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Alfred Kahn: Father of Airline Deregulation Essay

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Updated: May 7th, 2022

Alfred Kahn helped in the deregulation of the airline industry. Deregulation led to a significant increase in competition in the industry. However, Kahn’s efforts faced stiff resistance from parties that strived to protect the status quo. Increased competition threatened to lead to significant reduction in the fares and profitability of airlines. Therefore, most airlines opposed deregulation of the airline industry. They preferred to develop by reducing competition. However, this was not beneficial to the customers. This measure only benefited the airlines. However, regulation would force companies to compete based on pricing and quality. In a regulated market, airlines could only compete using the quality of their services. Therefore, deregulation increased the dynamics of competition in the industry. This is more beneficial to the customers. However, deregulation led to the rise of several problems. It forced companies to strive reduce empty seats in airplanes. This increased congestion. In addition, deregulation led to the limited re-emergence of monopolies. However, the monopolies only exploit a few customers. Deregulation of the airline industry was very successful. People can now travel at fares that were previously unthinkable. In addition, deregulation led to increased competition, which created more jobs. This would not have happened were it not for the efforts of a few people who championed deregulation. Alfred Khan is one of the people whose efforts led to the deregulation of the airline industry (Bier, 2003).

Kahn used the marginal cost economic theory to support deregulation. According to the marginal cost theory, the cost per unit of production is usually lower when there is production of large quantity of units. This is because companies can make use of economies of scale to reduce their cost of production. Khan’s enthusiasm for deregulation of the airline industry was due to his economic background and experience as chair of the New York Public Service Commission (NYPSC). Kahn initially resisted President’s Carters appointment as the chair of Central Aeronautics Board (CAB), citing the lack of regulation in the industry. However, Carter finally accepted the appointment after getting the assurance of the president that there would be deregulation of the industry (Bier, 2003).

When Kahn became the chair of CAB, the airline industry was highly regulated. CAB fixed the prices and routes of airlines. Regulation reduced competition as companies could only compete based on the number of flights they had and on-board comfort. Most aircrafts flew half-full. Kahn set forth to implement various laws that would lead to deregulation of the industry. Kahn faced stiff resistance from companies, pilots, and labor unions. These parties were of the opinion that deregulation would be harmful to the industry. However, this did not reduce Kahn’s resolve to deregulate the industry. Kahn viewed planes as marginal costs with wings. Therefore, it was vital to ensure that price was the major factor that influenced competition in the industry (Anon, 2011).

As Kahn was facilitating the deregulation of the airline industry, he did not know what would be its repercussions. However, Kahn was sure that deregulation would lead to reduced fares to customers. This was his main driving force. Despite being the author of two renowned books on economics, Kahn was yet to test his hypothesis that marginal costs would lead to a significant reduction in fares in real life. Deregulation ultimately led to significant reduction in fares that airlines charged. By 1986, 90% of Americans had flying discounts. The reduced fares enabled Americans to save $90 billion annually. In addition, deregulation opened up the airspace to more Americans. This is because customers could now afford the reduced fares. However, deregulation led to mergers, predations, and bankruptcies of airline companies (Anon, 2011). Kahn took a stand that was contrary to the stand of major players in the industry. Kahn had not anticipated the resistance he may face in deregulating the airline industry. This is because the airlines projected that deregulation would lead to significant reduction in their profitability. However, in dismissing their complaints Kahn claimed that he only wanted to protect the interests of the consumer. This is despite the fact that it may harm the industry. The stiff resistance from the airlines is a testimony that it is impossible to have competition that caters for the welfare of the public if there are many restrictive regulations. Deregulation would increase competition, which would greatly benefit the consumer. However, Kahn had the support of the Consumer Federation of America. The Consumer Federation of America supported Kahn’s deregulation efforts, as they would benefit consumers. Deregulation reduced the responsibilities of CAB. This led to the ultimate disbandment of the board.

Deregulation of the airline industry paved the way for the deregulation of other industry. Some of these industries include transport, telecommunications, trucking, and energy. Deregulation of these industries reduced the probability of formation of monopolistic markets. A free market enabled the consumers to benefit from increased competition. This ultimately benefited the consumers. Despite the huge impact of deregulation of the airline industry, Kahn does not like giving himself credit for deregulation of the industry (Bier, 2003).

References

Anon. (2011). Alfred Kahn: Alfred Kahn, deregulator, died on December 27th, aged 93. The economist. Web.

Bier, V. (2003). Effects of deregulation on safety: implications drawn from the aviation, rail and United Kingdom nuclear power industries. London: Springer.

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