Effects of regulation on scheduled aircraft capacity

When the fare for coach (first class) service is the same for all flight departures in a market, airlines can offer the service with revenues equal to costs, at many fare level, the aircraft capacity offered (and consequently, total seat departures per person) will vary. Under early 1970 U.S. Civil Aeronautics Board (CAB) regulations, the load factor standard used in judging fare reasonableness was a determinant of the capacity offered. This standard was devised to lead air carriers to offer service at fares (and capacity levels) consistent with public interests. If this standard were not in effect but other regulations of the early 1970s were in effect, carriers could have an incentive to offer service at lower load factors and higher fares than publicly desirable. This divergence between industry and public optimal capacity/fare levels, which can result under the type of CAB regulations and carrier behavior in effect in the early 1970s, is demonstrated in this paper. A supply and demand model of air transport in three U.S. transcontinental markets is used to identify the divergent solutions and their impact on traffic served, industry revenues and public benefits. The divergence is attributed to a combination of factors, including the use of single fare on flights at all times of day and an allowed return based on capacity flown.