Last Friday night witnessed the end of an era with the final commercial flight of a US Airways plane. Once flight 1939 from San Francisco landed in Philadelphia, the old airline ceased to exist and was officially subsumed into American Airlines. The event highlighted another milestone in the remarkable but turbulent history of passenger air travel in the United States, from its barnstorming roots through the folly of over-regulation and protectionism, to the ultimate triumph of market forces that have made flying more accessible and affordable to the public.
Chris Hopkins of Barnett & Co.The number chosen for the final flight, 1939, represents the year in which All American Aviation began carrying mail in Pennsylvania. The company quickly grew into a regional passenger carrier renamed Allegheny Airlines, and ultimately changed monikers again to USAir in 1979. Following a string of acquisitions including Piedmont and PSA, the firm rebranded again under the US Airways logo in 1997, and absorbed Tempe,Ariz.-based America West in 2005.
The cycle was completed in late 2013 when US Airways effectively bought American Airlines out of bankruptcy. The newly formed behemoth retained the American name and livery and claimed the title of world's largest airline following the merger. As of Saturday morning, the old US Airways website redirected passengers to the American site.
And now there are four. Over the past 14 years, the domestic air transport industry has undergone a startling consolidation from 10 major carriers to just four that haul over 85 percent of passengers in the U.S. And for the first time since 1978, the industry is healthy and profitable thanks to a painful but necessary adaptation to the new reality of a market-driven system.
To his great credit, President Jimmy Carter directed the deregulation of passenger air transport in 1978. Previously, air fares were dictated by the government and carriers were essentially guaranteed a profit regardless of capacity or demand. Half-empty planes were routine, and airlines competed by offering better meals and fancier appointments, not by discounting prices.
That changed radically once the market responded to deregulation. A long period of retrenchment and consolidation ensued, during which over 100 air carriers filed for bankruptcy. Many venerable names like Pan AM, Braniff and Eastern folded. Other legendary carriers including TWA, Northwest and Continental were acquired by larger airlines in an effort to gain operational efficiency and reduce the oversupply of flights and seats. Today, the industry is consistently profitable with American, Delta, United and Southwest transporting nearly 9 of 10 U.S. passengers and long-suffering shareholders finally enjoying the fruits of nearly four decades of restructuring.
But it is passengers that have reaped the biggest bounty. By any measure, the cost of flying has declined substantially and rendered air travel affordable to many more people than ever before. Industry statistics suggest that even considering higher fees for meals and baggage, the cost of air travel has fallen by about half over the past 30 years in today's dollars. It is difficult to think of many industries in which the price of the product has declined so much in real terms.
Meanwhile, more changes are afoot. Next on the agenda will be the retirement of the ubiquitous 50-seat regional jets that link so many smaller airports with the hub operations in cities like Charlotte, Dallas and Chicago. These regional jets are uneconomical to operate and are likely to be edged out in favor of fewer but larger 70-seaters over the next decade.
Before the turnaround in 2012, gallows humor in the airline industry held that perhaps someone should have shot down the Wright Brothers. Today, the industry is vibrant and profitable thanks to deregulation, consolidation and competition. Truly an American success story.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co., in Chattanooga.