The idea of regulating the transportation industry was initially thought of as a means to ensure price stability and control market practices to protect carriers and companies alike, and the vested interest of the nation from the free market mechanism. During 1887 the Interstate Commerce Commission (ICC) was passed to regulate the railroad industry to prevent price competition, and rebate and discounts offering typically associated with competitive free-market enterprise. As railroad regulation began to strengthen, government subsidies were provided to keep the ailing industry afloat as it became evident that the trucking industry was becoming a strong competitive rival. In a bid to sustain the railroad industry, the Transportation Act of 1920 was passed which mandated the ICC to provide a ‘fair rate of return’ practices amongst railroad companies, while congress was urged to regulate the trucking industry which saw the passage of the Motor Carrier Act of 1935 (Moore, 2008)
During the regulation of the transportation industrial complex, the airline industry was not left out. This transportation industry was highly regulated similarly in response to parallel mechanisms that had prompted the emergence of regulatory practices and confinements in other industries (Joskow, 2005). The passage of the Civil Aeronautic Act of 1938 closely replicated similar characteristics associated with the surface transportation restricting entry, discouraging price competition and providing government subsidies as a control mechanism. Subsidies were provided to ensure stability, sustainability and affordability of services rendered in the industry preventing price and general market competition. These regulatory provisions at the time were highly favored by academicians and political scholars alike. During this period, air transportation passengers enjoyed more affordable low air fare, while low earning routs were kept open through subsidies. Additionally, “the impact of the Great Depression caused industries to seek Federal aid and protection from ‘excessive competition'” (Chmura, 2012)
One of the differences between the two regulated industries is that the airline industry had some elements of market competitions in terms of quality of services, amenities provided on board an air carrier, etc. during the regulated era. Carriers were sometimes given over-priced routes and had to compete using quality of services and amenities offerings during flights. Also new entrants were at some point allowed into the industry without completely held to the same standard or confinements of the then regulatory practices. A good example was the case of Pacific Southwest airline operating in unregulated routes (Chmura, 2012).
The characteristics of free market enterprise were indeed not pronouncedly evident during the regulated surface transportation era due to tight control of market practices and nationalization various sectors of the industry for a short time. The economic effects that resulted from fixed price and strong control on mergers and entry into the industry were poor service quality, increase transportation cost, and provisions of subsidies by the government to make up for the plummeting earnings from unprofitable routes. This era also disfavored the non-union workers from other industry competing for jobs with union workers protect by regulations.
Deregulation of the surface transportation eliminated some of the economic disadvantages in the industry as free market characteristics became evident and price competition and quality of services erupted. As ICC began to decontrol the industry between 1977 and 1982, and its final demise in 1994, the industry began to see advancements quality service innovations and price reduction as a result of competitive pressure within the industry. Non-union workers could now compete for jobs in the industry thus increasing competition and expanding the industrial growth throughout the nation. This also saw the growth of Intermodal operations which has substantially gained momentum and polarity as transportation carriers have turned to it for cost reduction and ease of cargo and personals transportation.
The passage of the Airline Deregulation Act of 1978 also saw similar changes in the industries as price competition increased tremendously increasing services quality, innovation in technology, cost reduction and eliminations of ailing carriers from the competition.
While deregulation was highly favored in the surface transportation industry, it was widely argued in the airline industry that during the regulated era, “non-price competition emerged in various forms such as increased flights, better quality meals, and smaller load factors which benefited plane manufacturers and some consumer groups (Chmura, 2012). Some also argue that due to the nature of the industry, free market competition resulted into profit degradation due to large capital investment and lower earning capacity on less dense routes.
In all, the comparison of the deregulated and regulated surface air transportation could be seen above. While some would argue that the free market enterprise favored greatly the surface transportation to air transportation, others would support a reverse perception of similar conclusion in favor of the air transportation in a regulated era.
Chmura, C. (2012). The Effects of Airline Regulation. Retrieved from The Freeman: http://fee.org/the_freeman/detail/the-effects-of-airline-regulation
Joskow, P. L. (2005). Regulation and Deregulation after 25 Years: Lessons Learned for Research in Industrial Organization. Retrieved from Review of Industrial Organization: http://www.globalsepri.org/UploadPhotos/200891219316344.pdf
Moore, T. G. (2008). Surface Transportation Deregulation. Retrieved from The Concise Encyclopedia of Economics: www.econlib.org/library/Enc/SurfaceFreightTransportationDeregulation.html