What has happened to airline operating expenses Since deregulation?

When airline deregulation was adopted in October 1978, the performance of the regulated trunk, local service and Alaskan/Hawaiian airlines (the original carriers) differed substantially from that of the four intrastate carriers whose operations solely within California, Florida or Texas had not been subject to the regulation of interstate air transportation by the Civil Aeronautics Board. One of these differences was the substantially lower total operating expenses per revenue ton-mile (RTM) of the intrastate carriers compared with that of the original carriers after adjusting for the effects of distance. Proponents of deregulation predicted that without regulation a number of new low-cost carriers would enter the interstate industry and the resulting competition would motivate the original carriers to reduce their operating expenses per RTM. This paper examines what actually happened in this regard between 1978 and 2005. There are three parts to this issue. First, did the original carriers’ distance-adjusted total operating expenses per RTM (measured in constant 1978 dollars) decrease after 1978? Second, were most of the 133 new airlines that entered the industry actually low-cost operators relative to the original carriers, or were many relatively high-cost operators? Third, in general, did the differences in distance-adjusted operating expenses per RTM between the two groups become smaller or larger over time? That is, did their operating expenses per RTM converge or diverge under deregulation? The evidence in this paper supports the prediction that the original carriers’ operating expenses per RTM did decrease. However, while most of the new carriers were low-cost carriers, many proved to be relatively high cost – some by design and others unintentionally. Finally, while the evidence is not clear-cut, it does imply that there has been some convergence in the operating expenses per RTM of the original carriers and the new-independent carriers.