Air deregulation revisited: Choice of aircraft, load factors, and marginal-cost fares for domestic air travel

Abstract

If airline deregulation is working as predicted, then fares should fall to marginal costs. This paper computes such optimal fares, allowing for a wide variation in point-to-point distance, traffic, and available aircraft type. It is shown that marginal-cost fares are exceeded by average carrier costs. This implies an unpleasant dilemma: either the industry is naturally destructive (if the returns are internal to firms) or else the sustainable industry configuration is less than welfare-optimal. In the latter case, the possibility of a Pareto-improvement with a judicious form of re-regulation cannot be ruled out. In light of this, a certain amount of caution about the results of deregulation is suggested.