Effect of Deregulation on the US Airline Industry

Subject: Law
Pages: 11
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11 min
Study level: College

Abstract

Airline deregulation in the United States was established to correct the market defects caused by the government’s direct control over the aviation industry. Original practices in the industry were eliminated paving way for lower fares charged by carriers. The barriers to the market were broken creating a free entry regime for competitors. The process of liberalization created a platform for competitors to deliver quality services while earning higher profits through the minimization of costs. The implementation of the liberalization led to the development of sustainable airline industry.

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Despite the liberalization of the airlines being beneficial to the environment, several challenges were advanced. Predatory pricing strategies led to price wars, which increased operating costs. As a result, a large number of employees were dismissed. Meanwhile, cost reduction measures used became detrimental to the service delivery due to understaffing. Freedom to choose routes to ply led to longer travel and minimal stops when the hub network strategy was established. The dominant companies barred competition from new airlines through monopolistic practices.

A broad assessment of the effects of liberalization of the airline industry dismisses the new urge to re-introduce the federal controls. Historical evidence proposes that reregulation would reverse the profits brought by liberalization. Nevertheless, there are multiple benefits witnessed after the liberalization.

Effect of Deregulation on the Airline Industry

Airline deregulation refers to the phasing out of the network of rules laid down by the government to control airline functionalities and management. The government of the United States previously protected and fragmented the aviation sector. Air transport was subjected to a series of procedural rules and formal practices that governed the fare prices, destination routes, safety and other aviation matters. The legacy began in 1978 when President Carter signed into law the Airline Deregulation Act (Card, 1996). The act had been drawn up because of many factors emerging from the government’s absolute control over the airline industry. The law was drafted to minimize the demerits of bureaucratic government whims in public transport.

The previous government regulation of air transport envisaged several uneconomical practices. Airline prices were subject to a fixed minimum while destination routes were also pre-regulated. The Civil Aeronautics Board (CAB) created by the presidential mandate exercised these practices with an ignoble intuition to protect the rapidly growing airline industry. The participants in the industry were elaborately restricted to the policies used by the existing board. Any projectile advancement in the airlines was brought to the board for approval through sanctioned meetings. The decisions made by the board in those meetings were overplayed by political regulations rather than economic policies seeking to serve the nation’s interests (Chung & Szenberg, 1996). Worse still, the boards’ rulings had predictable outcomes, which would take long periods to be made. Such regulation required extensive integration of information, which was widely based on political matters. These delays complicated the decision-making process. Many economic and sensitive projects presented to the board were thwarted and arbitrarily dismissed without any plausible rationales attached to their discharge.

The CAB had pre-set fares that did not consider the costs of trips to the travel providers. Unlike other forms of transport, prices below the minimum charges were not allowed within the airline industry. The bilateral trade arrangements shaped the prices charged for travel between states. There were precise routes and frequencies of travel selected for the specific carriers. Assigned routes had to be followed resulting in turnaround flights and minimal dispatch along the routes. There were several areas not covered by air transport because the airline destination decisions were made at the national level. Long-distance travel costs were inevitably high cutting down the number of passengers since most of the average persons could not afford the fares. However, the revenues in the sector were shared equally irrespective of the mileage covered by the carriers (Leong, 1991). The regulatory regime saw airlines waste their resources adhering to the regulatory policies rather than focusing on the development of the air transport market. This waived the airlines’ motives that were aimed at providing cheap and efficient services to their clients.

The airports faced challenges in consideration of the growing demand. They had no ability to expand capacity without the government’s authority. For this reason, they needed grants to enlarge their runways or acquire higher grade landing facilities. The government employed air-traffic controllers, which sometimes instituted additional challenges to the air transport providers. Their unionized strikes slowed down the operations limiting aviation growth (MacAvoy, 1992).

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Demand for air travel grew along with the economy after the Second World War. This established the urgent need to develop a safe, faster and cost-effective means of transport. Though the regulations by the government became stricter and fringed, technological developments were advanced to help the dwindling airline industry. A culmination of repulsive friction between government and market forces saw the CAB reconsider the governance of the industry. The integral image of CAB carried along with the political and administrational views to the opposite phase of deregulation. The implementation of the deregulation act stimulated economic fears caused by resistance to change. However, the demerits expected were not extensively encountered within the new regime (Card, 1996).

The main aim of airline deregulation was to create a liberalized environment whereby the aviation industry would draw new airlines to it. This would increase competition, and consequently, citizens would benefit from the reduced airfares and enhanced service delivery. Airlines were to have the freedom of choice on issues such as the markets to venture and services provided on their own terms. Freedom achieved was vital for other developments but would have variable impacts on the carriers’ destinations. The Airline Deregulation Act created a subsidy program that would ensure that airlines served the needs of small communities (MacAvoy, 1992). It also created a forum intended to provide for the retrenched workers in the industry because of the stringent industry conditions caused by the deregulation. Workers who received lower remunerations were also included in the Employee Protection Program (EPP).

The liberalized regime made the government cede power over the actions of the airlines within the United States. However, this deregulation did not affect the governments’ control over air security and protection, airports, and investments. The Federal Aviation Administration (FAA) and the Department of Transport had the mandate to secure consumers from unmerited industrial malpractices. Deregulation implied that the government became minimally involved in the control of air transport. In addition, the airlines reserved the right to ply new routes and adjust fares freely. The regulatory regime required the treasury to cover the costs incurred in exercising the regulatory power, which was eventually replaced. The costs of imparting rules, procedures and other forms of legislation were wiped out when the controls were removed (Chung & Szenberg, 1996).

The process of deregulation in the United States took place in four superfluous phrases widely known as packages. The first stage involved the reduction of fare prices. This period commenced when the airlines were flexed and enabled to cooperate with the delimitations that governed aviation agreements. The second period of liberation was characterized by definitions of flight freedoms. The deregulation gave permission to carriers within member states. Fare and capacity limitations were also phased out in the process. During the third stage of liberalization, measures were invoked, which introduced freedom of access to the market. Airlines obtained community licenses to serve international routes in the market (Meyer et al., 1984). There was a high degree of unlimited freedom in consideration to airfares adjustment in the period. The final era started when the holders of community licenses gained unlimited operation freedom within the European Union. The four phases resulted in the establishment of a single market in the aviation sector.

Since leaders in the previous governments had predicted the deterioration of quality services and hiked prices, the new liberalized environment was treated as a success. The national airlines opposed the liberalization move, as the shift from the government-controlled market would cut out the benefits they gained from state protectionism (Tretheway, 1986). Consequently, they reacted to the new changes by consolidating their spot in the market through mergers, acquisition of medium and small competitors and provision of resistance strategies to limit new entrants. However, market forces corrected most of the market imperfections. The deregulatory era saw the high quality and consumer-focused services being incorporated. Airfares significantly declined compared to commodity prices in the inflation period. The fare costs reduction saw a considerable rise in the number of passengers. The rapidly increasing number of passengers signified consistency in the economic growth and equally competitive value of cost, which was economical to the customers. The public appreciated a resultant increase in real income. In addition, the new entrants in the market steered competition through the provision of discounted prices (Leong, 1991). The discounted prices enabled the passengers to create savings for investments, which would boost economic growth.

The liberalization of the industry also removed the policies that governed the number of routes plied by airlines in the regulatory period. The competition brought about by this liberalization led to an increased number of airline destinations. The players in the industry sought to satisfy the market demand by unveiling new routes, which served the needs of small and midlevel communities. The ‘Hub and Spoke’ network of routes led to proficient means of conveying passengers to several destinations. Unlike in the non-liberalized regime, carriers were allowed to participate in connective flights. This convenient service permitted carriers to transport passengers travelling not only to the carrier-bound hubs but also to destinations accessible from the hub. This system also allowed flexibility in time for arrival and departure convenient to the passengers. It also gave a wide variety of destinations from which clients would make their choices.

The deregulation of airlines came as a major boost to the cargo business. The express package delivery service was immensely advanced, and carriers obtained operating freedom. Overnight deliveries and delivery of small packages were rapidly expanded. This service ensured the safe delivery of highly-priced and time-susceptible items (Moses & Savage, 1989).

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Employment opportunities and remuneration levels grew after the deregulation. This enhanced service delivery although it increased operation costs through pensionable plans. Through competition tagged with the deregulation, the air travel network was created that led to the employment of many people. The entrants of new airlines to the industry created several job opportunities. The competitive job opportunities created an avenue for expansive innovativeness in the transport sector. The low-priced fares boosted the growth of several economic spheres such as tourism and regional trade (Osmun, 1982). Consequently, the promoted tourism sector elevated the consumption of other tourism-related services resulting in more opportunities. On the other hand, the level of trade between regional boundaries was made efficient to the effectiveness witnessed in the industry.

More innovation-oriented and faster newcomers in the airline sector took efficiency and competition to a new level. There were immense innovations established after the deregulation. Computer reservation systems (CRS) were created to help airlines and travel agents to monitor fares and airline services. This enabled agents and passengers to easily book travel tickets, check travel schedules, and make payments on behalf of their clients. Liberalization introduced competitive programs like the frequent flyer program. The airlines used the program to reward loyal and frequent customers by giving them free air tickets, extra in-plane services, and other appropriate rewards. The development of the free flyer programs also resulted in innovative credit card programs, where points acquired from frequent flights are redeemed for other products and services from partner companies. Another innovative milestone was the code-sharing agreements. They were signed to reduce the gap of connective flights between carriers and coordinate better services to clients (Chung & Szenberg, 1996).

Regardless of the benefits attributable to liberalization, the airline industry has had its fair share of demerits. The liberalization of the industry established several imperfections within the perfect market. In this case, the market dynamics were a hindrance to new entrants expected although they were to play a major role in making the airline industry thrive. The presence of new entrants in the market was not felt because of inexperience in the market, unsound financial footing and poor pricing structures (Meyer & Oster, 1981). For these reasons, financially strong airline companies maintained their absolute advantage over the newcomers.

Liberalization aimed at a fair concentration in the market share. The monopolistic airlines, which dominated the market, were diluted by the encouragement of new entrants. On the other hand, new entrants gained some command in the freely competitive market since there was freedom of entry and exit from the air transport market. Through the implementation of the deregulation act, the industrial trend had positive impacts on the airlines’ profits. However, the rapid growth in profits realized was downplayed by the increased operating costs. This saw the new entrants in the market encounter considerable capital and resource losses. Major players in the market created unfavorable terms for the new entrants, making this form of investment unviable. They invoked market barriers available to them such as the slot controls, discriminative perimeter regulations and the selective control of airport gate leases. They expanded their markets, acquired companies that competed with them, and consequently, made their dominance felt throughout the United States (Card, 1996).

The world economic fluctuations such as recession and depression have had a considerable impact on the liberalized air transport regime. In most instances, the economic cycle of the air transport sector was considered unstable. Since the environment gave carriers the freedom, they undertook ideal business practices that suited them. Based on the business forms that existed, challenges were witnessed as to whether the industry would satisfy the needs for economic growth and development. The airlines had troubles in maintaining profitability since the competitive market provided undercut prices. The high fuel costs and minimum wage requirements, which are not sensitive to the prices charged in the sector, have aroused additional challenges in the industry (Robson, 1998). The disequilibrium established by price wars has led to the bankruptcy of many airlines. Most of the companies in the airline industry, which came into being after the liberalization period, were either bought out, merged or went under receivership.

Multiple concerns have been raised over the fares in short distances charged by carriers. A considerable number of consumers view that fares did not decline at similar rates like the ones charged within long-distance travel. Other customers complain that transport charges between less-trafficked markets and between smaller cities did not reduce as expected. At the same time, service delivery did not improve in small city destinations as compared to large city destinations (Osmun, 1982).

Liberalization made the pricing process of fares complex amongst the carriers. The dynamism of fixing prices fares was subjected to the ever-fluctuating supply and demand for passenger seats. A balancing effect to match the fixed number of the passenger seats with flexible demand for them is almost impossible. Consequently, the airlines have encountered difficulties in conveying passengers resulting in delays and congestion. The law of demand and supply does play an exception here, and as a result, business fares are hiked to regulate the demand to manageable levels. Some airlines have resorted to plying routes that maximize their profits when the issue of high demand arises. This implies that some travel destinations are not equitably served to the desired level expected by passengers (Moses & Savage, 1989). The rapid increase in the number of passengers because of lower-priced fares calls for a major facelift in the sector.

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The liberalization of the airlines did not include the deregulation of air transport infrastructure and the traffic control system. The government did not pass on the ownership of these facilities to the industry players. In this regard, the state still has some federal control over the liberalized market. This has limited the use of post-modern technology to enhance the capacity-constrained by infrastructural limitations. Several initiatives are required to obtain maximum benefits and overcome the challenges faced in the liberalized aviation industry. Upgrading of the infrastructure to curb the congestion mess is necessary. The hub and spoke system remains limited to the industry’s infrastructure, which remained unaltered even in the liberalized regime. This will validate market demand-based charges during travel peaks to gain revenue for capacity expansion and investment (Robson, 1998). Airports should be permitted to enlarge their capacity, instead of waiting for government authorities to make such moves. This could be done through the privatization of the airport and its facilities, such as the traffic control system.

The traffic control system should be revamped to enable it to handle the ever-increasing air traffic. Commercialization of the system can serve to advance competition and lower the fares further. This will limit extra costs, fuel consumption, and time wastage by planes awaiting landing clearance. However, the expansions of the airports are subject to other social barriers. The environmental opposition emanating from the increased noise and air pollution restricts the expansion of airfield facilities. Therefore, the use of environment-friendly strategies such as decreased noise emissions, lower fuel consumption and emissions is vital (Meyer & Oster, 1981). Efficient pricing of runway takeoffs and landings based on peak and off-peak usage is required. This staves off the discriminative policies invoked by pre-existent large airline companies on the new entrants.

Reregulation of the airlines would not give remedy to the problems brought about by deregulation. The reintroduction of government legislative control of the airlines would cancel all the benefits brought by liberalization. The higher fares that will come along with the reintroduction of the controls could result in the relocation of passengers to other cheaper means of transport. Though the liberalization process has played a major role in the development of the global market, more steps are inevitable. Wider liberalizations are required to stimulate more economic growth than what the United States has done. The opening up of the Trans-Atlantic market and greater deregulation strategies with the second and third-world countries can make a considerable impact on the global economy.

References

Card, D. (1996). Deregulation and Labor Earnings in the Airline Industry. Cambridge, Mass.: National Bureau of Economic Research.

Chung, C., & Szenberg, M. (1996). The effect of Deregulation on the US Airline industry. Journal of Applied Business Research, 12(3), 133.

Leong, W. W. (1991). The effect of airline deregulation on the financial condition of the airline industry. New York: McGraw Hill.

MacAvoy, P. W. (1992). Industry regulation and the performance of the American economy. New York: W.W. Norton.

Meyer, J. R., & Oster, C. V. (1981). Airline deregulation: the early experience. Boston, Mass.: Auburn House Pub. Co..

Meyer, J. R., Oster, C. V., & Clippinger, M. (1984). Deregulation and the new airline entrepreneurs. Cambridge, Mass.: MIT Press.

Moses, L. N., & Savage, I. (1989). Transportation safety in an age of deregulation. New York: Oxford University Press.

Osmun, J. D. (1982). The Airline Deregulation Act of 1978 and its effect on the domestic air transport industry. New York: University Park Press.

Robson, J. E. (1998). Airline Deregulation. Political Science, 21(2), 17-22.

Tretheway, M. W. (1986). Airline deregulation. Vancouver: Faculty of Commerce and Business Administration, University of British Columbia.