The Oligopoly of the Airline Industry | Teen Ink

The Oligopoly of the Airline Industry

August 6, 2022
By brianq3182 BRONZE, Needham, Massachusetts
brianq3182 BRONZE, Needham, Massachusetts
1 article 0 photos 0 comments

Why do airline carriers in the United States offer services that are noticeably worse than the rest of the world? To understand this, it is important to examine the 1978 Airline Deregulation Act.This paper requires understanding of some context: before 1978, airlines were regulated by the Civil Aeronautics Board (CAB). The board wanted to limit competition between airlines in order to keep the industry stable. Carriers needed certification from CAB to fly a route, and CAB set the prices of air fares. The board granted certification to a select few airlines who were of “public convenience and necessity,” and gave “grandfather” certification for all routes held by airlines prior to the creation of the board; this regulation created an oligopoly of four airlines: United Airlines, American Airlines, Trans World Airlines, and Pan American Airlines. These companies rarely faced competition for routes and never competed in pricing. As a result, the big four were able to be dominant throughout regulation.

This limited competition created by regulation spurred deregulation. In 1975, Senator Ted Kennedy first highlighted this issue; he saw regulation of the airline industry as a consumer issue. He believed that breaking apart the oligopoly would benefit consumers, since increased competition would encourage innovation and lower prices. After multiple hearings pertaining to deregulation of airlines, the topic spread beyond Washington and became a larger issue. The strong and overwhelming support eventually caused President Jimmy Carter to pass the Deregulation Act of 1978, effectively limiting the government’s involvement in airlines, such as limiting the Civil Aeronautics Board’s abilities. The intent of deregulation was to increase competition and decrease prices. However,  the airline industry remains an oligopoly even after the Deregulation Act of 1978, since major carriers created a new structure of monopolistic hubs and dependency on mutual interdependence that allows dominant carriers to stay dominant. 

Airport Hubs as Barriers to Entry:

There are multiple aspects of airport hubs that act as barriers of entry, making them monopolistic. These aspects still exist to this day. Travel agents are one barrier. Travel agents are the prime ways consumers buy tickets, and airlines use this to their advantage. Often, agencies are biased to certain airlines through that airline’s commission override program (TACOs), where the program pays bonuses to travel agents who generate some specified level of revenue for that airline. In order to make revenue for that airline, the agent tries influencing consumer choices and selling tickets that benefit the carrier. This desire for higher commissions can also tie agents to using a certain airline’s computer reservation system, since agents believe that an airline will pay a higher commission if the agency uses that carrier’s system. As a result, new carriers are scared of entering major hubs, since the travel agents at those hubs are most likely biased towards that hub’s dominant airline, and it is the travel agents that sell the tickets.

Another barrier of entry to hubs are computer reservation systems (CRS). CRS show the scheduling and pricing for available flights of a certain route. Travel agents use CRS to sell fares to consumers. Often, the CRS’ own airline shows up at the top, and travel agents tend to use the first flights they see in the CRS. Hence, the system is biased towards the airline owning the CRS. In addition, other airlines’ scheduling and pricing information in the CRS may be wrong, leading travel agents to use only the dominant carrier’s information to sell tickets, as that information is the most reliable. Carriers often aggressively market their own CRS at their hub airports, causing the travel agents at that hub to use that airline’s system. Consequently, new airlines fear entry into a big hub, because that hub uses the dominant carrier’s CRS, and the CRS is biased towards the dominant airline. The CEO of American Airlines “has said that if he had to choose between unloading the airline or its SABRE reservation system, he would dump the airline without hesitation.” American airlines is a huge airline, yet the CEO prefers its CRS over the airline itself. Hence, American Airlines’ profit generation must be heavily dependent on its CRS. 

In addition, the dominant airline of a hub controls the availability of gates and slots, acting as another barrier of entry that make hubs monopolistic. In order to compete in the industry, a carrier must have access to airport resources such as gates, but a hub’s dominant carrier often has exclusive gate-lease agreements with the airport. As a result, new entrants face an issue of limited availability of gates at hub airports. According to a 2001 government hearing, “New entrants, including Sun Country Airlines and Air Tran, have testified before Congress that, even when gates and other facilities are not being used, airlines hoard gates and do not make them available to potential competitor.” Hoarding gates is an action that wastes time and planes, so a carrier must have a strong reason to do such. This shows how much major carriers want to maintain a monopoly, and go as far as hoarding gates to do so, to limit availability of important resources for a competitor. Also, the takeoff and landing slots at multiple large airports are restricted by the FAA, with the slots “grandfathered” to the original airline of the airport. This further acts as another barrier of entry to hubs, as some carriers can’t even fly into major hubs.

These three factors mean that dominant airlines control the traffic at monopoly airport hubs. Major carriers rely on these tactics for success. When examining 42 routes to Chicago O’Hare between 1978 and 1993, the number of nonstop flights decreased from 211 to 157. Hubs are where flights connect, and therefore, less direct flights mean a greater usage of hubs. The increase in hub usage shows that dominant airlines prefer operating through hubs, since they are crucial to an airline’s dominance, a dominance that comes from the airline’s ability to cut out competition with barriers of entry to hubs.

Monopolistic airport hubs create a monopoly on air routes. When examining 12 routes, with the 12 routes divided into six categories of similar routes (routes serving the same geographical locations), the dominant carrier on average has a ticket price that is 208% greater than the smaller carrier flying a similar route. Consumers generally choose the cheaper price, yet the dominant carrier is still able to have such high prices and stay in business, when compared to the attractively cheaper price. This indicates that there must be more to attracting consumers than just pricing. To understand this, it is helpful to examine Chicago’s O’Hare Airport. According to a 1994 government report, managers say “that other large airports, including Chicago's Midway, are not, in their opinion, adequate substitutes for O'Hare because they do not offer as many connecting opportunities.” Having fewer connecting opportunities means that Midway has significantly fewer passengers than O’Hare. By holding a monopoly on O’hare, dominant airlines at Chicago O’Hare also hold a monopoly on the routes coming to and from that airport. Because the majority of passengers use and connect through Chicago O’Hare rather than Midway, most of the passengers at that geographical location fly on routes offered by the dominant carriers. Essentially, a new entrant’s barrier of entry to flying these routes is the monopolistic hub. In fact, when examining the ten airlines that required subsidies in 1993, six of the airlines had flights connecting to Midway. Generally, flights to and from Midway, rather than Chicago O’Hare, damages the carrier. It’s damaging, because Midway has significantly fewer passengers than Chicago O’Hare. Controlling a major hub means also controlling most of the routes from that geographical location, as most passengers use or connect through the major hub. 

Delta Air Line’s monopoly on Hartsfield-Jackson Atlanta Airport:

At Hartsfield-Jackson Atlanta Airport, Delta Air Lines’ biggest hub, Delta uses its biased travel agents and computer reservation system, along with control of airport facilities, to monopolize the airport by cutting out competition. Business travelers using Atlanta airport complain of high ticket prices, and wish that there was more low-fare competition. However, according to a 2001 government testimony, Delta has a 74.3 percent market share in Atlanta, while low-fare carriers account for just 10 percent of the market share. People will generally want to use the cheaper service, yet at Atlanta airport, Delta dominates every other carrier, including low-fare model airlines. This indicates that there must be another factor to dominance, rather than simply fares. 

One factor that Delta uses to dominate the Atlanta airport is its Datas II computer reservation system. According to an argument about CRS, “If consumers flying to or from Atlanta have a sufficiently strong preference for Delta Airlines over other airlines, CRS vendors may have an incentive…to list Delta first on displays showing Atlanta flights. This occurs because travel agents will prefer to subscribe to CRS's listing Delta flights first on these displays…Hence, display bias in favor of Delta emerges for flights to and from Atlanta.” Although this argument seemingly contradicts the claim of this paper, it includes a key piece of information needed: the Datas II CRS is beneficially biased towards Delta Air Lines, since flights for Delta appear first. Therefore, travel agents at Atlanta airport are also biased, as Atlanta airport uses Datas II, and the travel agents use that system to book tickets for consumers. However, the quote then argues that Datas II doesn’t acts as a competitive advantage to help Delta maintain dominance, but rather is just for efficiency, since consumers already have a preference to fly Delta. Yet, the statistics contradict that argument: consumers will generally have a strong preference for the cheapest tickets, but Delta still holds a majority of the market share at Atlanta airport, compared to low-cost carriers. If consumers want low-prices, it is strange that the airline that doesn’t provide the cheapest service has the highest share. Delta has the dominant share, not because of its pricing and appeal to consumers, but because the CRS used at Atlanta is biased to increase the carrier’s dominance. 

In addition, Delta uses the availability of gates at Atlanta as another competitive advantage. According to a 1997 government hearing, “We have heard several complaints just in the last few months about unavailability of gates at Detroit, Newark, Atlanta to name three.” Airlines face an issue of limited gate availability at Atlanta. The speaker then says that “The problem is that Delta so monopolizes the Atlanta market that there are few or no significant alternatives.” With control over gates and by leasing such a small amount of gates to other airlines, Delta doesn’t just dominate through travel agents and its CRS; the carrier is physically able to dominate, through the control of physical structures and availability at Atlanta airport. This control serves to enhance its monopoly on the airport, and consequently on routes stemming to and from the whole Atlanta market. 

These competitive advantages cut out competition, allowing Delta to monopolize the Atlanta airport and consequently, routes at Atlanta. According to a 1997 government hearing, on an AirTran flight from Michigan to Atlanta offering low fares, fewer than 20 people were booked, and the flight was canceled. On an Akron/Canton to Atlanta route, AirTran had only a 60 percent load factor, despite offering attractively cheap prices. Given that consumers generally want low fares, it is strange that a flight to Atlanta on a cheaper flight than the dominant airline has a low load factor. The  powerful economic idea--the idea that low prices increase demand--is being broken by Delta. The ability to break such a powerful economic tool comes from Delta’s powerful advantages of controlling the Atlanta airport. People’s Express, a low-fare airline model, tried operating at the Atlanta airport in the 1980s, and ultimately went bankrupt. According to a newspaper article, “when you [People’s Express] take on these behemoths, you’re no longer competing on the basis of price…you find yourself competing with their automated reservations systems.” By competing on the basis of pricing, the biased strength of computer reservation systems, systems which are used at hub airports, caused the downfall of People’s Express. A major carrier, through reducing competition--competition like People’s Express--with its CRS, enhances its monopoly on the routes to and from its hub. “Initially the airline (People’s Express) was very successful with its one low fare strategy…But…traditional full service carriers introduced computerized yield management systems…In a desperate attempt to restructure the airline, the management moved away from its original low cost business model and changed the airline into a full service.” After competing with the big players, People’s Express felt that the carrier could only be saved by switching into a traditional airline model. To raise prices on routes, the airline implemented better comforts such as seating and inflight meals. However, these aren’t the factors that make airlines dominate routes; it’s the competitive advantages of owning monopoly hubs that allow a carrier to monopolize routes and have high prices--People’s Express didn’t have the resources to dominate hubs, and that is why their restructuring failed. In this deregulated era, the traditional airline structure of dominating hubs and routes is the only way to be a major player.

Mutual Interdependence's role with Monopolistic Airport Hubs:

Dominant airlines use these aspects of monopoly hubs, conjunct with mutual interdependence, to maintain an oligopoly in deregulation. Mutual interdependence describes how players interact with each other, based on the self-interests of each other. Mutual interdependence can be broken into two aspects: predatory pricing and working together.

Predatory pricing is one aspect of mutual interdependence in the airline industry. Predatory pricing is when an airline makes pricing decisions serving as a competitive advantage against other players. When Spirit Airlines tried entering Northwest’s Detroit hub with a 49 dollar fare for Detroit to Philadelphia, Northwest cut its price from 170 dollars to 49 dollars. Similarly, when Frontier Airlines tried entering United Airline’s Denver hub with service to Billings, Montana for 100 dollars, United slashed its price to match Frontier. When an airline cuts prices to compete, it is a sign to other carriers of predatory pricing, which would then be retaliated by with even larger price cuts. Through predatory pricing, airlines create a price competition on routes, resulting in losing profits to both airlines - it is a counterproductive tool. In the 1980s, US Airways said, “I know that if I cut my fare $20 today, you’re going to cut yours $20 tomorrow, then it’s stupid for me to do it.” This highlights the counterproductivity of predatory pricing; major airlines understand that price competitions are damaging, since both airlines lose profit. Starting price wars also makes other players see the instigator as an aggressive independent airline, painting a target on that airline as someone to cut out of the competition. In the 1980s, Northwest Airlines said, “I did not want my pricing analyst initiating actions in another carrier’s market like Chicago for fear of what that other carrier might do to retaliate.” This highlights the risk involved with predatory pricing; major carriers are scared to act on predatory pricing, since it sets them up to other major carriers as someone to cut out of the competition.

Working together is the second aspect of mutual interdependence. Working together means that the dominant carriers acknowledge the self-interests of the other major players, and act cohesively when making pricing and routing decisions. Mutual interdependence allows carriers to raise prices while maintaining a high load factor: airlines match price raises together, allowing all parties to gain monopoly-level profits. If an airline acts independently and raises prices, that airline loses passengers, since the other carriers have an attractively lower price. Along with price raising, carriers work together regarding routes and hubs: “There are some other major, high-cost and full-service airlines that fly a few flights from their hub airports to Delta's Atlanta hub. But the major airlines have learned to ‘live and let live’’ with Delta.” The major carriers are acting together by not intruding in Delta’s Atlanta hub competition, allowing Delta to maintain its monopoly on Atlanta’s hubs and routes. In order to be successful in a post-regulation era, major airlines act cohesively by allowing the other major carriers control over their respective hubs and routes; the resulting lack of competition allows major carriers to dominate new entrants through the control of these hubs and routes, even being able to raise prices. It is this lack of competition that allows big airlines to maintain an oligopoly. According to Delta, “We went through a period of bashing each other’s heads in over fares…It took us a while to learn how to compete.” Learning how to compete means learning that predatory pricing is counterproductive and damaging, and rather, learn to avoid competition with other big players, to dominate new entrants. Essentially, mutual interdependence allows the airlines in the oligopoly to work together to indirectly cut out new competition, maintaining the oligopoly. 

Braniff Airlines and American Airlines’ Connections with Interdependence and Hubs:

In the 1980s, Braniff Airlines failed, since the carrier didn’t adapt to the deregulated structure of competition through engaging in mutual interdependence and hub dominance. In a 1983 telephone transcript, Robert Crandall, the president of American Airlines, reached out to Howard Putnam, the president of Braniff Airlines, saying, “Raise your goddamn fares 20 percent. I’ll raise mine the next morning…you’ll make more money and I will too.” Howard Putnam immediately turned him down, saying “We can’t talk about pricing.” American Airlines was attempting to engage in mutual interdependence with Braniff through price raise matches; Braniff Airlines rejected this tactic. Crandall then told Putnam that “there’s…no put both companies out of business.” The price competition on routes from Dallas was damaging both companies, demonstrating the deleterious effect of predatory pricing. After the bankruptcy of Braniff, Crandall told reporters that “If Braniff would simply raise its prices we’d be happy to coexist,” essentially revealing that American Airlines would have let Braniff stay, had the airline accepted to work together, through avoiding competition at Dallas and raising prices. If Braniff Airlines had accepted mutual interdependence, the carrier most likely would have remained alive. However, Braniff, by acting on predatory pricing, ultimately went bankrupt. In deregulation, airlines need to act with mutual interdependence to be successful. 

By refusing American Airlines’ offer for mutual interdependence, Braniff Airlines was cut out of competition by American Airlines’ powerful advantages of control over Dallas Fort Worth airport. A Braniff employee “was convinced someone was ‘playing’ with American’s computer system to harm Braniff,” and when a travel agent claimed to have looked on the Sabre CRS (American Airlines’ CRS) at Dallas airport and saw a Braniff flight from that airport all booked out, she called Braniff airlines to request a seat for that route. However, according to Braniff’s system, there were still 157 unsold seats for that flight. By displaying the wrong information, the CRS most likely caused many passengers to switch from Braniff to American. It is a bias that particularly impacts at Dallas Fort Worth Airport, since that airport uses American’s CRS. The telephone transcript between Crandall and Putnam shows the damaging effects of these hub advantages on Braniff Airlines: “Mr Putnam: But if you’re going to overlay every route of American’s on top of…every route that Braniff has - I can’t just sit here and allow you to bury us.” By operating the same routes, both carriers engage in competition, a competition that causes both parties to lose profits. However, in contrast to Putnam’s complaints about the damaging effects of the price war, American Airlines, being the one who initiated the competition, must have thought the competition was winnable to become profitable. American Airlines believed it was winnable, due to their powerful advantages from hub ownership. Both airlines could compete in pricing, but American Airlines, with control over Dallas Forth Worth and the subsequent biased travel agents and CRS use at that airport, had factors that gave it the upper hand in the competition. Once Braniff was cut out of Dallas, American Airlines could then reap full control over the airport, with the prospect of controlling more gates, and holding a monopoly on routes to and from Dallas. Braniff Airlines, a once decently-sized carrier during regulation, made a huge mistake in deregulation: the carrier operated on the basis of predatory pricing, holding to the economic idea that lower prices increases demand. However, as proven earlier in this paper, monopoly hubs, which lead to a monopoly on air routes, can break that economic idea. By failing to engage in mutual interdependence and instead acting on predatory pricing, Braniff didn’t become a part of the oligopoly; it put a target on its back, falling into American Airlines’ powerful hand of competitive advantages from hub control. 


Control of hubs is so important for airlines, since hubs possess the barriers of entry to the airline industry: travel agents, computer reservation systems, and control of slots and gates. These factors are also the things that break the powerful economic idea - that low prices increase demand - used by new entrants. By controlling a hub, an airline also dominates the routes stemming from that hub’s geographic location, effectively maintaining a monopoly over the routes. To exist in unison with other major carriers, airlines learn to engage in mutual interdependence regarding the domination of hubs and routes. Major airlines work together to indirectly cut out new entrants from the industry, and reap monopoly level profits. 

It is important to note that while all the examples included in this paper occurred from 1978-2001, this structure still exists today. In 2015, United Airlines planned to buy 24 more take-off and landing slots at Newark airport from Delta, increasing its control of slots from 73% to 75. United held, and still holds, a monopoly on Newark through slot control. Delta, being a powerful player in the oligopoly, was not selling these slots to United Airlines because it needed money; therefore, selling the slots must have been because Delta wants to reduce its presence at Newark. Delta was allowing United Airlines to dominate Newark, demonstrating the two airlines acting cohesively with mutual interdependence. United Airlines abandoned the plan after the Department of Justice filed a suit to block it, alleging that it violated sections 1 and 2 of the Sherman Act. The government felt a necessity to intervene to limit United Airlines’ monopoly over Newark. 

The airline industry is strange; to be successful, major carriers had to restructure the system--to rig the system. It is a structure that is not seen in other industries. New entrants don’t have the capital or resources to start their own hubs and compete on the level of the major players. Rather, the easiest way to break through is with a low-fares business model, a business model that is also flawed in the airline industry, since major airlines have factors that break the economic tool that low prices attract more consumers. Essentially, the only way to break into the US airline industry is also the main way to be cut out from the industry. Since deregulation, the government has increasingly intervened to limit these powerful factors that big airlines possess, from researching the industry and holding inquiries, to passing acts mitigating the effects of some of the factors, to blocking deals that would enhance an airline’s monopoly. But, the oligopoly still exists. Perhaps, the only way to break apart America's airline industry oligopoly, a feat which deregulation was intended to achieve, is to regulate the industry again.


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The author's comments:

This paper will show that the Deregulation Act of 1978 did not achieve its intent at decreasing competition, through examining two key aspects that allow major airlines to maintain dominance even after deregulation: hubs and mutual interdependence. The examples examined in this paper occurred between 1978 - 2001. By controlling a hub, an airline gains competitive advantages over other carriers at that hub, advantages that act as barriers of entries, making ownership of hubs monopolistic. By holding a monopoly on a hub, an airline also holds a monopoly on routes flying to and from that geographical location. With mutual interdependence, major airlines work together regarding hubs and routes in order to dominate smaller carriers. This dominance creates a lack of competition, allowing dominant carriers to remain an oligopoly. Hence, the airline industry remains an oligopoly even after the Deregulation Act of 1978, since major carriers created a new structure of monopolistic hubs and dependency on mutual interdependence that allows dominant carriers to stay dominant. 

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