Alfred Kahn, Father of 1970s Airline Deregulation, Dies at 93
Tuesday, 28 December 2010 19:59

Alfred E. Kahn, the economist- turned-regulator whose moves to end U.S. government controls on airlines in the late 1970s set the stage for today's cheap fares and for much of the industry's financial troubles, died yesterday. He was 93.

Cornell University in Ithaca, New York, where he spent most of his career, said on its Web site that he died from cancer.

As chairman of the Civil Aeronautics Board under President Jimmy Carter, Kahn was probably the first Washington regulator to put himself out of a job. He argued that airlines could serve consumers and business best by competing with each other, a novel notion at a time when prices and routes were government- controlled.

It was under pressure from Kahn and Carter that Congress passed the Airline Deregulation Act of 1978. Later, as Carter's anti-inflation adviser, Kahn also earned fame for saying "banana" rather than "depression" to avoid uttering an unpopular word.

He was often asked in his later years whether his push for deregulation had made the industry worse off than if government oversight had remained.

"Consumers have benefited to the effect of $20 billion a year," Kahn was quoted in the Denver Post as saying at a February 2005 conference. "Where competition is feasible, the government should get the hell out of the way."

Stocking Feet

Kahn was known not just for what he did but for the humor and informality with which he did it. As CAB chairman, he granted media interviews in his stocking feet, hanging a leg over the arm of the old rocking chair in his office. He had a bad back, and once spoke to a conference of 60 utility lawyers while lying flat on a table.

He was chairman of the economics department and dean of the College of Arts and Sciences at Cornell before entering public service. He also finished his career there, as the Robert Julius Thorne Professor of Economics Emeritus and as a consultant to National Economics Research Associates.

At Cornell, he was an enthusiastic performer in Gilbert & Sullivan operettas. His roles -- he sang baritone -- ranged from Sergeant Meryll in "Yeomen of the Guard" in 1964 to the poet Bunthorne in the 2000 production of "Patience."

Alfred Edward Kahn was born in Paterson, New Jersey, on Oct. 17 1917, to parents Jacob and Bertha Kahn. His father, a Russian Jewish immigrant, worked in a silk mill, according to "Prophets of Regulation," by Thomas K. McCraw.

NYU, Yale

Kahn graduated from high school at 15 and New York University at 18, summa cum laude and first in his class. He earned his doctorate in economics from Yale University in 1942 after graduate study at NYU and the University of Missouri.

Before World War II, he also worked for policy research organizations and government agencies in Washington, including the Brookings Institution and the antitrust division of the U.S. Justice Department. He served in the Army during the war and began teaching at Cornell in 1947.

His thinking on what is called marginal-cost pricing -- setting a product's price to account for the cost of producing one more unit -- led him to focus on ways to inject competition into industries previously viewed as monopolistic, such as power utilities. Rather than merely controlling prices and service, he argued, regulators could set the stage for lower prices by applying some of the principles of classical economics.

His two volumes of "Economics of Regulation" appeared in 1970 and 1971; McCraw called the first volume "the most influential work written on the subject."

Utility Regulator

In 1974, Kahn was named chairman of the New York Public Service Commission, which regulated more than 40 industries, including buses, telephones, shipping docks and the electric-and gas-utility industry. Against the wishes of the affected companies, he pioneered such notions as peak- and off-peak pricing for electricity and disclosure of the cost of telephone services rather than bundling them together in rate applications.

Carter named Kahn to head the CAB as one of a host of new appointees empowered to overturn regulatory practices. At the time, the five-member board governed where airlines could fly and how much they could charge for all the routes in the U.S. It was ostensibly in the name of public service, but the lack of flexibility meant planes flew barely half-full and airlines were mostly required to charge the same price for the same route. No new airline had started up in the U.S. since 1938.

Kennedy Hearings

The airlines liked this state of affairs, as did their labor unions. But even before Kahn arrived at the CAB, calls for deregulation had begun. The late Democratic Senator Edward Kennedy of Massachusetts held congressional hearings in 1975 that showed airlines that avoided federal regulation by operating in state only, such as Southwest Airlines Co. in Texas, had full planes and fares half those of national airlines.

Kahn was no industry expert. Shortly after his appointment, he told executives at now-defunct Eastern Airlines Inc.: "I really don't know one plane from the other. To me, they're all marginal costs with wings."

That didn't stop him from going to work swiftly, helped by cost pressure from the in-state airlines that induced the national carriers to lower prices sporadically.

Under Kahn, the CAB began approving discount fares for interstate and trans-Atlantic travel. From Texas International Airlines' "Peanuts" fare to the "Super Saver" of AMR Corp.'s American Airlines, passengers began flying cheaper, and planes began filling up. Load factors rose from 55 percent to 61 percent in 12 months, according to McCraw.

New Airlines

Kahn also loosened rules to let airlines set their own fares, rather than applying for each one to the CAB, and to choose their routes with more freedom from government oversight. Such new airlines as Midway Airlines Corp., flying from Midway Airport in Chicago, started up.

The fuller planes caused some consternation among passengers accustomed to a high level of service. One friend wrote Kahn to complain that he had had to sit next to a "hippy" on a flight to Denver.

Kahn's response: "Since I have not heard from the hippy, I presume the distaste was not reciprocated."

He also ended the CAB's traditional goal of ensuring that no airline failed financially. The board's official decision granting multiple new rights for Oakland (California) Airport said: "We cannot agree to define healthy competition as that state where the fortunes of the competitors fluctuate but no competitor ever goes to the wall."

People Magazine

Kahn, understanding that the changes he had pushed through the CAB were subject to judicial review and the appointment of future board members, threw his weight behind congressional legislation to cement the new environment. He lobbied lawmakers concerned that service to their districts would be curtailed, and cultivated journalists to get his message across. He was one of the few federal regulators ever profiled in People magazine.

With the support of the Carter administration -- and, by this time, most of the airline industry -- the deregulation bill passed in October 1978. It gave the airlines more freedom to set fares and routes, and set a timetable for the phase-out of the CAB itself in 1985.

The day the act was signed, on Oct. 24, Kahn announced that he had a new job. He would become Carter's anti-inflation czar, at a time when consumer prices were rising at an annual rate of 8.9 percent.

He was less successful there. With monetary policy in the hands of the Federal Reserve and economic policy run by Treasury Secretary Michael Blumenthal, Kahn's only role was to explain and exhort.

Banana, Kumquat

His tendency toward frankness didn't endear him to the administration. He said that certain policies would bring on a "depression" and, when rebuked by the White House for using such a negative word, instead began warning that the economy faced the threat of a "banana." He later changed that to "kumquat" after banana companies objected.

Kahn returned to Cornell, to teach and consult, in 1980. He continued to make speeches and appearances, and to opine on such regulatory issues as telecommunications. He survived a serious auto accident in 2003 and endowed the New York hospital that saved him with funds to set up a camera traffic-surveillance system so emergency-room doctors could view the accidents that injured their patients.

In a luncheon tribute to him on June 24, 2003, former U.S. Assistant Attorney General John Shenefield said:

"He taught us a lesson that competition, even imperfect competition, is better than imperfect regulation; that facts make a difference, if only we have the humane procedures to uncover them and the brains to understand them; and that intellectual rigor, decked out in wit and flair, even in Washington, can be a winning combination."

Kahn is survived by his wife, Mary Simmons Kahn, and three children, as well as a nephew to whom the Kahns were legal guardians.


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