983 

1982 

1981 

1980 

197

1979 

8

196

1969 

1970 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

8

Note: U.S. domestic airlines, excluding cargo. 

Airline Salaries, 

Compensation, and 

Efficiency Have Grown 

since Deregulation 

There have been significant changes to airline employee compensation, 

employment, and productivity since deregulation. Prior to deregulation, 

labor was highly unionized and wage demands were typically met. 

Regulation allowed for increases in labor costs to be passed on to 

consumers through the regulated fare system. Several studies have 

estimated that airline wages were greater under regulation than they 

Page 12 GAO-06-630 Airline Deregulation
would have been in a competitive deregulated market.10 Even so, industry 

growth, barriers to entry, and union bargaining strength allowed labor to 

protect its compensation following deregulation. Since 1978, airline 

industry salaries and total compensation experienced real increases, 

though with some decline since 2002 (see fig. 4). Inflation-adjusted 

benefits per employee grew on average from $14,703 in 1979 to $24,852 in 

2004, a real increase of almost 70 percent. Meanwhile, inflation-adjusted 

salaries per employee grew from $52,295 in 1979 to $54,848 in 2004 on 

average, a real increase of less than 5 percent. Despite this increase in 

compensation costs, employee compensation as a share of total operating 

costs has declined since deregulation, especially since 2002 (see fig. 5). 

This decline in compensation costs as a share of total operating expense is

attributable to falling employment levels, to large increases in capacity, 

and increases in other costs (especially for fuel). Employment began to

decline with the industry downturn that began in 2000. As a result, 

measures of overall industry efficiency (as illustrated by available seat 

miles per employee in fig. 6) increased significantly. This is attributable to 

efficiency gains by legacy airlines during and under the threat of 

bankruptcy, and to more efficient low-cost carriers providing more 

capacity than previously. 

 10For example, David Card estimated that relative wages in the airline industry fell 10 

percent following deregulation. See “Deregulation and Labor Earnings in the Airline 

Industry” NBER Working Paper 5687, July 1996. Pierre-Yves Crémieux estimated that

flight attendants’ earnings were at least 12 percent lower by 1985 and 39 percent lower by 

1992 than if deregulation had not occurred, and that the corresponding shortfalls for pilots 

were 12 percent and 22 percent. See “The Effect of Deregulation on Employee Earnings:

Pilots, Flight Attendants, and Mechanics, 1959-1992” Industrial and Labor Relations

Review, Vol. 49, No. 2 (January 1996). Hirsch and Macpherson also estimated that airline 

wages decreased markedly during the later 1980s and early 1990s, despite continued union 

bargaining power. See “Earnings, Rents, and Competition in the Airline Labor Market”

Journal of Labor Economics, Vol. 18, No. 1, January 2000, pp. 125-55.

Page 13 GAO-06-630 Airline Deregulation
Figure 4: Airline Salaries and Benefits per Employee, 1968–2004 

Dollars (in thousands, 2005 dollars) 

Source: GAO analysis of DOT Form 41 data. 

Benefits

Salaries

0 

20 

40 

60 

80 

100 

199

1999 

2000 

2001 

2002 

2003 

2004 

8

19

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

89 

1988

1987 

1986 

1985 

1984 

1983 

1982 

1981 

1980 

197

1979 

8

196

1969 

1970 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

8

Year 

Note: U.S. Domestic airlines, excluding cargo. 

Page 14 GAO-06-630 Airline Deregulation
Figure 5: Airline Employee Compensation as a Share of Total Operating Expenses, 1968–2005 

0 

10 

20 

30 

40 

50 

200

2003 

2004 

2005 

2 

199

2000 

2001 

9 

1998

199

1996 

1997 

5 

19

1990 

1991 

1992 

1993 

1994 

89 

1988

1987 

1986 

1985 

1984 

1983 

1982 

1981 

1980 

197

1979 

8

196

1969 

1970 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

8

Percentage of total operating expense 

Year 

Source: GAO analysis of DOT Form 41 data. 

Note: U.S. Domestic airlines, excluding cargo. 

Page 15 GAO-06-630 Airline Deregulation
Figure 6: Airline Industry Employment and Capacity (ASM) Per Employee, 1977–2005 

0 

.5 

1.0 

1.5 

2.0 

2.5 

199

1999 

2000 

2001 

2002 

2003 

2004 

2005 

8

19

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

89 

1988

1987 

1986 

1985 

1984 

1983 

1982 

1981 

1980 

197

1979 

8

1977 

Number (in millions) 

Airline capacity (ASM) per FTE

FTEs

Year 

Source: GAO analysis of DOT Form 41 data.

Note: Domestic airlines, excluding cargo. The total for full-time equivalencies (FTE) are the sum of all 

full-time employees and one-half of all part-time employees. 

Legacy Airlines Remained 

Dominant until 2000, When 

Low-Cost Airlines 

Increased Market Share 

Following deregulation, legacy airlines were considerably larger and better 

financed than the host of small new airlines that entered the market place. 

Most of the new entrant airlines during the 1980s and 1990s failed. Large 

legacy airlines were generally able to retain market share despite new 

entrant airlines because of operating barriers—such as slot controls—and 

business practices—such as frequent flyer programs—that gave them 

competitive advantages. Larger and better-capitalized legacy airlines 

seeking to increase market share acquired weaker airlines—for example, 

American Airlines’ acquisition of Reno Air. Legacy airlines built up their 

hub-and-spoke networks, which allowed them to build their traffic flows 

and fend off potential competitors. We and others reported on the higher 

fares experienced by passengers that had to use these “fortress hubs.” 

Legacy airlines also developed regional, national, and international codesharing arrangements to extend their networks and compete for domestic 

and international passenger traffic. During the 1990s, we repeatedly 

Page 16 GAO-06-630 Airline Deregulation
reported on these and other barriers to entry that limited competition in 

the U.S. airline industry.11

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. The 

consequences of an overburdened cost structure for legacy airlines 

became apparent after 2000 when demand fell, especially demand from 

premium-fare business travelers. Low-cost airlines, which generally did 

not have these cost structures, have been able to increase their market 

share, while legacy airlines have struggled to bring their costs down. As 

we reported in 2004, low-cost airlines increased their presence in the top 

5,000 domestic city-pair markets by 44.5 percent; from 1,594 markets in 

1998 to 2,304 markets in 2003.12 In 1998, low-cost airlines operated in 31.5 

percent of markets served by legacy airlines, providing a low-cost airline 

alternative to 72.5 percent of passengers. By 2003, low-cost airlines 

competed directly with legacy airlines in 45.5 percent of markets served by

legacy airlines, serving 84.6 percent of passengers in the top 5,000 markets. 

While legacy airlines began to reduce their operating costs starting in 2001, 

they did so through capacity reductions and were not able to reduce their 

unit costs vis-à-vis low-cost airlines that were adding capacity.

13 We 

warned that legacy airlines could not survive with continued losses. In 

2005, two legacy airlines (Delta and Northwest) entered bankruptcy and 

are currently attempting to reorganize. 

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. We found that bankruptcy has been endemic to the 

airline industry since deregulation, with 162 bankruptcy filings since 1978,

owing to the fundamental financial weaknesses of the airline industry. 

 11GAO, Airline Competition: Effects of Airline Market Concentration and Barriers to 

Entry on Airfares, GAO/RCED-91-101 (Washington, D.C.: April 26, 1991); Airline 

Competition: Higher Fares and Less Competition Continue at Concentrated Airports, 

GAO/RCED-93-171 (Washington, D.C.: July 15, 1993); Airline Deregulation: Changes in

Airfares, Service Quality, and Barriers to Entry, GAO/RCED-99-92 (Washington, D.C.:

March 4, 1999). 

12In 2003, the top 5,000 city-pair markets accounted for 92 percent of domestic passenger 

traffic. 

13GAO, Commercial Airlines: Legacy Airlines Must Further Reduce Costs to Restore 

Profitability, GAO-04-836 (Washington, D.C.: Aug. 11, 2004).

Page 17 GAO-06-630 Airline Deregulation
Despite the prevalence of bankruptcy, however, we found no evidence 

that bankruptcy harmed the airline industry by contributing to 

overcapacity or by underpricing. 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.14 If Delta and Northwest, which entered bankruptcy in 

2005, similarly terminate their pension plans, the costs to PBGC and plan

participants will be even greater. At present, only American Airlines and 

Continental have active defined benefit pension plans, while the remaining 

airline plans are either terminated or frozen.15 In total, active and frozen 

airline plans were underfunded by almost $15 billion at the end of 2005, 

according to Securities and Exchange Commission filings. 

Airfares have fallen in real terms over time, with round-trip median fares 

almost 40 percent lower since 1980.16 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. Price dispersion—that is, the extent to which

passengers in the same city-pair market pay different fares—has also 

declined since 2003, likely indicating consumers’ unwillingness to pay the 

very high fares airlines were able to charge in the late 1990s. The extent to

which these benefits are attributable to deregulation as opposed to other 

factors, such as advances in technology, is uncertain. Various studies have 

attributed significant consumer benefit to deregulation, but estimating this 

benefit depends on several major assumptions and is not free of 

controversy. The decline in fares coincided with a growth in passenger 

Real Fares Have 

Declined and Service 

Has Expanded since 

1980 

 14PBGC may pay only a portion of the benefits originally promised to employees and 

retirees. For 2006, the maximum statutory limit of annual benefits guaranteed by PBGC is 

$47,659.08, for retirement at age 65. The amount paid decreases at earlier retirement ages. 

15Aloha, Alaska, Delta, Hawaiian, and Northwest airlines have frozen their defined benefit 

pension plans. Continental Airlines has frozen its pilots’ plan. Freezing a plan means that 

no additional benefits accrue, but assets and liabilities (and, therefore, the plan’s funded 

status) can change. USAirways and United’s plans were terminated and the remaining 

assets and benefit obligations were assumed by PBGC. 

16We analyzed changes in fares in constant 2005 dollars. 

Page 18 GAO-06-630 Airline Deregulation
traffic and increased competition over the period. While large 

communities and markets have experienced large gains in the number of 

passengers and service, as well as increased competition, small 

communities and markets have experienced much smaller gains. On 

average, however, the number of competitors in city-pair markets grew 

from 2.2 in 1980 to 3.5 in 2005. 

Real Fares Have Declined, 

but Declines Have Varied 

by Market 

Our analysis of DOT’s ticketing data from 1980 to 2005 shows substantial 

decreases in median fares since 1980, with an overall decrease of nearly 40

percent for median round-trip fares since that time. In addition, our 

analysis shows a convergence of fares across trip distances, although 

substantial differences in fares by trip length and by market size remain. In 

recent years, passengers flying long distances or in medium to large 

markets have paid much lower fares as compared with 1980 fares, while 

those flying in smaller markets or over shorter distances today have seen a 

smaller reduction in fares as compared with 1980 fares. Finally, the 

difference between the fares paid by customers flying within the same 

routes began to decline in 2003, after increasing in the years following 

deregulation. 

Overall, median round-trip fares have declined 38 percent since 1980, 

falling from $414 to $256.17 The largest decreases occurred in the late 

1980s, but the overall trends have continued down in subsequent years.18

Figure 7 provides information about median round-trip fares. 

 17We are reporting data for round-trip itineraries flown on domestic airlines as collected in 

DOT’s Origin and Destination Survey. These data do not include information for tickets

reported by Southwest Airlines before the third quarter of 1998, however. Until that time,

the airline followed nonstandard reporting procedures and reported all itineraries as oneway trips. Thus, round-trip itineraries were reported as two separate one-way trips.

Generally, median round-trip fares since 1999 have been between $17 and $25 lower with 

the inclusion of the Southwest Airlines fares than they would have been without the 

Southwest fares. For more information about the effects of Southwest’s reporting process,

see appendix I.

18Median round-trip fares per mile, or yields, also dropped substantially, decreasing over 50

percent in the same time period from 32 to 15 cents per mile. 

Page 19 GAO-06-630 Airline Deregulation
Figure 7: Median Round-Trip Fare, 1980–2005 

0 

100 

200 

300 

400 

500 

Fare (in 2005 dollars) 

Source: GAO analysis of DOT Origin and Destination Survey data. 

Year 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Median fares have converged when compared by the distance traveled 

since deregulation. In 1980, median fares ranged from $680 for trips longer 

than 1,500 miles to $230 for trips of 250 miles or less— reflecting the 

pricing structure in place under regulation, which linked fares to costs 

while subsidizing shorter routes.19 Since that time, however, fares have 

converged toward the low end of this range, with the longest trips now 

averaging just $326, a drop of 52 percent. Median fares for the shortest 

trips, in contrast, have not fallen as much. For trips of 250 miles or less, 

median fares have fallen 13 percent to $201. Figure 8 provides information 

about median fares by distance categories. 

 19Under regulation, shorter trips were effectively subsidized by longer-haul routes, given 

that CAB set fares relatively lower in short-haul markets in the belief that passengers 

traveling shorter distances would not choose air travel if they had to pay the full cost of 

service. 

Page 20 GAO-06-630 Airline Deregulation
Page 21 GAO-06-630 Airline Deregulation 

Figure 8: Round-Trip Median Fares, 1980–2005 

The size of the market has also affected how fares have changed since 

deregulation.20 The smallest markets continue to have the highest average 

fares, and have seen the smallest reduction in these fares (see fig. 9). In 

1980, passengers flying in the smallest markets paid $412 on average for 

their tickets, while those flying in the largest markets paid $329. By 2005 

average fares in the smallest markets had fallen 16 percent to $348, while 

passengers in the other markets we analyzed saw their fares fall 26 percent 

or more on average. Examples of city pairs in the smallest-market category 

 20We divided city-pair markets into five categories based on the number of passengers in 

each with the number of passengers roughly equal in each category. In 1980, the quintiles 

averaged just over 452,000 passengers, and the smallest quintile accounted for 85 percent 

of the 7,739 markets included in our analysis. By 2005, the categories averaged just over 1.1 

million passengers, and nearly 90 percent of the 12,090 markets were in the smallest 

quintile. 

Fare (in 2005 dollars) 

Source: GAO analysis of DOT Origin and Destination Survey data. 

Year 

0

100

200

300

400

500

600

700

800

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

>1,500 miles

<1,500 miles

<1,000 miles

<750 miles

<500 miles 

0-250 miles
in both 1980 and 2005 include the Atlanta, Georgia–Joplin, Missouri route; 

and the Great Falls, Montana–Sacramento, California route. In contrast, 

the Boston, Massachusetts–New York, New York route; and the Chicago, 

Illinois–Los Angeles, California route, were in the largest-market category

in both 1980 and 2005. 

Figure 9: Mean Fares by Market Size, 1980–2005 

Fare (in 2005 dollars) 

Source: GAO analysis of DOT Origin and Destination Survey data. 

Year 

0 

100 

200 

300 

400 

500 

199

1999 

2000 

2001 

2002 

2003 

2004 

2005 

8

19

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

89 

1988

1987 

1986 

1985 

1984 

1983 

1982 

1981 

1980 

Smallest category 

Second category 

Third category 

Fourth category 

Largest category 

-0.40 

-0.35 

-0.30 

-0.25 

-0.20 

-0.15 

-0.10 

-0.05 

0.00 

Largest category 

Fourth category 

Third category 

Second category 

Smallest category 

Percentage change 

While median fares trended down steadily after deregulation, the 

differences in the prices paid by individual customers in the same city-pair 

market grew, most notably in the 1990s with the increased use of yieldmanagement systems by airlines.21 The dispersion of fares began to decline 

 21Yield management (also known as ”revenue management” or ”real-time pricing”) is a

pricing policy for optimizing profits generated by the sale of a product or service by 

segmenting markets, based on real-time modeling and forecasting of demand behavior per 

market micro-segment. 

Page 22 GAO-06-630 Airline Deregulation
in 2003, however, when changes in the overall economy and a decline in

the willingness of some passengers to pay higher fares for premium 

service—notably business passengers—likely combined with the 

increased use of the Internet for ticket purchases to reverse some of the 

prior increases in ticketing variation. Since then, the variability of fares 

has decreased, meaning that fares for most tickets sold are now generally 

more similar to average fares.22 Figure 10 illustrates the coefficient of 

variation, or dispersion, of round-trip yields. 23

Figure 10: Dispersion of Yields within Routes (Coefficient of Variation), 1980–2005

0.0 

0.2 

0.4 

0.6 

0.8

1.0 

1.2 

1.4 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Coefficient of variation 

Source: GAO analysis of DOT Origin and Destination Survey Data. 

Year 

Note: The coefficient of variation is the standard deviation divided by the mean. 

 22The dispersion or variability of fares is measured as the coefficient of variation, which is 

the standard deviation divided by the mean. It provides a measure of the difference from 

the mean—or average—fare. We examined the coefficient of variation within routes to 

account for variations in the price per mile paid by customers in the same city-pair 

markets. 

23Price per mile, or yield, standardizes revenue by distance, allowing for the comparison of 

fares paid without regard to the length of trip. 

Page 23 GAO-06-630 Airline Deregulation
Many studies have estimated that consumers have benefited from 

deregulation. Assessments of these benefits, however, vary substantially 

as have the methodologies used. One approach is to calculate the 

difference between actual fares and a benchmark proxy measure of what 

fares might have been had the industry remained regulated. Any 

differences are then attributed to the effects of deregulation. 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.24 For 

example, in 2005 Rose and Borenstein compared postderegulation fares to

the SIFL and estimated that 2004 fares were about 30 percent lower than 

what the comparative regulated fares would have been, resulting in a $5 

billion savings to passengers that year.25 Likewise, Winston and Morrison 

used the same proxy in 1995 and estimated that real fares declined about

33 percent from 1976 to 1993. After adjusting the SIFL data to account for 

presumed productivity gains and increased load factors,26 they estimated 

that, on average, deregulation led to fares 22 percent lower than they 

would have been in a regulated environment, resulting in an annual 

savings of about $12.4 billion in 1993 dollars over the same period.27 While 

pointing to declines in overall fares, these studies also indicated that 

benefits have been unevenly distributed by market size and route length. 

In fact, those traveling on heavily traveled routes are likely to be paying 

less than they would have paid under a regulated system, and those flying 

on shorter-distance routes are likely to be paying more. 

Studies Have Found Fare 

Reductions but Vary in the 

Degree to Which They 

Credit Deregulation 

 24SIFL fare data are available at approximately 6-month increments from the Office of

Aviation Analysis. They are updated to reflect changes in airline operating costs per 

available seat-mile (ASM), and are intended to approximate unrestricted coach fares. They

are used by the Internal Revenue Service to impute the value of free transportation

provided on corporate aircraft. 

25Severin Borenstein and Nancy Rose, “Regulatory Reform in the Airline Industry” (paper 

prepared for the National Bureau of Economic Research Conference on Regulation, Sept. 

2005). 

26Load factor is a measure of the percentage of seats filled. Load factor is calculated by

dividing RPM by ASM. 

27Winston and Morrison adjusted the provided SIFL data by 1.2 percent, accounting for a 

1.45 percent increase in costs from greater efficiency through 1983 and a 0.25 percent 

decrease for higher load factors. For more information, see Steven A. Morrison and Clifford

Winston, The Evolution of the Airline Industry, first edition (Washington, D.C.: The

Brookings Institution, 1995).

Page 24 GAO-06-630 Airline Deregulation
Some experts have questioned the extent to which deregulation can be

credited for decreases in airfares since 1978, and draw attention to the 

difficulty in measuring impact. First, a former CAB and DOT official, who 

participated in CAB route awards and fare determinations and later 

calculated the SIFL for DOT, points out that the fare ceilings used by CAB 

under regulation—calculated as the Domestic Passenger Fare 

Investigation (DPFI)—were more complicated than their proxies. Rose 

and Borenstein also acknowledged that using the SIFL as a proxy for the 

CAB regulated fare may be increasingly implausible, given that it is 

unlikely that the same cost assumptions would have been used for the 27 

years following deregulation. As a result, using the SIFL to approximate 

airline fares under regulation may overestimate the savings resulting from 

deregulation. For example, while the DPFI fare calculations took several 

factors into account, including depreciation and capacity, the SIFL 

calculations primarily consider airline costs.28 The former DOT official 

further noted that the DPFI calculations allowed for discounted fares if 

load factors were increased to offset the fare reduction, something not 

reflected by the SIFL fare. Second, some experts have pointed out that 

fares were already declining before deregulation, thus making it difficult to 

attribute changes in the industry to deregulation rather than improvements 

in productivity and other factors.29 In fact, real average fares paid per mile 

(yields) since 1962 do show a steady decline, reflecting both CAB fare 

setting flexibility and cost-savings following the introduction of jet service 

in the early 1960s, but without a sharp break in 1978 following the 

deregulation of the industry (see fig. 11). 

 28The DPFI fare calculations took several factors into account including revenue, expenses, 

depreciation, capacity, seating arrangement, equipment type, and load factors. They were

based on reported traffic levels for any fare class accounting for at least 5 percent of 

revenue passenger miles. The DPFI fare served as a fare ceiling based on a 55-percent load

factor and a standard seating adjustment. 

29See Paul Stephen Dempsey, Flying Blind: The Failure of Airline Deregulation. 

(Washington, D.C.: Economic Policy Institute, 1990). 

Page 25 GAO-06-630 Airline Deregulation
Figure 11: Real Yield Trends, 1950–2004 

0

5

10

15

20

25

30

35

40

200

2003 

2004 

2 

199

1999 

2000 

2001 

8

19

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

89 

1988

1987 

1986 

1985 

1984 

1983 

1982 

1981 

1980 

197

1979 

8

196

1969 

1970 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

8

195

1959 

1960 

1961 

1962 

1963 

1964 

1965 

1966 

1967 

8

1950 

1951 

1952 

1953 

1954 

1955 

1956 

1957 

Yield (in 2005 cents) 

Year 

Source: GAO analysis of Air Transport Association data. 

Real yield

Nominal yield

Trend lines, before and after deregulation

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.

30 By 2005, 76 percent of the city-pair markets we analyzed had three 

or more carriers compared with 34 percent of all city-pair markets in 1980

(see fig. 13). By contrast, the percentage of city-pair markets with only one

carrier decreased from 20 percent in 1980 to 5 percent in 2005. As these 

two figures show, most of the increase in competition occurred during the 

1980s, just after deregulation. 

 30Because of statistical sampling issues, we analyzed competition only in city pairs with at 

least 118 passengers in our sample in any given quarter. This equates to about 1,180 actual

flying passengers. 

Page 26 GAO-06-630 Airline Deregulation
Figure 12: Average Number of Effective Competitors, 1980–2005 

0 

1 

2 

3 

4 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Year

Average number of competitors

Source: GAO analysis of DOT Origin and Destination Survey data. 

Note: Because of statistical sampling issues, we only analyzed competition in city pairs with at least 

118 passengers in our sample in any given quarter. This equates to about 1,180 actual flying 

passengers per quarter. 

Page 27 GAO-06-630 Airline Deregulation
Figure 13: Percentage of Markets by Number of Effective Competitors, 1980–2005 

0 

20 

40 

60 

80 

100 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Three or more competitors

Two competitors

One competitor

Year

Percentage of city-pair markets

Source: GAO analysis of DOT Origin and Destination Survey data. 

Note: Because of statistical sampling issues, we only analyzed competition in city pairs with at least 

118 passengers in our sample in any given quarter. This equates to about 1,180 actual flying 

passengers per quarter. 

Longer-distance markets are more competitive than shorter-distance 

markets, some of which have lost competitors since 1980. While city pairs 

with a distance of over 1,500 miles have seen an increase in the average

number of carriers from 2.3 in 1980 to 4.2 in 2005, markets shorter than 

250 miles have seen a decrease from 1.6 in 1980 to 1.4 in 2005 (see fig. 14).

This difference exists in large part because longer-distance markets have 

more viable options for connecting over more hubs. For example, a 

passenger on a long-haul flight from Harrisburg, Pennsylvania, to Seattle,

Washington (a distance of over 2,000 miles), would have options of 

connecting through six different hubs, including Cincinnati, Chicago, and 

Detroit. By comparison, a passenger from Harrisburg to Rochester, New 

York (a distance of just over 200 miles), has three viable connecting 

options. 

Page 28 GAO-06-630 Airline Deregulation
Figure 14: Average Number of Effective Competitors by Distance Traveled, 1980–2005 

Average number of competitors

Year 

0 

1 

2 

3 

4 

5 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Source: GAO analysis of DOT Origin and Destination Survey data. 

>1,500 miles

<1,500 miles

<1,000 miles

<750 miles

<500 miles 

0-250 miles

Note: Because of statistical sampling issues, we only analyzed competition in city pairs with at least 

118 passengers in our sample in any given quarter. This equates to about 1,180 actual flying 

passengers per quarter. 

Passenger Traffic Is More 

Concentrated despite 

Growth in the Number of 

City Pairs since 1980 

Passenger traffic, already concentrated in relatively few city-pair markets 

in 1980, has become more concentrated. In 1980, 80 percent of passenger 

traffic occurred in the largest 14.1 percent of all city-pair markets, but by 

2005, that same percentage of traffic occurred in the largest 10.7 percent of 

all city-pair markets (see fig. 15). While large markets have seen 

substantial gains in traffic, smaller markets have not, and in many cases 

have actually seen declines in traffic since deregulation. For example, 

while the number of passengers flying between Washington, D.C., and Los 

Angeles grew 327 percent between 1980 and 2005 in our sample, the 

number traveling between Boston and Cedar Rapids, Iowa, decreased 49

percent. 

Page 29 GAO-06-630 Airline Deregulation
Figure 15: Percentage of Airline City-Pair Markets with 80 Percent of Passengers, 1980–2005 

0 

2 

4 

6 

8

10 

12 

14 

16 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Percentage of city-pair markets 

Year 

Source: GAO analysis of DOT Origin and Destination Survey data. 

Note: Because of statistical sampling issues, we only analyzed service in city pairs with at least 13 

passengers in our sample in any given quarter. This equates to about 130 actual flying passengers 

per quarter. 

The number of city-pair markets has increased modestly since 1980. 

Largely owing to an overall growth in traffic, the number of city pairs with 

at least 13 passengers in the sample per quarter (which equates to about 

130 actual passengers per quarter) increased by over 3,800 city-pair 

markets between 1980 and 2005, from about 8,500 to over 12,300 (see fig. 

16).31 However, few cities have gained air service since deregulation 

because the airport system was already largely developed at the time of 

deregulation, so the number of cities that could be connected would not 

be expected to have changed much since deregulation. Instead, many city-

 31In analyzing service measures, we counted only city-pair markets with at least 13 

passengers per quarter in our sample, which equates to about 130 actual flying passengers. 

This was to increase the probability that changes in service we observed in our sample 

reflected actual flow routes and was not due to sampling or data error. In 2005, 99 percent 

of passengers in our sample were in those city-pair markets with at least 13 passengers in 

the sample. 

Page 30 GAO-06-630 Airline Deregulation
pair markets that could be connected did not have enough actual 

passengers reflected in the sample data to be counted.32

Figure 16: Number of City-Pair Markets with at Least 130 Passengers per Quarter, 1980–2005 

Year 

Source: GAO analysis of DOT Origin and Destination Survey data. 

0 

2 

4 

6 

8

10 

12 

14 

16 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Number of city-pair markets (in thousands) 

Notes: 

(1) Our analysis includes only one-way tickets with a maximum of three coupons and round-trip 

tickets with two, four, or six coupons. A coupon is issued for each segment of an itinerary so that a 

passenger connecting once on a one-way flight is issued two coupons. 

(2) Because of statistical sampling issues, we only analyzed service in city pairs with at least 13 

passengers in our sample in any given quarter. This equates to about 130 actual flying passengers 

per quarter. 

Smaller Communities Have 

Not Experienced 

Comparable Benefits since 

Deregulation 

Smaller communities, in general, have not experienced the same increases

in traffic and air service as larger cities since deregulation—particularly in 

recent years, when many small cities lost service or experienced a decline 

in the number of departures. For example, we reported in 2005 that while 

large, medium, and small-hub airports have seen traffic rebound since 

 32For example, a passenger could fly between the two small EAS cities of Crescent City, 

California, and Presque Isle, Maine, with a sufficient number of connections, but it is 

unlikely that many passengers have done so or, if they have, that they would be in the 

sample.

Page 31 GAO-06-630 Airline Deregulation
September 11, 2001, nonhub airports had 17 percent fewer flights in July 

2005 than in July 2000.33 Additionally, we reported in 2002 that traffic at 

EAS communities decreased 20 percent from 1995 to 2002. However, lack

of service for small communities is not solely a problem of the deregulated 

era. We reported in 1985 that in the 10 years leading up to deregulation,

137 small communities lost all commercial air service. 

The primary reason for diminished service to smaller communities is the 

lack of a population base to support that service. Local air traffic is 

directly related to both local population and employment. For small 

communities located close to larger cities, these demand reductions are 

exacerbated because local passengers drive to airports in larger cities to 

access better service and lower fares. We reported in 2002 that some EAS 

airports serve only about 10 percent of the intercity traffic to and from 

their city because many travelers instead drive to alternative airports or to 

their destination. Small communities have not benefited from the service

of low-cost carriers; as we reported in 2005 only 5 of over 500 nonhub 

airports received low-cost carrier service. Lack of service from low-cost 

airlines can partially explain why small cities also face relatively higher 

fares than larger cities do. 

Similarly, longer-distance markets have seen greater gains in traffic than 

shorter-distance markets. Passengers on routes of 1,500 (or more) miles 

increased 312 percent between 1980 and 2005, while passengers on routes 

between 250 and 499 miles grew 68 percent in our sample. For example, 

while traffic between Dallas-Fort Worth, Texas, and Hartford, 

Connecticut—a distance of 1,470 miles—grew 477 percent between 1980 

and 2005, traffic between New York and Raleigh-Durham, North 

Carolina—a distance of 427 miles—fell 19 percent in our sample. Shortdistance markets lost a large share of their passengers after September 11, 

2001, in part because the increased time required for security measures 

makes driving a more viable alternative. The frequency of short-haul 

flights has also decreased. DOT found that the number of scheduled flights 

under 250 miles decreased 26 percent between July 2000 and July 2005, 

 33The FAA classifies airports based on an airport’s total enplanements as a percentage of 

the total in the United States in any year. Large hubs are those with at least 1 percent of

total enplanements, medium hubs with between 0.25 percent and 1 percent of 

enplanements, small hubs with between 0.05 percent and 0.25 percent of enplanements, 

and nonhubs as those with less than 0.05 percent of total enplanements. 

Page 32 GAO-06-630 Airline Deregulation
while the number of flights of over 1,000 miles increased by 15 percent 

during that time.34

The Average Number of 

Connections per City-Pair 

Market Has Increased 

Since Deregulation 

Our analysis indicates that the average number of connections needed, at a 

minimum, to connect any two cities has increased since 1980. Figure 17 

shows the percentage of all city-pair markets in our sample with at least 13

passengers per quarter (or 130 actual passengers) that can be connected 

nonstop, with one connection, or with two connections.35 Very few citypair markets currently require two connections. The average number of 

connections needed to connect any two city-pair markets increased from 

1.6 in 1980 to 1.7 in 2005, which is likely attributable to the development of

hub-and-spoke networks to connect airline traffic. For some passengers 

this development has increased the number of connections needed. For 

example, in 1980, passengers traveling between Philadelphia,

Pennsylvania, and Tulsa, Oklahoma, could fly nonstop, but by 2005 one 

connection was required. While there may have been declines in nonstop 

connectivity for many small city-pair markets, the overall ability of 

passengers to connect to wider markets through hubs has likely improved. 

The shift from shorter-range turboprop planes to longer-range regional jets 

has allowed cities that are too small to support mainline jet service, but 

too far from hubs for turboprop service, to be connected to hubs, 

increasing the number of one-connection city-pair opportunities.36

 34DOT, Aviation Industry Performance: Trends in Demand and Capacity, Aviation 

System Performance, Airline Finances, and Service to Small Airports, CC-2005-057 

(Washington, D.C.: June 30, 2005), p. 13. 

35Our data counted the number of coupons, or “flight segments,” per ticket. While a onecoupon trip would not require a passenger to connect between two different planes at an

intermediate hub, it does not necessarily mean that the flight is nonstop. A passenger on a 

flight that makes a stop and then continues with the same flight number to a different 

destination would be considered as having been on a nonstop flight. There is no way to 

determine the number of passengers in our data sample that this scenario applies to. 

36GAO, Aviation Competition: Regional Jet Service Yet to Reach Many Small 

Communities, GAO-01-344 (Washington, D.C.: Feb. 14, 2001). We reported in 2001 on

airlines’ use of regional jets to provide service in new markets that were more distant than

previous markets served with shorter-range turbuprop service. For example, regional jet 

service was used by American Airlines in 1999 to directly connect Grand Rapids, Michigan, 

to Dallas, Texas, whereas previously American only served Grand Rapids with turboprop 

service to Chicago, Illinois. These new, longer, nonstop markets have increased the flight 

opportunities for many communities by connecting them directly with a greater number of

hub airports.

Page 33 GAO-06-630 Airline Deregulation
Page 34 GAO-06-630 Airline Deregulation 

Figure 17: Percentage of Markets and the Minimum Number of Connections, 1980–2005 

Note: Because of statistical sampling issues, we only analyzed service in city pairs with at least 13 

passengers in our sample in any given quarter. This equates to about 130 actual flying passengers. 

The largest markets are generally served by nonstop service. In 2005, 88 

percent of passengers traveled in city-pair markets that included nonstop 

service and less than 1 percent of passengers traveled in city-pair markets 

that required two connections.37 However, because many passengers in 

directly connected markets may choose to fly with a connection (e.g., in 

exchange for a lower fare), the actual number of passengers flying without 

a connection is lower. For example, while passengers flying between 

Seattle and Tampa, Florida, could fly nonstop in 2005 (and were able to in 

1980), they could also choose to connect through a number of hubs, 

 37City pairs with under 13 passengers per quarter were not included in this analysis due to 

sampling issues. It is likely that many of those markets, due to their small size, require at 

least one connection. 

Source: GAO analysis of DOT Origin and Destination Survey data. 

Year 

Percentage of city-pair markets

0 

10 

20 

30 

40 

50 

60 

70 

80 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

One connection

Non-stop

Two connections
including Chicago, Atlanta, and Denver, Colorado, for a number of 

reasons. Our data do not distinguish between passengers who flew with 

one or two connections out of necessity (e.g., because of no better option 

in their market) or voluntarily when a direct flight was available. 

Additionally, the development of hubs has helped bring about increases in

flight frequencies, allowing some passengers taking connecting flights to 

benefit from better flight times and reduced connection times. 

As another means of measuring changes to connectivity over time, we 

calculated a flight distance ratio. This ratio, also known as “circuity,” 

measures the total miles flown on a trip (adding up the distance of all 

segments of a flight) divided by the distance between origin and 

destination. A nonstop flight would have a ratio of 1, and a ticket with at 

least one stop would have a higher ratio the farther out of the way the 

connections were between origin and destination. Figure 18 shows that, 

since 1980, the flight distance ratio has slowly risen. Much of this increase

is likely due to the increased use of connecting flights. 

Figure 18: Flight Distance Ratio, 1980–2005 

1.00 

1.01 

1.02 

1.03 

1.04 

1.05 

1.06 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Source: GAO analysis of DOT Origin and Destination Survey data. 

Year 

Flight distance ratio 

By other measures of airline service---not covered by DOT’s Origin and 

Destination Survey data such as flight frequencies, flight delays, and 

amenities---service has been mixed. For example, in 1999 we reported that 

Page 35 GAO-06-630 Airline Deregulation
medium and large communities had significant improvements in their 

number of departures, nonstop destinations served, and use of jet service 

since deregulation.38 However, by other measures, service has 

deteriorated, especially in recent years as traffic has rebounded. For 

example, DOT has reported that 77.4 percent of flights arrived ontime in 

2005, compared with 82.1 percent in 2002 and 79.4 percent in 1990. 

Additionally, DOT reported that the agency received almost 7,000 

consumer complaints in 2005, an increase of over 50 percent from 2003.39

According to our analysis of the evidence, reregulation of airline entry and 

rates would not benefit consumers and the airline industry. Although some 

aspects of customer service might improve, reregulation would likely 

reverse many of the gains made by consumers, especially lower fares. 

While numerous industries have been deregulated over the last 30 years, 

very few have been reregulated. We found that the few instances in which

an industry was reregulated stemmed from inadequate competition, such

as occurred in the cable television industry after it was deregulated. Lack

of competition has not been the case in the airline industry, where 

competition has been keen. Our analysis of fares and service since 

deregulation provides evidence that consumers have benefited over the 

intervening years. While it is impossible to accurately calculate these gains 

because no regulated system exists against which to compare deregulated 

fares, deregulation has corresponded with increased competition in the 

airline industry, which has likely contributed to lower fares and a larger 

airline market than might have prevailed without it. Reregulating the 

airline industry would have ramifications reaching far beyond the fare and

service effects on airline passengers and communities. For example, the 

higher fares for airline travel that would likely result from reregulating the 

industry could shift some of the nation’s 670 million domestic airline 

passengers to other modes of transportation that are neither as safe nor 

efficient as air travel, and considerable infrastructure investment would be 

required to handle the increased demand. 

Evidence Suggests 

That Reregulation of 

Airline Entry and 

Rates Would Reverse 

Consumer Benefits 

and Not Save Airline 

Pensions 

 38This report defined large communities as those with metropolitan populations of over 1.5

million people, medium-large communities as those with metropolitan populations 

between 600,000 and 1.5 million people, medium communities as those with metropolitan 

populations between 300,001 and 600,000 people, and small communities as those with 

metropolitan populations of 300,000 or less.

39The number reported by DOT is based on formal complaints filed by consumers with the 

DOT. 

Page 36 GAO-06-630 Airline Deregulation
Restoring service to some small communities is an insufficient reason to 

reregulate airline entry and rates. We previously reported that small 

communities face a range of fundamental economic challenges in 

attracting and retaining commercial air service. Among these challenges is

the lack of a population base or economic activity that could generate 

sufficient passenger demand to make service profitable to airlines. Smaller 

communities located near larger airports may also face reduced demand 

because they do not have low-cost airlines or frequent service. Despite 

these challenges, smaller city-pair markets have generally experienced 

lower fares since deregulation—just not to the degree that the largest citypair markets have. The smallest city-pair markets in our analysis have also

experienced a net gain in the number of connections and in overall traffic 

since deregulation. If Congress determines that these markets are 

underserved, it might more directly address service to small communities 

through targeted legislation—such as increasing subsidies for EAS—than 

through wholesale reregulation. 

Finally, reregulating the airline industry would not salvage airline 

pensions. Legacy airlines’ financial problems are the result of the same 

competitive forces that contributed to lower fares for consumers. The 

demise of airlines since deregulation has been endemic to the airline 

industry, as more efficient airlines have taken market share from less 

efficient airlines. 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. Increasing fares via government-imposed price floors 

similar to those that existed prior to 1978 would be an inefficient means of 

ensuring that airlines would generate sufficient revenues to adequately 

fund their pension plans, especially when most airlines no longer offer 

defined benefit plans. Congress is currently considering changes to 

defined benefit pension regulation, including specific provisions that 

would grant airlines additional time to fund frozen defined benefit plans 

and thereby avoid plan terminations. We have previously recommended 

that Congress consider broad pension reform that is comprehensive in 

scope and balanced in effect. 

Page 37 GAO-06-630 Airline Deregulation
We provided a draft of this report to DOT for its review and comment. 

DOT officials provided some clarifying and technical comments that we 

incorporated where appropriate. 

Agency Comments 

We provided copies of this report to the Secretary of Transportation and 

other interested parties and will make copies available to others upon 

request. In addition, this report will be available at no charge on our Web 

site at http://www.gao.gov. 

If you or your staff have any questions on matters discussed in this report, 

please contact me on (202) 512-2834 or at heckerj@gao.gov. Contact points 

for our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this report. Key contributors to this report can be found 

in appendix II. 

JayEtta Z. Hecker 

Director, Physical Infrastrucutre 

Page 38 GAO-06-630 Airline Deregulation
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To assess the original intent of Congress in passing the Airline 

Deregulation Act, we reviewed the act and accompanying legislative 

materials, and various other documents and studies. To ascertain the 

legislative intent of Congress in deregulating the airline industry, we 

reviewed the act, legislative reports, and floor debates. We also reviewed 

related court cases and studies and historical accounts of airline 

deregulation. 

To evaluate past changes in the airline industry, we reviewed Department 

of Transportation (DOT) studies, our own studies, analyzed financial and 

operational data, and interviewed industry experts. We analyzed airline 

financial and operational data from DOT’s Form 41 data set. We obtained

these data from BACK Aviation Solutions, a private contractor that 

provides online access to U.S. airline financial, operational, and passenger 

data that are reported by airlines to DOT. To assess the reliability of these 

data, we reviewed the quality control procedures applied to the data by

DOT and BACK Aviation Solutions and subsequently determined that the 

data were sufficiently reliable for our purposes. 

To analyze changes to airline fares and service since deregulation, we used 

data from DOT’s Origin and Destination Survey. Begun in 1979, the Survey 

captures airline-reported information about the full itinerary and fare paid 

from every tenth ticket to DOT. The survey does not include data on flight

frequency, aircraft type, flight amenities, or other data that could be used 

to measure airline service. In the fourth quarter of 1998 DOT changed the

name of the database from DB1A to DB1B and began collecting an 

additional data field to distinguish between the carrier that issued the 

ticket from the carrier that operated the flight (e.g., a flight operated by Air 

Wisconsin as a US Airways Express flight, connecting to a US Airways 

Express flight, connecting to a US Airways mainline flight—all issued by 

US Airways under the “US” code). To assess the reliability of these data,

we reviewed the quality control procedures applied to the data by DOT 

and subsequently determined that the data were sufficiently reliable for 

our purposes. 

We analyzed these data for the period from 1980 through the second 

quarter of 2005. We did not include 1979 data in our analysis because DOT 

staff reported that these data were not reliable, since many airlines had 

difficulties reporting data in the first full year of deregulation. We limited 

our analysis to data reported for the second quarter of every calendar year 

in order to avoid data reflecting increased summer travel or reduced 

winter travel. Furthermore, we limited our analysis to passenger 

itineraries wholly within the continental 48 states; thereby excluding 

Page 39 GAO-06-630 Airline Deregulation
Appendix I: Scope and Methodology 

international itineraries and any travel to airports in Alaska, Hawaii, and 

U.S. dependencies. We excluded international fares and foreign carriers 

because international markets were not deregulated when domestic 

markets were. We excluded flights to or from Alaska, Hawaii and U.S. 

territories because of the long distances involved. 

In general, we limited our analysis to a subset of round-trips and certain

one-way trips between city pairs. We defined markets by city pairs rather 

than airport pairs. For cities served by multiple airports (e.g., the Dallas 

area includes both Dallas-Forth Worth International Airport and Dallas 

Love Field), we recoded all airports in the city to the one with the most 

enplanements. Thus, we identified round trips as those for which the final 

city on the ticket was the same as the originating city (even if the 

passenger record indicated, for example, that the trip originated at DallasFort Worth and returned to Dallas Love Field). One-way trips were those 

in which no two cities in the ticket matched one another. 

We included only round trips involving two, four, or six flight segments 

(coupons). These represent round trip itineraries that have no stops, one 

stop, or two stops in both directions. In counting the number of coupons 

used in each direction of a flight (i.e., outbound or return), we relied on 

the “trip break” codes that DOT assigns. These codes indicate the point in 

a passenger’s itinerary at which the passenger begins the return trip. 

Because the data originally reported by the airlines do not unambiguously 

identify the point on a round trip at which the passenger begins the 

journey home, DOT applies an arithmetic algorithm that identifies the 

point in the itinerary farthest from the point of origination. However, 

because DOT’s trip break codes may incorrectly identify the destination 

airport, we eliminated any tickets that had an unequal number of coupons 

before and after the DOT-assigned trip break. Thus, we eliminated all 3- 

and 5-coupon round trip tickets (e.g., one in which a passenger flies 

nonstop from Boston to Phoenix, Arizona, then to Denver, and back to 

Boston). On the other hand, we included records for roundtrips that had 

equal numbers of outbound and return coupons, but connected over 

different airports on the outbound and return segments (for example, New 

York to Los Angeles connecting in Chicago westbound and in Dallas-Fort 

Worth eastbound). 

We analyzed changes in fares and yields in inflation-adjusted 2005 dollars, 

using the chain-weighted price index for gross domestic product. To 

compute the yield for every ticket, we divided the inflation-adjusted fare 

paid by the total distance between origin and destination for a one-way 

ticket or by double the distance between origin and destination for a 

Page 40 GAO-06-630 Airline Deregulation
Appendix I: Scope and Methodology 

round-trip ticket. We excluded tickets with unusually high fares (i.e., those 

with yields in excess of $3 per mile in 2005 dollars), because according to

industry researchers, these fares are likely to indicate data errors. We 

retained tickets in the analysis when the fare paid was $0, indicating trips 

“purchased” with frequent flyer rewards. 

For our analyses of changes in fares and service, we divided city pairs into

categories based on distance or passenger density. To determine the 

distance between city pairs, we calculated the distance between airports 

using the latitude and longitude of their locations. We then grouped all city

pairs into 250-mile or 500-mile increments. We also determined the total

number of sample passengers in each market. We then ranked, for each

year, all markets by the number of passengers and grouped the markets 

into quintiles, in which each quintile had an even number of passengers.1

Because the number of passengers in each market changed from year to 

year, the specific markets in each quintile also changed from year to year.

Our analysis of service measures was conducted by only counting city-pair 

markets with at least 13 passengers per quarter in our sample, which 

equates to about 130 actual flying passengers. This was to increase the 

probability that changes in service we observed in our sample reflected 

actual flow routes and was not due to sampling or data error. 

We defined “service” in terms of connectivity and the number of 

competitors in a market. We measured connectivity in two ways: the 

minimum number of flight segments available to connect two cities and 

the extent to which passengers needed to connect over distant hubs to 

reach their destination. We identified the minimum number of connections 

needed to connect any two cities and also determined whether that 

number changed over time. Additionally, because some passengers will 

choose to connect between two cities rather than take nonstop flights 

(e.g., because fares may be cheaper or the schedules may be more 

convenient), we weighted the coupons by passenger traffic to establish 

how most passengers traveled in the city pair. To determine whether 

passengers could fly more or less directly to their destinations, we 

calculated the distance between origin and destination along with the 

distance of every segment on the ticket. We then divided the sum of the 

segment distances by the distance between origin and destination (or 

 1

Quintile breaks did not always result in quintiles that were exactly equal because, often, 

the smallest pair in the quintile had too many passengers to make the total for the quintile 

exact. 

Page 41 GAO-06-630 Airline Deregulation
Appendix I: Scope and Methodology 

twice that distance if the flight was a round trip) to estimate how far out of 

the way the travelers went. 

To analyze competition within markets and over time, for every city pair,

we determined the market share for each reporting carrier, based on 

ticketed passengers, and counted only those carriers with at least 5 

percent of the market as effective competitors. We excluded tickets with 

interlined flights in our analysis of city-pair competition. An “interlined 

flight” is one in which a passenger transfers from one to another 

unaffiliated carrier. That is, the passenger travels on at least two different 

reporting carriers. When analyzing city pairs for competition, we only 

analyzed those city pairs that, in any given quarter, had a minimum of 118 

passengers in our sample (equaling a minimum of 1,180 real passengers in 

the market). This passenger minimum was derived to provide us an 

acceptably low probability of misclassifying carriers as effective 

competitors, that is, as having a 5 percent market share. For various 

scenarios, with this market size threshold, the probability of correctly 

classifying carriers was at least 95 percent. 

We recognize that many other dimensions of service quality exist. In the 

past, we have reported changes in service quality in terms of available 

capacity out of particular cities, whether service was provided with jets or 

turboprop aircraft, and how many locations a passenger from a given city 

could reach on a nonstop basis. In addition, DOT collects other 

information on service quality, such as the percentage of on-time arrivals 

and departures and the number of consumer complaints about airlines. 

Because of time constraints on this engagement, we were unable to 

incorporate more of these dimensions in our analysis. 

When DOT began requiring the survey data by airlines, Southwest Airlines

received a waiver that allowed it to report data differently, because of its 

unique ticketing procedures, whereby it issued only one-way tickets. 

Under the waiver, Southwest reported its round trips to DOT as two 

separate trips, which were included in DOT’s DB1A or DB1B databases. 

Southwest maintained this waiver until the third quarter of 1998, when it

was required to report ticket data more accurately, including both 

directions of a ticket. During the period covered by the waiver, the number 

of one-way tickets in the sample was unnaturally high. Recognizing that 

the data could be biased as a result, we reanalyzed our sample data 

without the Southwest data and found that the results were only 

marginally different. Median round-trip fares since 1999 have been 

between $17 and $25 lower with the inclusion of the Southwest Airlines 

fares than they would have been without the Southwest fares. Therefore, 

Page 42 GAO-06-630 Airline Deregulation
Appendix I: Scope and Methodology 

we did not exclude Southwest tickets after 1999 from our analysis of 

fares.2

To determine whether there is sufficient evidence to support reregulating

the airline industry, we considered our findings under the prior questions 

and our earlier reports, especially those relating to pension regulation. We 

reviewed and updated the status of airline pension plans and assessed 

examples of deregulation and reregulation in other countries and in other 

industries. In addition, we reviewed our prior reports that have evaluated

past problems in the airline industry, including small community service,

barriers to entry, fare and service problems, and financial problems, 

including bankruptcy and pension issues. For this and the prior report 

questions, we reviewed our methods and results with DOT and academic 

experts from the Massachusetts Institute of Technology’s Global Airline 

Industry Program. 

We performed our work between September 2005 and May 2006 in 

accordance with generally accepted government auditing standards. 

 2

Restrictions in place by the Wright Amendment still mean that Southwest passengers 

originating at Dallas Love Field and connecting in another airport must buy two separate 

tickets. As a result, tickets originating at Dallas Love Field will only indicate nonstop flights 

and may not always accurately reflect the true itineraries of travelers. 

Page 43 GAO-06-630 Airline Deregulation
Appendix II: 

A

GAO Contact and Staff 

cknowledgments 

Page 44 GAO-06-630

Appendix II: GAO Contact and Staff 

Acknowledgments 

JayEtta Z. Hecker (202) 512-2834 or heckerj@gao.gov

In addition to the contact named above, Steven C. Martin, Assistant 

Director; Paul Aussendorf; Jay Cherlow; David Hooper; Colin Fallon; 

Mitch Karpman; Molly Laster; Sara Ann Moessbauer; and Mathew 

Rosenberg made key contributions to this report. 

GAO Contact 

Acknowledgments 

(544116) Airline Deregulation
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