Chapter One
The Road to Deregulation
For four decades, the US federal government told airlines where to fly, how much to charge, and who could compete. Then, in 1978, everything changed.
A Regulated Industry
The Civil Aeronautics Board (CAB), established in 1938, held near-total authority over US commercial aviation. It set fares, allocated routes, and controlled market entry with an iron grip. Airlines were essentially public utilities — stable, predictable, and expensive. A coast-to-coast ticket in the mid-1970s cost the equivalent of over $1,000 in today's money. Flying was for the wealthy and the business traveller. The working public took the bus or the train.
The Economists' Case
By the early 1970s, a growing body of academic research — led by Alfred Kahn at Cornell and Stephen Breyer at Harvard — argued that CAB regulation was economically irrational. It protected incumbents, suppressed competition, and kept fares artificially high. Intrastate carriers in California and Texas, operating outside CAB jurisdiction, were already proving that lower fares were viable.
The Political Moment
President Carter arrived in Washington in 1977 committed to deregulation as an anti-inflation measure. He appointed Alfred Kahn — the leading academic critic of airline regulation — to chair the CAB itself. It was a deliberate act of institutional subversion. Kahn immediately began dismantling the board's authority from within.
The Bipartisan Coalition
The Airline Deregulation Act passed with rare bipartisan support. Senator Edward Kennedy, no friend of big business, championed it as a consumer protection measure. The airline industry was divided — some carriers saw opportunity, others feared the chaos of open competition. On 24 October 1978, President Carter signed the Act into law.
"What we're doing is substituting the discipline of the market for the discipline of the government. It's as simple as that."
Alfred Kahn, CAB Chairman, 1977–78
What the Act Did
- Phased out CAB control over domestic fares between 1978 and 1983
- Allowed airlines to enter any domestic route without government approval
- Permitted airlines to exit unprofitable routes, subject to notice periods
- Abolished the CAB entirely by 1985
- Created the Essential Air Service programme to protect small communities
The Immediate Aftermath
The first years of deregulation were chaotic. New carriers flooded the market — Midway, New York Air, People Express — offering fares that undercut the majors by 50% or more. Established airlines scrambled to respond, cutting costs and launching their own discount services. Between 1978 and 1982, average domestic fares fell by nearly 20% in real terms. But the turbulence was real: Braniff International collapsed in 1982, the first major casualty of the new era. The experiment had begun in earnest.