Before 1978, the U.S. airline industry was tightly regulated. The federal government controlled what fares airlines could charge and what cities they could serve. Concerned that government regulation had made the industry inefficient, inhibited its growth, and caused airfares to be too high in many heavily traveled markets involving the nation’s largest communities, the Congress passed the Airline Deregulation Act of 1978. The act phased out the government’s control of fares and service but did not change the government’s role in regulating and overseeing air safety. Opponents of economic deregulation warned that relying on competitive market forces to determine the price, quantity, and quality of domestic air service could adversely affect safety and harm the economies of smaller communities. In 1990, both GAO and the Department of Transportation (DOT) reported that fares had fallen since deregulation at airports serving small and medium-sized communities as well as at airports serving large communities. Studies by DOT and others have differed in their conclusions about deregulation’s impact on airline service and safety. Between 1938 and 1978, the Civil Aeronautics Board (CAB) regulated the airline industry, controlling the fares airlines could charge and the markets they could enter. Legislatively mandated to promote and develop the air transportation system, CAB believed that passengers traveling shorter distances—more typical of travel from small and medium-sized communities—would not choose air travel if they had to pay the full cost of service. Thus, in keeping with its mandate, CAB set fares relatively lower in short-haul markets and higher in long-haul markets than would be warranted by costs. In effect, long-distance travel subsidized short-distance markets. In addition, CAB did not allow new airlines to form and compete against the established carriers. Concerned that these practices had, among other things, caused fares to be too high in many markets, the Congress passed the Airline Deregulation Act, which the President signed into law on October 24, 1978. The act phased out CAB’s control of domestic air service and placed reliance on competitive market forces to decide fares and service levels. As a result, fares were expected to fall at airports serving large communities, from which many trips are long-distance over heavily traveled routes. However, without the cross-subsidy present under regulation, fares were expected to increase somewhat at airports serving small and medium-sized communities. In addition, it was expected that airlines, free to make their own decisions concerning service, would stop flying to some smaller communities where they could not make a profit and replace jets with smaller turboprop (propeller) aircraft in others because those communities could not economically support jet service. In 1989, the then-Chairman, Senate Committee on Commerce, Science, and Transportation, concerned that people traveling to and from small and medium-sized communities could be paying higher fares as a result of airline deregulation, asked us to compare the trends in airfares at airports serving small and medium-sized communities with the trend for airports serving large communities. Contrary to the Chairman’s expectation, however, we found that the real (adjusted for inflation) fare per passenger mile was 9 percent lower in 1988 than in 1979 at airports serving small communities, 10 percent lower at airports serving medium-sized communities, and about 5 percent lower at airports serving large communities. Fares had declined at 76 of the 112 airports we reviewed (68 percent), including 38 of the 49 airports serving small communities (78 percent). Nevertheless, airports in several small, medium-sized, and large communities experienced increases in fares of over 20 percent. We noted that the greatest fare increases tended to be in the Southeast, while the largest fare decreases were in the Southwest. In addition to this study, we have reported on several other issues concerning airfares since deregulation, including the effects of market concentration and the industry’s operating and marketing practices on fares. These reports are listed at the end of this report. “Smaller cities have benefited from the shift to hub and spoke service. Most small cities receive more frequent service than previously, and many now receive service to connecting hubs from more than one major airline or their affiliates, thereby providing the traveler with a choice of airlines and routings to most destinations.” Many other studies have been conducted of deregulation’s impact on airfares and service. While generally concluding that fares overall have declined, the studies have reached different conclusions about the impact on the quantity and quality of service. For example, Morrison and Winston estimated that the lower fares since deregulation save passengers $12.4 billion annually. They also estimated that because of the (1) increased number of flights, (2) efficiencies of the hub-and-spoke networks in connecting smaller communities to the overall aviation system, and (3) resulting savings in travel time, passengers save an additional $10.3 billion a year as a result of deregulation. While other studies generally agree that fares have decreased since deregulation, they point out that the lower fares may have been achieved at the cost of reduced service quantity and quality for many smaller and medium-sized communities and that therefore the overall net benefits of deregulation are less clear. Brenner, for example, concluded that service quality has declined for small and medium-sized communities, largely because his research showed that a number of very small communities have lost air service completely and that many small and medium-sized communities are served mostly or entirely by turboprops, as opposed to the jet service they had under regulation. Extensive research has also been conducted on the impact of deregulation on air safety. This body of work commonly acknowledges that since deregulation, the rate of accidents has continued its historic decline. Figure 1.1 shows the sharp decline in the number of airline accidents per million aircraft miles flown since 1960. Although the rate of improvement has slowed in recent years as the number of accidents each year has grown very small, the accident rate for airlines in 1994 (0.004 accidents per million aircraft miles flown) was half the rate in 1978 (0.008 accidents per million aircraft miles flown). Preliminary data for 1995 indicate that the rate increased somewhat, although it remained below the rate in 1978. A study committee sponsored by the National Research Council concluded that the decline in the accident rate has largely been a result of the (1) introduction in the 1960s of more advanced, “second generation” jet aircraft into the U.S. fleet (such as the 727, 737-200, and DC-9) in place of the first generation of jets introduced in the late 1950s (such as the 707 and DC-8) and (2) subsequent advancements in aircraft technology, air traffic control procedures, and pilot training. The committee found little evidence to support concerns that deregulation had negatively affected air safety in general or safety for travelers from small and medium-sized communities in particular. Nevertheless, others have come to different conclusions, holding that deregulation has prevented further gains in safety because the increased competitive pressures brought by deregulation have forced airlines to limit spending on maintenance. Rose, for example, demonstrated some correlation between lower profitability and higher accident rates, particularly for smaller airlines. Many of these researchers also believe that for smaller communities, air safety has decreased since deregulation because substituting commuter carriers and turboprops, which have higher accident rates, for larger airlines and jet aircraft at these airports has increased those communities’ accident risk. Although the accident rate for commuter carriers fell by 93 percent between 1978 and 1995 (from 0.270 to 0.019 accidents per million aircraft miles flown), these researchers note that the accident rate for these carriers in 1995 was still more than three times higher than the rate for the larger airlines. Nevertheless, research has been inconclusive to date on whether the increased presence of commuter airlines and turboprops has resulted in more accidents at airports serving small communities. Noting that several years had passed since our comparison of airfares at airports serving small, medium-sized, and large communities, the Chairman, Senate Committee on Commerce, Science, and Transportation, asked us to update our work and to determine whether the regional differences in airfare trends that we previously observed still existed. In addition, expressing concern that deregulation may have adversely affected small and medium-sized communities to the extent that airlines eliminated service or replaced jets with turboprops and noting that opinions differed on this subject, the Chairman requested that we compare the changes in the quantity, quality, and safety of air service since deregulation for airports serving small, medium-sized, and large communities. In updating our prior comparison of airfares, we analyzed data on fares for the same 112 airports that we had reported on previously. Specifically, we examined the trends in the average yields—fares per passenger mile—between 1979, 1984, 1988, 1991, 1994, and the first half of 1995 for travel out of 49 airports serving small communities, 38 airports serving medium-sized communities, and 25 airports serving large communities. In 1994, these airports accounted for 4.7 million (66 percent) of the 7.1 million domestic airline departures and 320.6 million (67 percent) of the 481.7 million domestic airline enplanements in the United States. In our prior report, we examined the trends using fare data for 1979, 1984, and 1988 for these communities. We updated these trends using data for 1991 and 1994 because (1) 1991 represented the mid-point between 1988 and 1994 and (2) the 1994 fare data were the most current full-year data available at the time of our review. The data for the first 6 months of 1995 provided us with the most current data available. To provide consistent, comparable information, we identified and used the same routes (origin and destination airport combinations) that we reviewed in our prior work.