The Distortionary Effects of Stringent Employee Hours-of-Service Regulations on the U.S. Airline Industry

Abstract

Maximum employee work-hour restrictions are implemented to reduce accidents. However, because they decrease the stock of work-hours available to employers, they may also have detrimental effects. A quasi-experiment suggests that pilot hours-of-service reforms, which decreased the number of flights and hours a pilot may work, reduced consumer choice and increased fares in the airline industry. We find that regional and low-cost carriers reduced scheduled flight frequency, while less constrained legacy carriers (and potentially their wholly owned subsidiaries) were unaffected. Further, we find evidence that market concentration increased on many routes, implying that fare increases may be due to a decrease in competition. These findings illustrate a situation where a policy implemented to correct one market failure, airlines not internalizing the full social costs of accidents by allowing dangerously fatigued pilots to fly, exacerbated another market failure by decreasing competition.