Deregulation of Aviation in the Commercial Airline Industry - Research Paper Example

?Deregulation of Aviation in the Commercial Airline Industry Introduction Airline deregulation refers to the process of price and entry restrictions removal on airlines, which particularly affects the carriers that are allowed to only serve specific routes. In 1978, the United States signed an airline deregulation Act, and later developed a new regulation form, to deal with allocation of scarce availability of slot numbers in the airports and other problems that may be as a result of this scarcity. With cost and price competition views, various solutions were proposed, in order to control the routes served and the prices charged by major airlines. Airline deregulation has yielded and continues to yield uncountable benefits to travelers who fall in the average category. Economists have estimated that the lower prices have helped consumers to save a lot from the airline’s competitive market place. According to Smith & Cox (2007), one decade of airline decontrol implementation led to 35% growths in the airline industry, through increased employment and passenger travel. The two economists say that travelling increased by 55 %, as the real travel cost decreased by approximately 17% in the major routes. They found that by the second decade, ticket prices decreased by 20% in real terms, while passengers served were 324 million. Historically, airline services were partially regulated, because of oligopoly and monopoly concerns, as only a few airlines provided flights that were direct between cities. The aim of the US airline deregulation was to control entries and reduce prices in the transport system in the United States. Since then, many other nations have seen the need to deregulate their domestic airline markets, and this has effectively been applied in European Union airline markets. Today a big number of international airline markets are subject to tight airline regulations. United States’ Airline Deregulation In the United States, airline deregulation was born from the 1925 Air Mail Act and 1926 Air Commerce Act. Serious commercial aviation economic regulation began in 1938 with Civil Aeronautics Act passage. The creation of Civil Aeronautics Board (CAB) gave it power to regulate and control airline routes as well as market entry and exit, and mandate service rates. Later, airline safety regulation was passed together with 1958 Federal Aviation Act that bore Federal Aviation Administration. By 1938, US government was regulating much commercial aviation in terms of routes, schedules and fare. The three main functions of CAB are regulating airline route, limiting new market entrances by air carriers, and regulation of passenger carriers. CAB report shows typical regulatory thinking. Without certain circumstances that give sound reasons for new carriers, inherent desirability to increase the airline industry was not valid. The 1978 Airline Deregulation Act deregulated many of these controls and completely changed the civil aviation face in the United States. In order to serve any given route, an airline was required to seek permission which led to many barriers in the permission granting. Consequently, the system was removed by airline deregulation including the dismantling of the flag carrier notion. However, this caused a new problem because many civil suits were filed in state or federal court against an airline. While the court handled breaches of contract and personal injury claims the transportation department had neither the facilities nor authority to mediate or try many disputes between airline and consumers (Johnson, 2008). Therefore, many consumers have been left to search for themselves legal justice with their claims. This is enhanced by the Open Skies Agreements between United States and other nations which have opened the aviation market to foreigners and removed competition barriers. This allows airlines to operate their air services to any point of other countries from any point in United States. These agreements have successfully removed competition barriers as well as allowing airlines to accommodate foreign partners. International routes’ access to other countries from their domestic countries and freedom from economic regulations of traditional forms has further improved airline operations in the US, (Bailey, 1987). Airline, as a global industry, works better with rules that are globally set to allow them to start airlines in foreign countries and to undertake operation of domestic services in other countries/territories. Unfortunately, these agreements may fail to give an approximation of freedom of many industries in their competition in different global markets. Literature Review a. The Need for Airline Deregulation The entrance of turbojet-driven planes into commercial use in the US airline industry brought about a dark moment in the industry, thus initiating the need for deregulation. Integration of jets into the market made the industry to experience marked growth. In a span of one decade, their operations had increased by over 50%, since many people preferred to travel by air (Bailey, 1987). The steady increase in airline operations posed serious strain on federal operator’s ability to cope with the airline’s travel complex nature that was fast increasing. Furthermore, there were basic economic condition changes as well as in the aircraft technology, which triggered an abrupt decrease in the industry’s performance (Dempsey, 1989). Low economic growth, high inflation onset, high costs of labor and fuel costs, and falling productivity really devastated the airlines. b. Benefits of Airline Deregulations Deregulations of airlines lead to a steady decrease in prices. According to Johnson, (1987), the prices fell about 40% in 1978, that is, from 12.3 cents to 7.9 cents. This impressive trend triggered dramatic expansion in the number of passengers flown per mile from 250 to 750 between 1978 and 2005 respectively, in the number of million passenger miles. Johnson observes that deregulation of airlines might be a failure if fare at small and medium airports does not decline like in large airports, but these small airports have equal rights to better service and low price benefits, just like the large airlines. Airline deregulation has also improved on safety with a decrease in price (Dempsey, 1989). The American records indicate an improvement in safety, since the implementation of airlines deregulation act. This safety is however determined by accurate examination of airline fatalities that occur annually, in relation to the miles flown, overall number, by the air carriers of a particular nation. Fare deregulation, however, has no extension to the federal oversight’s wider removal in the airlines industry. Airlines Deregulation Act Passage and implementation did not affect airline safety matters as they were still under the regulations of Federal Aviation Administration (FAA). There are many different ways of measuring airline service quality, like the number of times that aircrafts departure, total miles flown, service timeliness, other services and programs and various amenities and frills. With the enactment of airline deregulation, the overall service quality has increased (as indicated by these measures) such as the increase in the number of flights service timeliness and programs and services among others. For the past several years, the quality of airline service has significantly dropped according to public views. In 2008, the American Satisfaction Index, in a study that was carried out by Michigan University, observed that the preferences and expectations of 80,000 consumers ranked major US airlines last among all surveyed industries (Johnson, 2008). In 2009, the airlines industry moved by one point, ahead the newspaper industry and satellite and cable TV, (Johnson, 2008). On the other hand, United States government has repeatedly been called upon to pass a bill of rights of air passengers, in order to provide specific requirements on what air passengers must be given under certain conditions. The bill is currently under pressure from passengers of several high profiles standings. The short term effects of airline deregulation in US, among others, was that many airlines abandoned routes that were less profitable and those that operated in smaller, short distance cities. For instance, United Airlines had had operated in Bakersfield and California, booming oil town with over 225,000 people, until 1978 (Dempsey, 1989). After the deregulation, it stopped operating in Bakersfield and started operating to Las Vegas and San Francisco. The other effect was the hub-and-spoke routes growth. Major airlines changed their routes into key cities that serve as their operation centers and stops for many flights (hubs), even when they were not directly operating in the cities. Eastern Airlines had a hub at Miami, while Delta Airlines operated from its hub in Atlanta. The two airlines had many flight trips from their hubs thus filling more seats and covering many miles per day. In 2007, for example, nonstop daily flights between West Palm Beach, Florida, and New York rose to 23 from 5 (Dempsey, 1989). On the other hand, deregulation of allowed new airlines to penetrate the market without the need to agree to established larger airline demands. An example of such airlines include People’s Express. This airline was founded by Burr Donald, an entrepreneur who invented theunconditional management method like low salaries, few employees, fewer managers, and all employees’ equitable stock ownership. This airline ran a very tight operation in which passengers paid for checked in baggage as well as their meals on planes. However, the fare was very low, that it could be compared with that of intercity bus service. Therefore, its revenue dramatically increased in early 1980s and by 1985, it reached a billion dollars. Eventually, large already established airlines cut their fare prices and since the People’s Express could no longer compete with them, since they offered far much better services. The emergence of low cost carriers in the air transport reduced in favor of hub-and-spoke system further increased market efficiency in small markets service. This system allowed some airlines to compete out other competitors from their fortress hubs. This has increased point-to-point service in the air transport system in the United States. It has also led to the development of aircrafts that offer a wider range of types of aircrafts that better adapt to markets of different sizes. Other older well established airlines also started offering purchase of advance tickets, thus completely competing out small airlines like Peoples Express which was later sold at a great loss in 1986 due to massive losses and dissatisfaction of customer (American Customer Satisfaction Index, 2008). Further more, freeing airlines from CAB rules made both major and regional airlines to inaugurate new routes. They competed for passenger business on a no holds-barred competition. Consequently their prices drastically dropped while revenue rose steadily. This resulted to an increase in the number of passengers who used airlines for their travel, recording approximately 320 million passengers in 1979. c. Problems of Airlines Deregulation Although there has been a substantial economic liberalization gain, the industry has faced several problems. These problems are massive and transitional adjustments needed by strict regulations. The monopolies of regulated airlines have received capital returns that have caused high costs, which would not be found in a competitive market, although they were expected to be reasonable. Bailey (1987 for instance, unionization of the airline’s workforce made the employees to benefit from increased salaries while the work rules were inefficient due to the establishment and strengthening of regulations that was held by the Act of Railway Labor. This caused major problems since it was contrary to the expectations of a competitive market (Morrison, 1987).Today’s markets are facing various problems especially with US’ Flight Commission Centennial and Legacy Airlines. Unfortunately, there was marked economic recession during the enactment of the deregulation Act that brought about serious negative consequences. During this period, airlines recorded $ 421 million net operating losses in 1981 when passengers dropped to 286 million. These problems were further made worse by Professional Air Traffic Controller (PATCO) national wide strike. Braniff Airlines completely collapsed in 1982 with other airlines continuing their expansion despite the economic problems thus putting them under serious risk. Another negative effect of airline deregulation is that airline trends have not yet been evenly distributed throughout the national network of air transport. Moreover, costs have dramatically fallen on higher traffics with longer distance than those on shorter routes (Bailey, 1987). Deregulation’s long term effects are still being debated by economic analysts. Post-deregulation era climate was very unstable, as shown by the Eastern and Continental airlines’ fates, the main domestic carriers. They both suffered severe financial crisis that was further worsened by mismanagement and bad employment relationships. They finally became bankrupt with Pan America and United States most important carriers suffering similar fate. Generally, many big airlines suffered major losses that left them bankrupt or under low financial growth than expected. After airlines deregulation, airlines moved fast to hub-and-spoke system where an airline selected its hub (origin) and spoke (destination). As the airplanes varied in sizes, depending on the spoke travel and consolidation of transfer stations increased the capacity of utilization leading to fare reductions (Bailey, 1987). The model of network hubs offered more convenience to consumers for routes than point-to-point routes which are much cheaper for implementation by airlines. Legacy carriers will use network hubs and point-to-point to capture scope and pricing advantages of economy. Conclusion The positive deregulation consequences were significant drop in fare prices, improvement of security, service and programs, among others. Reduction of fare helped passengers to increase their savings, where it is estimated that they saved up to $ 100 billions. It also allowed smaller airlines that were operating on short unprofitable routes to proliferate into the big carriers market. Generally, the larger airlines suffered negative consequences of airlines deregulation like bankruptcy, collapse high operating losses more than the smaller airlines. However, millions of flying passengers and smaller airlines gained the better benefits of airlines deregulation. Though smaller markets were not affected by service erosion as predicted by deregulation opponents, larger airlines had nothing to small to smile at, as competition exposure made them suffer heavy losses through labor union’s conflicts. As a result, many of them were liquidated, especially those that were founded in the after deregulation. References American Customer Satisfaction Index, (2008). Scores by Industry. Observed on 9th May, 2011 From http://www.econlib.org/library/Enc/AirlineDeregulation.html Bailey, E.G. (1987). Deregulating the Airlines. Cambridge, Mass.: The MIT Press. Dempsey, P., (1989). The Social and Economic Consequences of Deregulation. Westport, Conn.: Quorum Books. Johnson, J., (2008). Airline industry the Worst in Customer Ratings. Chicago; Chicago Tribune Publishers. Morrison, S., Winston, C. (1997), The Economic Effects of Airline Deregulation, Studies in the Regulation of Economic Activity. New York; Brookings Press. Smith, F. L., & Cox B., (2007). Airline Deregulation, The Concise Encyclopedia of Economics. Chicago, Chicago University Press. Read More