In the 1960s the CAB's attention shifted down to the local service airlines, which acted as feeder airlines to the trunk airlines and which still received subsidies to furnish air service to the very small cities and low-density areas of the United States. This air service was considered essential to maintaining economic development in these cities, and politicians paid close attention to the activities of these airlines. These airlines (Allegheny, Bonanza, Central, Frontier, Mohawk, North Central, Ozark, Pacific, Piedmont, Reeve, Southern, Trans-Texas, West Coast, Wien Alaska, and others) upgraded from DC-3s to turboprop transports (Fokker F-27, Nihon YS-11, Nord 262, Convair 580) and finally in the 1960s to small jet transports (BAC-111, DC-9) as they were given routes vacated by the larger airlines.
The initiative in fare levels rested with the airlines, and a filing of a proposed fare change would go into effect in 30 days unless the CAB decided to intervene and call for a public hearing. In the interests of equity there was a distance-based national fare structure ensuring that the price for a 500-mile (800-km) trip at a given class of service was identical everywhere in the country. Twice the CAB instigated a general investigation of fares, and after the second ended in 1974, it enunciated a domestic fare structure based on a "fair rate of return on investment" that, after 36 years of regulation designed to introduce competition, resulted in the airline industry being treated by the CAB as though it were a public utility.
Industry fare levels would depend on industry costs and investment. The reaction to this was a vociferous public debate on "deregulation" of the domestic airline industry that lasted for four years. In 1978 Congress passed the Airline Deregulation Act, which over the next five years phased out the CAB. The result of this was to eliminate completely the rules of competition for the industry. Domestic airlines were free to start and eliminate service anywhere and charge any price. New start-up airlines, providing minimal evidence of financial and operational viability, were given certificates freely. Lower fares in individual markets initiated by the newcomers caused instant declaration of matching fares by the incumbents. The major airlines invented computerized revenue-management systems that carefully controlled the actual availability of these low-fare seats, restricting them to the surplus seats on their flights with low load factors.
The result has been chaotic air travel markets in which consumers have difficulty in understanding the daily variations in prices and in keeping track of who is serving the market. Travel agents, once valued consultants for passengers seeking lower-priced seats, are biased in their advice by airlines that offer extra commission fees when initiating new competitive services.
The competition between the domestic airlines has produced unexpected results. Initially it was thought that it would be difficult for the smaller airlines to survive against the larger carriers. Instead, using their lower labor costs and their smaller jet aircraft (DC-9, B-737), they added longer-haul services out of their traditional hub airports, allowing passengers to go directly to destinations on their airline instead of connecting to the larger carriers. This caused considerable early expansion and success for regional airlines such as Allegheny (renamed USAir), Piedmont, Frontier, and Republic. The new "start-up" jet airlines copied this service pattern of building a hub utilizing small jet transports (PeoplExpress at Newark, Texas Air at Houston, Midway Airlines at Midway Airport in Chicago, New York Air at Laguardia, America West at Phoenix, Ransome at Philadelphia), introducing cheaper "no frills" service and innovative management-labor ownership. However, the success of these smaller firms was transitory, and by 1991 they all had disappeared except for USAir and America West.
To respond to this challenge, the larger airlines reversed their long tradition of ordering larger and ever more productive aircraft and acquired very large fleets of these same smaller and less productive jet transports (MD-80, B-737), using them to build new competitive patterns of hub service from airports already within their route structures. They could then rapidly enter most of the larger and medium-sized markets of the United States, using indirect instead of their traditional nonstop services, and could control the traffic flows to aggregate loads at these hubs that filled their wide-body flights on existing services between the hub airports.
The airlines initiated "frequent flyer" plans that rebated free travel to customers based on mileage flown, but the attractiveness of vacation destinations on the larger airlines gave them an advantage over the smaller and newer airlines. To make travel planning even more complicated, airlines offered off-season sales in terms of reduced mileage requirements for rebated travel.
While spectacular travel bargains became available, the overall reduction in fares touted by proponents of deregulation has been disappointing when expressed in terms of average domestic yield. In the early years of regulation (1938–1958), when the introduction of more productive transport fleets matched annual domestic growth rates averaging 21%, the annual reduction in real domestic yield was 3.5%. In the era of jet introduction (1958–1978) the average annual reduction in domestic yield was reduced to 2.6%, and average domestic growth was 10.4%. In the 12 years after deregulation took place the average annual reduction in average real domestic yield has been only 1.1%, and average annual domestic growth only 5.5%. Fare reduction since deregulation has been less than one-half the annual reduction during the prior 12 years of domestic regulation.
