Airline Regulation and Service to Small Communities

Abstract

One major point of contention in the debate over deregulating the U.S. domestic airline industry is the effect of deregulation on service to small communities. Opponents of deregulation suggest that U.S. Civil Aeronautics Board (CAB, the Board) regulation has induced airlines to offer unprofitable services to small communities that the carriers would not provide in the absence of regulation. Ending of regulation would thus cause loss of air service to numerous cities, in their opinion.' Proponents of deregulation believe that the role of regulation in preserving such services has been overstated. Their misgivings stem in part from the analyses of White [1972] and Douglas and Miller [1974], that demonstrate that CAB cross-subsidy schemes designed to subsidize unprofitable services may be undone by quality competition,2 and in part from the observation that more than three hundred cities have lost their CAB-regulated airline service in the past three decades.3 Given this disagreement, there is a need to clarify the role of regulation in preserving services to small communities. Several studies have examined aspects of the issue. Eads [1972] provided an excellent analysis of the effects of regulation on the development of the local service airlines, but addressed the ne major point of conte ion in the question under consideration only in passing. The CAB's Service to Small Communities [1972] investigated the before-subsidy profitability of the local service carriers' services to small communities and explored alternatives to the current local service subsidy program. The U.S. Department of Transportation (DOT) [1976a, 1976b] reported the extent of abandonments of small communities by CAB-regulated carriers and scrutinized the provision of small com-