Moving Ahead

The past three decades have seen remarkable deregulation of the airline, air freight, trucking, and rail industries.

Thomas Gale Moore

Senior Fellow

Hoover Institution

One-quarter of a century ago, the Federal Government regulated the US transportation system with a heavy hand. The Civil Aeronautics Board (CAB) controlled the airline industry: it supervised entry, mainly by prohibiting any new carriers, and fixed rates, generally at whatever level the industry deemed necessary. Routes were strictly controlled and the CAB rarely permitted airlines to compete in new markets. In similar fashion, the motor carrier industry was under the thumb of the Interstate Commerce Commission, which also barred new trucking or bus firms. As with airlines, rates were controlled at levels requested by the industry and routes were subject to tight restrictions.

This paper summarizes the major changes in policy that have taken place over the last quarter of a century, then outlines outstanding policy issues that should be addressed in this new Millennium. Although there are many similarities and feedbacks from policy dealing with airlines to policy dealing with surface transportation, they will be treated separately.

Surface Freight Transportation

Beginning with the 1950s, a series of academic studies showed that regulation, rather than protecting the public was protecting the industry, leading to higher rates and poorer service. In 1962, President Kennedy recommended that Congress reduce regulation of surface freight transportation. In 1971, the Department of Transportation proposed reducing controls over the trucking industry; but, because of Teamster opposition, the White House refused to back the bill. In 1976, the fear that the government would have to nationalize the whole railroad industry, engendered by the bankruptcy of the Penn-Central Railroad, led Congress to pass the Railroad Revitalization and Regulatory Reform Act (the 4-R Act). This legislation provided railroads with new but limited freedom in pricing. Unlike the motor carrier industry, the railroads supported deregulation. This act was the first transportation deregulation bill to ever to be enacted. Unfortunately for the industry, the Interstate Commerce Commission’s strict interpretation of the law provided little benefit.

In November 1975, President Gerald Ford proposed legislation to reduce trucking regulation. Although Congress gave the bill no support, the President appointed three new members to the ICC, Betty Jo Christian, Robert Corber, and Charles L. Clapp, who were sympathetic to the President’s view. Together with Daniel O’Neal, appointed by Richard Nixon, they changed the orientation of the ICC towards a more competitive policy. Starting in June 1975, the Commission was modifying ICC rules to encourage more competitive behavior. President Jimmy Carter promoted Daniel O’Neal to chairman, giving the pro-deregulation group more clout. For the first time, the Commission began to approve a significant number of applications for new authority.

In 1977, following successful hearings on competition in the airline industry, Senator Edward Kennedy, chairman of the Senate Judiciary Committee subcommittee on antitrust and monopoly held additional hearings on motor carrier regulation. His legislative assistant, Stephen G. Breyer, now a Justice of the Supreme Court, oversaw those hearings. Both hearings documented the high cost to consumers of the regulation of these highly competitive industries.

In the spring of 1979, the ICC exempted the carriage by rail of fresh fruits and vegetables from regulation, giving railroads the same freedom that truckers had long had enjoyed. In the same year, the ICC dropped restrictions on motor contract carriers that prevented them from competing with common carriers, expanded zones that were free of federal controls, and announced that it would take rates into consideration in approving new operating rights. In May, a commission established by Chairman O’Neal proposed relaxing entry standards for much of the interstate trucking business. The commission also proposed freeing rates for a significant portion of the trade.

Given the weak financial position of the railroads and the likelihood that, if something were not done, the government would have to take them over, President Jimmy Carter in 1979 sent a bill to Congress to deregulate the rails over the next five years. It would have allowed the companies to set their own rates and abandon unprofitable lines.

Facing the prospect of deregulation by the Commission on its own, the industry and Congress felt they must act. Even though the trucking industry, the Teamsters Union, and many in Congress were disturbed by the prospect and did their best to slow or stop the momentum towards a more competitive motor carrier industry, Congress in 1980 acted to partially deregulate the industry. Decontrol of the trucking industry, in turn brought additional pressure on the rail carriers. Given the prospect that the railroads would have to be nationalized unless something were done, in the fall of 1980, Congress passed the Staggers Act to provide additional pricing and route abandonment freedoms to the industry.

The 1980 Motor Carrier Act did not fully remove federal oversight. Truckers were still required to file rates, which inhibited free pricing, since their competitors could quickly match lower rates. New entrants were still required to secure a license from the Interstate Commerce Commission but requirements were greatly liberalized. Prior to the 1980 Act, an applicant for new authority had to prove the “convenience and necessity” of the new service; the new provisions required opponents to show only that the new service was “inconsistent with the public convenience and necessity.”

The Staggers Act gave railroads new freedom to set prices within wide limits. Rail lines could enter into contracts with shippers to carry goods at agreed upon rates. Tariffs could not be considered unreasonable, even for “captive” shippers, unless they exceeded 180 percent of variable costs. To qualify as “captive,” shippers also had to prove that there was no effective competition, a provision designed to protect coal, chemical, and other bulk commodity shippers. Railroads were also given new authority to abandon routes.

During the 1980s there was some talk of removing these remaining regulations, but only with the advent of the Clinton Administration were they removed and the Interstate Commerce Commission abolished. In its place Congress established the Surface Transportation Board as part of the Department of Transportation.

The Surface Transportation Board (Board) was established on January 1, 1996, as an independent body housed within the U.S. Department of Transportation (DOT), with jurisdiction over certain surface transportation economic regulatory matters. Its authority is largely confined to railroad pricing and merger issues. The Act abolishing the ICC eliminated various regulatory functions, transferred licensing and certain non-licensing motor carrier functions to the Federal Highway Administration within DOT, and transferred remaining rail and non-rail functions to the Board. This act also effectively deregulated intra-state controls over motor carriers, which had been blocking a fully competitive trucking industry.

Deregulation Results:

From 1980 to 1995, in the spirit of these acts, the ICC continued its efforts to decontrol surface transportation industries with highly successful results. Deregulation of the trucking industry, which, as mentioned above, was completed only in the 1990s, resulted in lower rates and better service to shippers but lower wages for truck drivers as the Teamsters Union lost power. Trucking licenses, which had commanded a high price — as much as millions of dollars — declined significantly to a few thousand as the ICC made new licensing relatively simple and easy. Even though bankruptcies increased, the number of licensed trucking firms increased sharply in the first few years of deregulation.

Standard & Poor's found that the cost of shipping by truck had fallen by $40 billion from the era of regulation to 1988. Improved flexibility enabled business to operate on the basis of “just-in-time delivery,” thus reducing inventory costs. The Department of Transportation calculated that the outlays necessary to maintain inventories had plummeted in today's dollars by more than $100 billion.

The Staggers Act, which, as described above, had partially freed the railroads, was highly beneficial for the carriers as well as for shippers. The rail industry withstood well the sharp recession of 1981-82, and enjoyed record profit levels in 1983, notwithstanding a sharp drop in revenue per ton-mile. By 1988 railroad rates had fallen from 4.2 cents per ton-mile in the 1970s to 2.6 cents. As chart 1 shows, since 1984 rail rates have continued to fall, declining over the following fifteen years by 45 percent. Competition and the Staggers Act have been a great success.

Chart 1

Rail Rate Index (adjusted for inflation) 1984=100

Source: Surface Transportation Board

The Office of Economics of the Surface Transportation Board reported in its 2000 Rail Rate Study that “numerous academic studies have confirmed that rail economic regulatory reform resulted in significant economic efficiency benefits, most notably rapid productivity growth, that enabled railroads to become financially stronger while lowering average rate levels.” The study goes on to assert that shippers saved over $30 billion in 1999.

Airline Deregulation

Airline deregulation followed a similar pattern. A number of academics pointed out that the industry was inherently competitive and that regulation, rather than protecting the public, was forcing it to pay excessively high prices. The Senate Judiciary Committee held hearings on airline regulation. Testimony showed that two intrastate air carriers, Pacific Southwest Airlines (PSA) and Southwest Airlines, which were free of federal control, provided cheaper and often better service than the carriers regulated by the Civil Aeronautics Board (CAB).

Under the leadership of Chairman John Robson, appointed by President Ford, the CAB examined the effects of regulation and concluded that reducing federal oversight would benefit passengers. Jimmy Carter continued the emphasis on fewer controls by appointing Alfred Kahn as chairman and Elizabeth Bailey as a new member. The result was a board dedicated to reducing regulation.

In 1976, the Board relaxed its restrictions on charter carriers, which offered significantly lower fares than the traditional airlines, allowing them to sell tickets in advance. Seeing its market from East Coast to West Coast erode, American Airlines petitioned to reduce fares sharply for a limited number of seats. These “Super-Saver” fares, approved in the spring of 1977, created a surge of traffic between San Francisco and Los Angeles to New York. Given this success in greater pricing flexibility, the CAB continued to approve virtually all requests to offer lower fares. In that same year, the Board began to give carriers greater freedom to enter and leave new routes and looked with favor on proposals to provide new service at lower fares.

While passenger airlines were receiving greater authority to compete, Federal Express was lobbying to open up freight air traffic. The CAB had granted it only a commuter license that limited FedEx to small aircraft, restricting its ability to compete. It wanted authorization to fly large aircraft to and from any state or city in the country. In 1976, the Civil Aeronautics Board under Chairman Robson had recommended that airfreight transportation be largely deregulated. With support for less federal control from other freight carriers and no visible opposition, President Jimmy Carter, in November of 1977, signed H.R. 6010 that deregulated airfreight transportation.

Although little attention has been paid to the abolition of airfreight regulation, it has been hugely successful. Prior to deregulation, airfreight had been growing around 11 percent per year. In the first year of decontrol, 1978, revenue ton-miles jumped by 26 percent. This early success helped build support for exempting passenger transportation from control.

The success of airfreight transportation deregulation, combined with the obvious intention of the CAB to decontrol, the reduction of fares, and the increased profitability of the airlines under looser regulation, led Congress to pass, in October 1978, the Airline Deregulation Act. This legislation eliminated federal control over routes by December 1981 and over fares by January 1983. The CAB itself was abolished at the end of 1984. The new law authorized airlines to abandon routes but established an Essential Service Air Program to provide subsidies for service to small communities.

Over the next six years, 17 new carriers entered the market; four intrastate carriers started offering interstate service; two charter companies switched to scheduled service. At present, twenty-three years after Congress decontrolled the industry, 32 carriers fly scheduled service, although some of these are subsidiaries of other airlines. This compares to 10 trunk airlines and 5 offering local service in 1978. Of the major carriers today, only America West is a totally new airline; but prior to 1978 two — Southwest and Aloha — were intrastate carriers and one — Alaska — was primarily a charter airline. Of the 10 trunk carriers operating in 1978, Eastern, Trans World, Pan American, Western, and Braniff have either gone out of business or been bought by another carrier. As the following table shows, the market share of the major airlines has changed greatly.

Airline Market Share before deregulation and in 2000

Airline	1978 Market Share	2000 Market Share	Change
United	19.6%	12.3%	-7.3%
American	13.9%	12.2%	-1.7%
Delta	11.6%	16.1%	4.5%
Trans World	9.2%	0	-9.2%
Continental	5.2%	6.5%	1.3%
Western	4.7%	0	-4.7%
Pan American	4.7%	0	-4.7%
Northwest	4.6%	8.3%	3.7%
Braniff	3.7%	0	-3.7%
US Air	2.1%	9.2%	7.1%
Southwest	~0.5%	11.5%	11.0%

The most striking change has been the growth of Southwest, which has gone from an insignificant share of the market as an intrastate carrier confined to Texas before deregulation to the fourth largest airline in the US. United Airline’s decline is almost as striking. From the dominant position as the largest air carrier, its share has dropped to a virtual tie for the second largest.

As chart 2 below shows, the effect on the market value of the various airlines has been remarkable. Southwest has gone from virtually “zero” to a market capitalization of over $14 billion. On the other hand, United’s market value has declined hugely in real terms to less than three-quarters of a billion dollars at the end of 2001. However, the total valuation of the major airlines today is more than double that of all the trunk and regional carrier together in 1976, before any deregulation. It is even 45 percent more than in 1983. Although some of the carriers, such as United, Northwest, TWA, and Pam Am, have suffered or even gone out of business, the industry has done well.

Chart 2

As for passengers, the percentage traveling on discount fares has increased hugely. In 1976, on long flights, only 27 percent of those flying in coach between major metropolitan areas managed to get a discount ticket; by 1983, 73 percent were getting special fares. Virtually all passengers today, except for a handful of business travelers, are paying less than the full coach fare. From 1977 to 1996, after adjusting for inflation, airfares have fallen some 40 percent. Chart 3 shows how the average fare has declined since the early 1970s. The Federal Trade Commission estimated in 1988 that, after adjusting for fuel costs, the flying public was paying 25 percent less because of deregulation. Stephen Morrison, Professor of Economics at Northeastern University, calculated that deregulation produced a net benefit, in 2001 dollars, of about $15 billion, most of which was in the form of lower prices for consumers.

On the other hand, these lower fares have boosted load factors — from 49% in 1976 to 58% in 2000 — meaning that travelers are finding planes and airports far more crowded. Higher load factors, however, make it possible for the airlines to make money at these lower prices. Over the quarter of a century since deregulation, the number of passengers flying has roughly doubled while passenger miles have nearly tripled, proving the success of deregulation.

Chart 3

Chart taken from statement of Steven A Morrison before the Committee on the Judiciary,

United States House of Representatives, November 5, 1997.

Further Reform

Although great progress has been made in reducing regulation of transportation, further steps would improve the US system. Currently the motor carrier industry is subject to no economic controls; consequently there need be no change in policy. The restrictions on Mexican truckers should be lifted, but this is mainly a trade and protectionism issue. On the other hand, railroads are still subject to some price controls, limits on abandonment, and control over mergers. Rail passenger service, particularly Amtrak, has been a problem ever since it was established in the 1970s. Government limits over air passenger transportation continue through cabatoge restrictions, FAA administration of air traffic controllers, and government ownership of airports. Finally, as a result of September 11, security considerations have burgeoned, making air travel more expensive, more time consuming, and perhaps safer.

Railroad Freight Reform

Today the rail industry remains the most closely supervised mode of transport with limits on abandonment, on mergers, on labor usage, on ownership of other modes, and even, in certain situations, on pricing. The Surface Transportation Board oversees the rail industry and administers the Staggers Act, under which the Board must insure that rates charged to “captive shippers” are fair.

Under federal law, the STB can exempt railroad traffic from rate regulation whenever it finds such control unnecessary to protect shippers from monopoly power or wherever the service is limited. Congress has legalized individual contracts between shippers and rail carriers, allowing competitive pricing. The Staggers act authorizes railroads to price their services freely, unless a railroad possesses “market dominance.” Congress continued a prohibition on intermodal ownership and required the maintenance of labor protection.

All rail mergers, for example, require Board approval; once given the green light, however, those mergers are relieved from challenge under the antitrust laws or from state and local legal barriers. Railroads face a stringent review by the Board that, in addition to general antitrust considerations, includes the effect on other carriers, the fixed charges that would arise, and the effect on employees. In particular, the Board must by law provide protection in any consolidation for employees who might be adversely affected. The latter provision is very popular with rail labor unions; the industry views it as employment protection that makes achieving significant savings from mergers difficult.

Under current law, railroads must seek Board permission to abandon lines, build new track, or sell any service. Since users and other interested parties employ the law to slow or even block change, adding to costs, those rules should be repealed. If Safeway, for example, wants to close a store, sell it, or build a new one, we are all very fortunate that it need not seek approval from government functionaries. The same freedoms should be allowed the transportation industries.

Federal law also enjoins the Surface Transportation Board to regulate rates charged “captive shippers” — those that can ship only by one line and enjoy no satisfactory alternative. Coal and grain companies have exploited this provision to gain lower rates. The markets for coal and grain are highly competitive, so the producers cannot sell their output at more than the market price. Consequently a railroad that drives shipping costs up to the point where the cost of producing the coal or grain and the cost of moving it exceeds the competitive price will find that it has no traffic. In other words, although the railroad has no direct competition, it, too, is constrained by the market.

If a coal company enjoys significantly lower costs because of a favorable location or a rich and easily exploited mine, it could reap higher profits than less favorably sited enterprises. However, if the mine has only one option for shipping its product, that is, a single railroad, the rail carrier will be able to secure much of that above normal profit. In that case, the stockholders of the railroad will gain at the expense of the stockholders of the mining corporation. There exists no rationale for the government to intervene by favoring one company over another. The captive shipper clause must go.

Congress should also change swiftly another clear anachronism, the ban on railroads’ owning trucking companies or certain water carriers. Federal regulations proscribe railroads from owning trucking firms, although the Board and, in earlier decades, the ICC has granted many exceptions. From the time of building the Panama Canal, the Interstate Commerce Act has prohibited railroads from possessing water carriers that ply that waterway. Early in the twentieth century, the public believed that those huge companies needed the competition of water carriers to keep down transcontinental rates. Like the prohibition on ownership of water carriers, the ban on owning trucking firms stems from the same unwarranted fear of railroad power. With the plethora of options available to shippers today, such rules are totally unnecessary. The restrictions simply limit the ability of railroads, trucking firms, and water carriers to offer the most efficient multimodal services.

The Staggers Act authorized railroads to negotiate contracts with shippers but only with government approval. In addition, all rates must be filed with the Board and tariffs that are either “too high” or “too low” can be disallowed. Congress should repeal these vestigial regulatory powers. At best they add to paperwork and to the cost of operation; at worst they slow innovation and reduce competition.

Amtrak

The Surface Transportation Board retains jurisdiction as well over passenger transportation by rail. In particular it arbitrates between Amtrak and freight railroads, which own most of the track used by the government-owned passenger railroad. Ideally, Congress should privatize Amtrak and let it negotiate with freight railroads over its use of trackage. Assuming that a mutually profitable arrangement exists, private arrangements will develop.

In 1997, given the dismal financial performance of Amtrak, Congress gave Amtrak $2.2 billion to modernize its system under the stipulation that it would be operating without federal aid in five years. Congress established the Amtrak Reform Council (ARC) to draw up a plan to reconstitute rail passenger transportation if the government railroad was unable to eliminate its constant deficits. In November 2001, the ARC determined unanimously that, in the words of Chairman Carmichael Friday, the passenger train company had “failed terribly. It hasn’t produced a modern system, it’s done a lousy job of raising money and the Northeast Corridor, the one corridor it controls, is far behind on maintenance and improvements.”

The Council has recommended to Congress that Amtrak be broken up and competition be introduced. A new company would own the Northeast Corridor infrastructure and other Amtrak properties while a second company would operate the trains. Amtrak itself would manage rail passenger franchise rights, secure funding from Congress, and oversee performance. Eventually certain corridors would be franchised to private companies or to the states. There would be no expectation that passenger transportation could be made profitable. In fact, the ARC’s plan would simply waste more of the taxpayers’ money.

Over thirty years Amtrak has already spent some $25 billions of taxpayers’ moneys in an effort to turn itself into a self-sustaining enterprise. Last year Amtrak asked for $3.2 billion to cope with new business. Even this money, the Council believes will still not result in a company that can pay its bills free from subsidy. The report of the Council to Congress finds that rather than moving towards self-sufficiency, Amtrak is weaker financially today than it was in 1997. It singles out long-haul trains as inherent money losers that under any circumstances will have to be subsidized or abandoned.

Congress should face the facts: passenger rail transportation cannot be made profitable, except in a few corridors, such as between Washington and New York and perhaps Boston. That portion of the system can probably cover its operating costs but most likely will be unable to cover its capital costs. With a few minor exceptions, passenger rail is not profitable anywhere in the world; there is no reason to believe it can be made profitable here. The appropriate policy would be to auction off the assets of the current system, favoring investors who would attempt to continue some passenger service. It seems likely that the East Coast corridor between Washington and points north would survive, albeit with a lower paid workforce. If all union contracts and employees are kept, as the ARC recommends, the system can only survive with taxpayers’ funds.

The infrastructure of the Northeast Corridor, which Amtrak currently owns, has been allowed to deteriorate. According to the Council’s Action Plan the Northeast corridor infrastructure is in need of about $1 billion annually in capital funds. The Council’s solution is to set up another government corporation to manage it and make the needed investments. The ARC recognizes that this entity will be unable to fund its capital needs. Large federal or state subsidies will be required. Government corporations, such as Amtrak and the Post Office, are notoriously poor at keeping costs down and operating efficiently. The corridor’s tracks and infrastructure should either be sold to the private sector or sold back to the freight railroads, which are its main users. If any state or states should wish to buy parts of the existing system, the Federal government should gladly let them have them.

Air Travel Reform

Although airline deregulation has been a great success, the industry has been plagued with crowding, delays, and, on some routes, dominance by a single carrier. The causes lie in the failure to deregulate other essential features of the industry. The Air Traffic Control system, in particular, remains a ward of the FAA. Government entities own virtually all airports. The recent move to federalize airport security will add more government bureaucracy without adding more security.

Air traffic control

The Federal Aviation Administration (FAA) runs the current air traffic control system (ATC). Since it is a government agency, annual Congressional appropriations control its finances. Its rules follow normal bureaucratic practices with Congressional committees looking over its actions. Moreover, the FAA, charged with providing safe transportation, must regulate itself, a major conflict of interest.

Being a government agency, it has been unable to bring on line quickly new technologies that would improve safety and reduce delays. While computer technology changes every year or two, the FAA’s procurement policies require five to seven years to complete. It still has 1960 era mainframe computers, equipment that depends on vacuum tubes, and obsolete radars. As a consequence, equipment breaks down frequently and planes must be spaced farther apart than would be necessary with state-of-the-art computers and radars.

Congress has held numerous hearings and put great pressure on the FAA to modernize but has been unable to improve matters significantly. To create and maintain a modern system, air traffic controls must be separated from the FAA. The Clinton Administration recommended a government corporation to run the ATC system; but another government corporation, like the Post Office or Amtrak, although it would probably be an improvement over the current arrangement, is not the solution,.

A fairly large number of other countries — Canada, the Czech Republic, Germany, Latvia, New Zealand, South Africa, Switzerland, Thailand, and the United Kingdom — have wrestled with this problem and have found that separating the ATC system from government oversight while maintaining government safety regulations works well.

Although no country has fully privatized its ATC system, Canada has created a private non-profit corporation owned by the users. Its system has successfully reduced delays. The other free-standing ATC systems are at least partially government owned. Given the restrictions that the Federal government puts on its government owned corporations, such as Amtrak and the Post Office, it would be preferable to follow Canada’s example by establishing a non-profit corporation owned and controlled by airlines and other users of the ATC system.

Most of these systems are funded through user fees. The problem that arises is what to charge general aviation. Since the FAA currently subsidizes general aviation, its owners and pilots oppose any notion of a freestanding corporation dependent on user fees. Nevertheless, client pay is a good rule. Noncommercial general aviation pilots, who typically fly single-engine planes, should be charged only when they file a flight plan or land at an airport with a control tower. Commercial general aviation planes, such as corporate jets, should pay their share of the costs of the system.

The government should maintain its oversight of a non-profit ATC system, if for no other reason than to reassure the public of its safety. By having a private company operating the system under the supervision of the FAA or some other agency, the existing conflict of interest between the mandate of the FAA to promote air travel and to ensure the safety of the system will no longer exist.

Airline Cabotage

If public policy is based on a competitive market in air transportation, as we all believe it should be, it is time for the US to drop its restrictions on foreign ownership and operation of air carriers. Under current law, non-Americans can own no more than 25 percent of the voting stock of US airlines. America has no similar restrictions on investment in steel, autos, or most other industries. There is no reason to make an exception for the airlines. Other private carriers should be free to invest in the United States. At the moment, several US carriers are in financial difficulties. Purchase by a healthy foreign airline would make great sense, bringing new capital and new competition to the American market. Virgin Atlantic Airways, for example, is interested in building a low-cost US carrier to feed its international service.

At the same time the longstanding policy of negotiating “open skies” agreements with other governments should be based not on what US carriers get out of the agreement but on the benefits to American travelers. Cathy Pacific, based in Hong Kong, to give another example, could offer improved service and competition both in the domestic market and internationally. British Air might invest in US Air to provide nationwide service connecting to Europe. The introduction of such foreign carriers would strengthen competition in the American market bringing additional benefits to travelers.

Airport Privatization

Because the Airport and Airways Trust Fund moneys have been available only to government-owned airports, private airports are ineligible for any of the funds that are raised from taxes on fuel and passengers. Since those airports eligible for grants are subject to federal appropriations, even state and local government owned airports cannot plan and count on money from the trust fund. Rep. James L. Oberstar, Ranking Democratic Member of the House Transportation and Infrastructure Committee, highlighted the problem recently when he said:

Fifty-five percent of the daily flight operations in the world take place in the United States, yet we are not improving and expanding our airports fast enough to meet the growing demand for air travel. In 1987, 20 airports in this country reported delays totaling 20,000 hours or more. Ten years later that number grew to 27. Unless we address the capacity problem at our airports, the number is projected to reach 31 by 2007.

Repealing the federal taxes on aviation and allowing airports to impose their own fees, which could vary by time of day to reflect peak use, would give airports incentives to expand their capacity and introduce technologies that would reduce delays.

Airport Security

September 11 sharply increased the public’s demand for greater security at airports. The federal government responded, after considerable wrangling in Congress, by federalizing the security personnel at all major airports. The bill passed requires all airports, except for a pilot program for five of them, to use federal employees, who must be American citizens, to screen passengers and luggage. Those security personnel would be employed by the Department of Transportation but presumably would not enjoy the security of civil service workers. One airport from each of five size categories, from biggest to smallest, will experiment with private screeners supervised by federal employees. After three years, all airports could opt out of the program and use private screeners overseen by federal agents.

The government, not the screeners, was responsible for the terrorists’ attacks. The knives the hijackers used were legal under federal rules. The INS allowed those men into the United States and failed to expel them when their visas expired. Government workers are not noted for their diligence or efficiency. In Europe and Israel, private companies perform the security checks. Federalizing the screeners may produce less security than we enjoyed before September 11. Although the legislation specified that the new federal employees would not have the same civil service protections as other Department of Transportation employees, there will be a tendency over time to give them more employment security. Already there are efforts to allow aliens to remain as security guards. Firing incompetent workers will be much more difficult under this legislation than it was when private companies managed security. What is changing is not the nature of the security personnel but their employer.

Concluding Thoughts

Transportation is inherently competitive. Following elimination of most of the economic controls on trucking, railroads, and airlines, those industries have flourished. Although the performance of these sectors has improved greatly since the 1970s when the federal government controlled entry, rates, and routes, problems remain. Those difficulties stem in part from the success of deregulation, which, in the airlines, has democratized air travel while the infrastructure has remained in government hands.

Decontrol of these industries has demonstrated that the market works much better free from government controls than with government oversight. We need to apply that lesson to the remaining problems and remove federal ownership and control from administration of air traffic control, the airports, and the security system. The government should free the freight railroads from the remaining constraints on that industry. Finally, the government should recognize that passenger rail transport is never going to be profitable, especially when run by the government. Only the private sector can possibly run a profitable passenger train system and then only if free from government controls on labor and pricing.

Readings

“Rail and Trucking Deregulation” by Thomas Gale Moore in Regulatory Reform: What Actually Happened, eds Leonard W. Weiss, Michael W. Klass 1986 Boston: Little, Brown and Company.

“Clearing the Track: The Remaining Transportation Regulations.” Regulation by Thomas Gale Moore. 1995 Vol 18, No. 2.

Airline Deregulation: The Unfinished Revolution, by Robert W. Poole, Jr., and Viggo Butler, Reason Public Policy Institute and Competitive Enterprise Institute, March 1999.

Reinventing Air Traffic Control: A New Blueprint for a Better System by Robert W. Poole, Jr. and Viggo Butler, Reason Foundation, Policy Study No. 206, May 1996.

Intrastate Trucking: Stronghold of the Regulators by Cassandra Chrones Moore, Policy Analysis, Cato Institute, February 1994.

20^th Anniversary of Airline Deregulation: Cause for Celebration, Not Re-Regulation by Adam D. Thierer, Backgrounder, The Heritage Foundation, April 22, 1998.

“Changes in railroad rates since the Staggers Act” in Transportation Research Part E, by Scott M. Dennis, 2000.

An Action Plan for the Restructuring and Rationalization of the National Intercity Rail Passenger System, A Report to Congress, by the Amtrak Reform Council, February 7, 2002.

Opening U.S. Skies to Global Airline Competition, by Kenneth J. Button, Cato Institute, November 24, 1998.