AIRLINES

AIRLINES

In 1978, the airline industry, which had been
heavily regulated and controlled, was liberated
from government oversight and released to the
vagaries of the marketplace. As a result, the
industry underwent significant change during
the 1980s and 1990s. At the same time, several
major air disasters took place, including the
1996 Valujet and TWA 800 aircraft crashes. In
response to the post-accident events, Congress
passed the Aviation Disaster Family Assistance
Act (ADFAA) the same year. The terrorist attacks of September 11, 2001, wrought further
change on the airline industry. Just weeks after
the attacks, President GEORGE W. BUSH signed
the Air Transportation Safety and System Stabilization
Act (ATSSSA). According to a statement
released by President Bush on September 22,
2001, the act was intended to ensure passenger
safety and to “assure the safety and immediate
stability of the nation’s commercial airline system.”
It also created financial turmoil for nearly
all the major carriers. What followed was a
period of evolution and metamorphosis that
changed the nature of flying forever.
Deregulation
When the first commercial airlines appeared
after WORLD WAR I, fewer than six thousand passengers
a year traveled by air. By the 1930s, the
Big Four—Eastern Air Lines, United Air Lines,
American Airlines, and Trans World Airlines
(TWA)—dominated commercial air transport.
These companies had garnered exclusive rights
from the federal government to fly domestic airmail
routes, and Pan American (Pan Am) held
the rights to international routes. The hold of
these four airlines on their lucrative contracts
went virtually unchallenged until deregulation
in 1978. Even after the formation of the Civil
Aeronautics Board (CAB) in 1938, formed to
license new airlines, grant new routes, approve
mergers, and investigate accidents, the Big Four
and Pan Am continued to be guaranteed permanent
rights to these routes. In fact, no new major
scheduled airline was licensed for the next four
decades.
In October 1978, Congress passed the Airline
Deregulation Act (49 U.S.C.A. § 334 et seq.),
ending the virtual MONOPOLY held by the Big Four and Pan Am. The government’s goal was to
promote competition within the industry. The
act gave airlines essentially unrestricted rights to
enter new routes without CAB approval. The
companies could also exit any market and raise
and lower fares at will.
The immediate effect of deregulation was a
drop in fares and an increase in passengers. New
cut-rate, no-frills airlines, such as People Express
Airlines and New York Air, offered travelers the
lowest fares ever seen in the industry. Forced to
compete to fill their planes, the larger companies
lowered their prices as well. Then the oil-producing
countries in the Middle East formed a
cartel and raised the price of jet fuel 88 percent
in 1979 and an additional 23 percent in 1980.
Combined with tumbling fares and increased
passenger loads, the higher cost of jet fuel
caused airline profits to drop.
Labor strife also affected the industry in the
early days following deregulation. In 1981, after
years of working under stressful conditions
made worse by deregulation, the Professional
Air Traffic Controllers Organization (PATCO)
called a strike, demanding shorter working
hours and higher pay. The union expected support
and cooperation from the Reagan administration
because of a sympathetic letter President
RONALD REAGAN had sent to PATCO when he
was campaigning for the presidency. In the letter,
he pledged to do whatever was necessary to
meet PATCO’s needs and to ensure the public’s
safety. But Reagan ordered the strikers to return
to work within three days or be fired. Most did
not return. The FEDERAL AVIATION ADMINISTRATION
(FAA) ordered all carriers to temporarily
reduce their number of flights by
one-third. Newer and smaller carriers found
themselves increasingly unable to gain access to
lucrative routes. Rebuilding the air traffic controller
force took years, during which landing
slots at the largest airports remained restricted,
and small carriers, unable to compete, simply
abandoned their attempts to break into the
larger markets.

To some extent, competitive pricing actually
had the opposite effect of what the deregulators
intended. When the small “upstart” companies
offered extremely low fares, the larger companies
responded aggressively. For example, in
1983, People Express announced a $99 roundtrip
fare between Newark, New Jersey, and Minneapolis–
St. Paul.Northwest Airlines, which had
always dominated the Twin Cities market,
undercut People by instituting a $95 fare for the
same destination and scheduling extra departures.
As a result, People decided it could not
compete and withdrew from the market. Passengers
enjoyed the benefit of lower fares, but only
for a short time before the competitive effect
faded and high fares returned.
When deregulation brought competitive
pricing, the large carriers began to realize that it
was not profitable for them to do business the
way they had in the past. The first major change
they made was to abandon the practice of crisscrossing
the continent with nonstop flights to
many different cities. Instead, the major airlines
scheduled most of their flights into and out of a
central point, or hub, where passengers might
need to change to a different flight to complete
their journey. One airline controlled most of the
reservation desks and gates at a particular hub—
for instance, United in Chicago, Northwest in
Minneapolis–St. Paul, American in Dallas–Fort
Worth, and Delta in Atlanta. For this reason, and
because passengers tend to dislike changing carriers
in the middle of a trip, the dominant company
in a hub had a tremendous advantage over
the competition in influencing what carrier a
passenger would choose. By 1990, two-thirds of
all domestic passengers traveled through a hub
city before arriving at their final destination. Of
those passengers, eight out of ten remained on
the same airline throughout their journey. By
1992, there were at least twelve “fortress hubs,”
or airports where one airline controlled more
than 60 percent of the traffic. Passengers who
flew out of these hubs paid over 20 percent more
than they would have for a comparable trip out
of an airport that was not a hub.
After deregulation, the airlines also came to
realize that they needed a more efficient way to
book reservations and issue tickets. It is difficult
to imagine, in these days of highly sophisticated
computers and split-second communications,
that until the late 1970s and early 1980s, airline
schedules were contained in large printed volumes,
reservations were taken over the telephone
and tallied manually at the end of each
day, and tickets were written by hand. To
streamline this process the large companies initially
proposed a joint computer system, listing
schedules and fares. The JUSTICE DEPARTMENT
objected on the grounds that such a system
would be anticompetitive and would violate the
SHERMAN ANTI-TRUST ACT (15 U.S.C.A. § 1 et
seq. [1890]). Instead, each airline developed its own computer system and entered data in a
manner that unfairly biased travel agents’
choices in favor of the carrier that owned the
system. Through skillful manipulation of the
data, the airlines were able to put competitors at
a disadvantage. For example, the airline that
owned the system might enter the data so that
all its flights to a particular destination appear
on the screen before any flights of a competitor.
In a further attempt to win loyalty from passengers,
the large airlines instituted frequentflyer
programs, which awarded free tickets to
travelers after they logged a certain number of
miles flown with the company. The combination
of hubs, central computer reservation systems,
and frequent-flier programs made the major airlines
almost invulnerable in large markets.
Deregulation also brought a period of financial
upheaval and an epidemic of “merger fever.”
A number of companies ceased doing business
between 1989 and 1992, and still others merged
with stronger, more aggressive companies.
Among the companies that disappeared from
the skies were Eastern, Pan Am, Piedmont, and
Midway Airlines. Continental and TWA sought
the shelter of Chapter Eleven BANKRUPTCY reorganization.
USAir and Northwest required cash
infusions through cooperative arrangements
with foreign airlines. Even financially strong carriers
such as United and American laid off
employees and abandoned plans to purchase
new aircraft, which added to the woes of the
depressed aerospace industry.
The mergers and buyouts of the 1980s were
often accomplished in an atmosphere of hostility
and distrust. Charges of predatory pricing
and other unfair business practices were leveled
by one carrier against another. During the
1980s, the Justice Department’s Antitrust Division
made a number of GRAND JURY investigations
into alleged anticompetitive activity by the
major airlines, but no indictments were handed
down. However, the companies that survived
did not emerge unscathed. Many of the acquisitions
were highly leveraged buyouts that left the
reconstituted companies heavily in debt. With
profits insufficient to cover their enormous debt
loads, the companies frantically competed for
business, engaging in fare wars that produced a
dizzying array of pricing plans with equally
numerous and confusing restrictions. Some of
the tactics were questionable, but, again, not
clearly illegal. In 1993, American Airlines was
sued by Continental and Northwest for alleged
predatory pricing during a 1992 fare war. The
jury took just over two hours to return a verdict
in favor of American.
By 1993, the industry began to rebound.
Continental Airlines and TWA emerged from
bankruptcy, and a few small carriers, such as
Kiwi International, formed by former Eastern
pilots, responded to the public’s demand for low fares and began to make incursions into the
established markets, although they generally
shied away from directly challenging the giants.
Older carriers for the most part chose to stay
with their hub-and-spoke systems, while several,
including Northwest and United, came up with
a creative new solution to their financial woes.
Northwest avoided bankruptcy when its
unions agreed to wage concessions in return for
part ownership of the airline. Then, in 1994,
after seven years of negotiating, employees of
United gained majority control of their company
in return for deep pay and benefits cuts.
Secretary of Labor Robert B. Reich commented
that other financially troubled companies would
undoubtedly follow suit: “From here on in, it
will be impossible for a board of directors to not
consider employee ownership as one potential
business strategy.” However, some industry analysts
doubted that employee ownership would
be effective in the long run because of inherent
conflicts between labor and management, or
between different labor groups. “It can’t work,”
declared former Chrysler chairman Lee A.
Iacocca. “What do you think will happen when
it’s a choice between employee benefits and capital
investment?”
Safety
One troubling criticism of deregulation is
that aggressive competition has forced airlines
to cut corners, resulting in safety lapses. In 1990,
Eastern Airlines was handed a 60-count federal
indictment charging it with shoddy and dishonest
maintenance practices. The indictments
came after years of complaints by the financially
troubled airlines’ mechanics, who claimed that
pressures to cut costs led to maintenance shortcuts
and falsification of maintenance records. In
January 1991, Eastern ceased operation.
Critics contend that Eastern was hardly
alone in its cavalier approach to safety. They
charge that the FAA is understaffed and poorly
managed and that money shortages have caused
all the airlines to relax safety standards. They
point not only to increased pressures on the
labor force but also to companies’ reluctance to
replace their aging fleets, the congestion of airspace
caused by increased air travel, crowded
hub airports that create security risks, and overworked
and sometimes poorly trained air traffic
controllers. Yet, statistically, passengers are no
more likely to die in a plane crash since deregulation
than they were before it. Still, critics
maintain that, despite the airlines’ and the government’s
efforts to assure the traveling public
to the contrary, air safety is in need of substantial
improvements.
Many critics feel that at least part of the
problem lies in the dual role of the FAA.
Charged simultaneously with promoting the
economic health of the aviation industry and
fostering safety, the agency is often at odds with
itself. In addition, the FAA’s budget was cut and
the number of inspectors reduced in the 1980s,
the same period during which the number of
passengers multiplied and the number of air
traffic controllers was reduced. Furthermore,
unions, which stand to benefit from the
increased scrutiny and higher standards
imposed by the FAA, continue to be major instigators
for change. However, even neutral commentators
have suggested that it is time to
impose some degree of regulation, in the form
of stronger FAA oversight, on the industry. In
fact, the FAA has been accused of suffering from
a “tombstone mentality” that causes the agency
to delay acting on safety concerns until negative
publicity generated by a crash forces the issue.
Even after safety measures are recommended by
the NATIONAL TRANSPORTATION SAFETY BOARD
(NTSB), the agency charged with investigating
accidents, the FAA has been criticized for not
always following through.
Aging aircraft became a major concern during
the late 1980s and early 1990s. In 1988, an
Aloha Airgroup Boeing 737-200, purchased in
1969, lost the top of its fuselage while flying at
24,000 feet. A flight attendant was immediately
sucked out of the plane. The plane made a harrowing
emergency landing, but not before 65
passengers suffered injuries, some serious. Congress
responded in 1991 by passing the Aging
Aircraft Safety Act (49 App. U.S.C.A. 1421 note),
which requires airlines to demonstrate that their
older planes are airworthy. Critics claim that
enforcement of the law has been lax and that it
ignores other compelling reasons to replace
aging aircraft, such as the availability of newer
fire-retardant seat materials and of updated
seats designed to be more resistant to the impact
of a crash.
Concerns over airline safety became even
more acute in the early 1990s with a series of
fatal crashes. The Boeing Company, a major
producer of aircraft, predicts that the number of
jet crashes worldwide could double by 2010 if
accident rates of the early 1990s continue. Such a projection strikes fear into the hearts of the flying
public. However, according to David R. Hinson,
former FAA administrator, flight safety “is
not a simplistic science that lends itself to easy
solutions.” Flight safety experts point out that all
the most obvious causes of crashes have been
addressed with technological advances that
include such safeguards as early warning systems
for wind shear.
Many experts feel that not enough research
has been devoted to the study of the human elements
that contribute to crashes. Boeing reports
that flight crews have been the primary cause in
more than 73 percent of jet crashes since 1959.
In 1990, a federal jury in Minneapolis convicted
three Northwest Airlines crewmen—a flight
captain, a copilot, and a flight engineer—of flying
a jet aircraft while under the influence of
alcohol. Although this was the first flying-whileintoxicated
conviction involving professional
pilots, many claim that the problem of alcohol
and drug abuse among flight crews is widespread
and well hidden. Yet it is difficult to convince
companies to focus on the issue of human
elements that contribute to accidents. According
to airline industry expert Clay Foushee, “It’s a lot
easier to convince someone to fund a fancy new
piece of technology than research into social sciences.”
In 1994, five fatal crashes, three involving
commuter airlines, brought safety concerns to
light once again. After the fifth crash, Secretary
of Transportation Federico Peña ordered a
safety audit of the entire airline industry. As a
result, commuter airlines, which had previously
been held to a lower standard of safety than
major carriers, were placed under new operating
rules that required them to bring their safety
standards up to those of the other companies by
the end of 1996. Industry experts said the elimination
of the two-tier safety standards was “the
most important decision affecting the industry
since it was deregulated in 1978.”
Several other safety and health issues have
been publicized. The quality of air aboard an
airplane has been questioned by some. As a
result of intense LOBBYING by passenger groups
and flight attendants, federal law now prohibits
smoking on all domestic flights and on many
international flights as well. Air quality was
again questioned in 1993 when it was revealed
that, as a cost-saving measure, many airlines
were circulating fresh air into their aircraft less
frequently than they had in the past. This led to
complaints by passengers and crew of
headaches, nausea, and the transmission of respiratory
illnesses. Although the FAA conceded
that circulating more fresh air would be beneficial,
it backed off from requiring airlines to do
so, because of the cost involved.
The safety of babies and toddlers on airplanes
was investigated after it was shown that a
number of them suffered injuries, some serious
or fatal, during incidents that did not injure
their parents. Unlike adults and their luggage,
children under age two are not required to be
secured on an airplane but rather may be held
on an adult’s lap. These “lap babies” are often
ripped from the adult’s grasp during turbulence
or crashes. In 1994, Representatives Jolene
Unsoeld (D-Wash.) and Jim Ross Lightfoot (RIowa)
introduced a bill that would have required
the use of child safety restraints on commercial
flights. However, the measure, which was supported
by the Association of Flight Attendants,
NTSB, Air Transport Association, Aviation Consumer
Action Project, and Air Line Pilots Association,
was opposed by the FAA and eventually
defeated. An FAA spokesperson, testifying in
opposition to the bill, said the FAA’s research
indicated that if all children who needed them
were placed in child safety seats, the airlines
would save approximately one life over a tenyear
period, and families would save $2.5 billion
in added fares and costs over the same timespan.
In contrast to the FAA’s findings, a study conducted
at Harvard Medical School estimated
that one infant a year could be saved through the
use of safety seats. The sponsors of the bill
vowed to continue to press for more stringent
safety standards for babies.
Safety concerns will continue to plague the
airline industry, even though the FAA assures
the flying public that, statistically, at least, flying
a major airline in the United States is far safer
than driving on an interstate highway.Questions
persist about the FAA’s effectiveness in overseeing
air safety. And financially strapped airlines,
which posted $12.8 billion in losses from 1990
to 1994, must make difficult risk-benefit analyses
when contemplating new safety measures.
Some critics such as RALPH NADER, who initially
supported deregulation, are now calling
for limited government intervention to ensure
safety. However, experts warn that the U.S. airline
system, which is already extremely safe,
probably can never be completely without risk.
According to Stuart Matthews, president of the Flight Safety Foundation, “If the public
absolutely demands that flying be totally safe,
you are going to have to ban flying.” Given the
choice between taking a calculated risk and not
flying at all, Americans, who take their lives into
their hands each time they drive, will probably
continue to trust the statistics and take their
chances.
The ADFAA and September 11
In 1996, to address concerns that the families
of airline crash victims were not receiving timely
information, Congress passed the Aviation Disaster
Family Assistance Act (ADFAA) (49 USCA
§ 1136; 49 USCA § 41113). The act requires airlines
to submit a plan to the National Transportation
Safety Board that would address the
needs of the families of passengers who are
involved in any aircraft accident that results in a
major loss of life. Once approved, the carrier
must make a GOOD FAITH effort to carry out the
plan.
Plans approved under the ADFAA have
some minimum requirements for notification
and care of families affected by an airline crash.
Among them are that the airline carrier must set
up, publicize, and staff a toll-free telephone line
that passengers’ families can call for information.
The carrier must also cooperate with the
independent, NTSB-appointed nonprofit (i.e,
the Red Cross) to provide an appropriate level of
aid and support. In addition, the carrier must
assist a passenger’s family in traveling to the
crash site, as well as provide for their physical
needs while at the accident location. Finally, the
carrier must respect a family’s wishes for burial,
a memorial, or a religious ceremony, and get the
input of all families before any memorial is
erected in memory of the passengers.
The ADFAA provides limitations on the liability
of airline carriers for passenger lists. The
act states that a carrier may not be liable for
damages in preparing or providing a passenger
list, unless the conduct of the air carrier was
grossly negligent or constituted intentional misconduct.
Further limiting airline liability, the
ADFAA provides that no unsolicited communication
concerning a potential action for personal
injury or WRONGFUL DEATH may be made
by an attorney or any potential party to the litigation
to an individual injured in an airplane
accident, or to a relative of an individual
involved in the accident, before the 45th day following
the date of the accident.
The provisions of the ADFAA became crucial
on September 11, 2001—the day that four
domestic airplanes were hijacked by terrorists
and crashed into the World Trade Center in New
York City, the Pentagon in Washington, D.C.,
and a field in Pennsylvania. In the aftermath of
that tragedy, the government built on the
ADFAA by passing the Air Transportation Safety
and System Stabilization Act (ATSSSA) (Pub.L.
107-42, Sept. 22, 2001, 115 Stat. 230). This act
took into consideration the devastation wrought
on U.S. airlines on September 11 and enacted
measures to try to ensure their survival.
In addition to compensating airlines for
direct losses incurred as a result of September
11, the ATSSSA established a framework for
computing the maximum grant that an airline
could claim as compensation. To streamline
efforts, it set up the Air Transportation Stabilization
Board to review the prospective loan applications.
The act attempted to protect the
insurance industry, as well as the aviation industry,
by limiting the claims that could be made
upon them.
The act also established the September 11th
Victim Compensation Fund of 2001 to deal
directly with the needs of families who were victims
of the SEPTEMBER 11TH ATTACKS. The fund
provided direct financial assistance to families
so they would not have to endure lengthy court
battles. Liability for all third-party losses was
transferred from the airlines to the U.S. government
and a waiver system was established so
that families could not sue the airlines for damages
as a result of the terrorist attack at any
future date.
Security measures for airlines have also been
upgraded since September 11. The government
took over security at airports from private companies
through the creation of the Transportation
Security Administration. In addition,
cockpit doors were reinforced, passengers were
limited in what they could bring on to flights,
luggage screening was upgraded, and pilots were
allowed to carry guns to protect themselves on
flights.
Despite the ATSSSA and the increased security
measures, however, the September 11
attacks had a disastrous effect on U.S. airlines. A
little over a year later, two major airlines, U.S.
Airways and United Airlines were in bankruptcy,
with a good chance that others would follow.
And the threat of low-cost airlines, such as
Southwest, combined with a widespread decline in flying,made the business plans of most major
airlines insupportable. All major airlines except
Southwest saw huge losses in 2001 and 2002. As
of 2003, it was not clear who would survive this
latest shakeout or what the future of the airline
industry would be.
FURTHER READINGS
Dempsey, Paul Stephen. 2003. “Aviation Security: The Role
of Law in the War Against Terrorism.” Columbia Journal
of Transnational Law (spring).
Schroeder, Kristin Buja. 2002. “Failing to Prevent the
Tragedy, but Facing the Trauma: The Aviation Disaster
Family Assistance Act of 1996 and the Air Transportation
Safety and System Stabilization Act of 2001.” Journal
of Air Law and Commerce 67 (winter).
Schwieterman, Joseph. 2002. “From Consolidation to Crisis:
The Airline Industry in Transition.” DePaul Business
Law Journal 14 (spring).
Stempel, Jeffrey W. 2002. “The Insurance Aftermath of September
11: Myriad Claims, Multiple Lines, Arguments
Over Occurrence Counting, War Risk Exclusions, the
Future of Terrorism Coverage, and New Issues of Government
Role.” Tort and Insurance Law Journal 37
(spring).
CROSS-REFERENCES
Aeronautics; Carriers; Labor Union; National Transportation
Safety Board; Sherman Anti-Trust Act; Unfair Competition.