The Airline Industry Policy in the USA and Canada - Assignment Example

Running Head: INDUSTRY POLICY Regulation Aspect of the Airline Industry Policy in the U.S.A and Canada Name Institution Date Compare one aspect of industry policy in two countries, focusing on one industry. Which policy is best? Why? Introduction An industry policy can be described as a set of instructions, laws and regulations that are formulated in accordance to the requirements as well as the priorities of a given economy by a ruling power within the government. It is usually adopted by all economies and plays a role of a determinant factor towards a country’s industrial development for a given period of time. It is therefore considered as the guideline for either encouraging or discouraging some of the continuing or new industrial/investment related decisions on a specific industry. Despite that, this policy is often put through change from time to time in case it is observed to be ineffective. This particular paper will therefore compare the regulation aspect of the airline industry policy in the U.S and Canada. In addition, it will be able determine which policy between the two countries is best as well as reasons for this. One common aspect between the airline industry policy in the U.S.A and Canada, in terms of regulation is the aspect of domestic service regulation. In both countries, this is undertaken through deregulation of domestic service. For instance, Canadian airline industry has since 1998 been entirely deregulated, with only a few exceptions relating to safety and foreign control (Madore & Shaw, 1993). Through economic deregulation, measures that were meant to monitor market entry and exit were removed. As a result, there are no regulations governing fares and services. Deregulation has therefore enabled the two air carrier families to contend equally as well as unencumbered on major domestic routes. The Canadian government has, however, hold on to some air services regulations within the North in the far-away areas of the nation, especially with regards to fare controls and market entry. These regulations are meant to ensure key services to and from the far-away but under populated markets. In the U.S.A, domestic service regulation was done by deregulation of the airline industry which started in 1979.Before it began; the Civil Aeronautics Board took control of both the airline routes as well as the ticket prices that were charged, with an aim of serving the interests of the public. In addition, with the adoption of deregulation, any particular domestically owned airline that was considered able and fit by the Department of Transportation (DOT) was permitted to fly on any domestic route. The major regulatory role of the Department of Transport changed from recommending whether an airline was to operate within the interests of the public to determining whether an airline was operating in compliance with safety standards and other operating procedures (Madore & Shaw, 1993). Despite the fact that route timetable and airline industry pricing have been largely deregulated for more than 20 years; a number of other aspects of the U.S airline industry are still highly regulated. FRBSF Economic Letter (2002) argues that most significant regulations possibly originates from the local governments that own as well as manage airports within their regions, as a result control major bottlenecks to airport services, runaways and access to boarding gates. Additionally, international routes have only been gradually deregulated through negotiated mutual open-skies agreements, which generally permit airline companies from two various countries under consideration to operate between those countries devoid of restrictions. Another aspect between the airline industry policy in the U.S.A and Canada, in terms of regulation is the aspect of International Service Regulation. In the Canadian context, the international air services regulation is based on terms set up by mutual agreements between Canada and other nations. An increasing talk concerning policies developed to open up markets of air carriers to competitive forces has been witnessed in North America. Such policies have resulted in the reformation of the Canadian airline industry. The first one of these policies is the open skies policy that permits a Canadian carrier and other countries under the bilateral agreement to offer their services on any transborder route at any time. Canadian and other countries companies’ under the bilateral agreement would compete without restraint for flights between the countries. This policy is believed to intensify various activities of the North American hub-and-spoke networks. It is commonly acknowledged that the major carriers of the major hub airports would benefit from significant advantages in terms of cost savings, enhanced flight frequencies, as a result greater market share. The second policy has been the cabotage policy whereby a Canadian airline is able to carry Canadians from one point to another out of the countries involved bilateral agreement and vice versa. The U.S international air services regulation is also based on terms set up by bilateral agreements between it and other nations involved in the agreement. Similar to the case of Canada, America also adopts the open skies policy which is a mutual agreement between it and other nations to open up the aviation market to foreign access in addition to removing barriers to competition. This gives the airlines the freedom to operate their air services from any point in the U.S to any point in the other countries (Tanguay, 2010). The U.S. has Open Skies agreements with over 60 nations, including 15 of the 25 European Union nations. The Open Skies agreements have been able to achieve a lot in terms of eliminating barriers to competition and enabling airlines to have foreign partners, freedoms from the many traditional forms of economic regulations as well as the access to international airline routes to and from their home nations (Morrison & Winston, 1995) Even though the Open Skies agreements seems to have marked a shift towards liberalization, the U.S Department of Transport incorporated many established elements of prior bilateral air transport agreements into its skies definition. Considerably, the U.S Department of Transport refused to liberalize existing stipulations regarding cabotage as they claimed changes in laws regarding Cabotage needed legislative action and were outside the area of the Open Skies Initiative (Edwards, 2003). Foreign Ownership restrictions form another aspect of the airline industry policy in the U.S.A and Canada, in terms of regulation. The air carriers of Canada are subjected to regulations governing foreign ownership. For instance, in order to operate air passenger services within Canada, a company has to belong to a citizen of Canada or a resident of Canada or be subject to a de facto Canadian control, whereby 75 per cent of the voting shares have to belong to Canadians. The restrictions are meant to ensure that foreign interests do not gain voting control of a Canadian carrier. According FRBSF Economic Letter (2002), various industry analysts have recently inquired whether the limits on foreign ownership are supposed to be raised. It is believed that this would offer Canadian carriers better flexibility in bringing about agreements with foreign carriers in addition to providing for more efficient international air networks. A great number of experts feel, however, that, for purposes of security, effective control of the Canadian carriers has to continue being exercised by Canadians. According to Furlan (2002), the U.S has previously restricted ownership as well as controls of carriers to U.S citizens due to four major reasons; the protection of the fledging U.S airline industry; concern over foreign aircraft access to the U.S airspace, regulation of global air service through mutual agreements and armed forces reliance on civilian airlines to supplement air capacity. The U.S air cargo industry is presently managed by the federal statues requiring that any air carriers in search of certification to be owned or controlled by the U.S citizens. This requirement is imposed by the Department of Transportation fitness reviews on applicant airlines to make certain that they meet the citizenship definition. These restrictions stop cross-border acquisitions as well as foreign establishment of foreign cargoes; bring to an end equity capital to the industry, deterring efficiency and creating artificial barrier to competition (Bingham, 1998). Which policy is best? Why? The U.S and Canada airline industry policy appears to be similar in terms of almost all the regulation aspects. For instance, both the U.S and Canadian regulations disallow foreign –owned airlines from providing domestic flights-that is to say, picking up as well as dropping off passengers within the U.S and Canada. In addition, rules governing foreign ownership in both countries require that their citizens own or control no less than 75 percent of the shareholders’ voting interests. It can, however, be argued that the Canadian policy is the best. One of the reasons for this is that, unlike Canada, the U.S policy appears to have several contradictory trends in its governmental attempts to liberalize global, commercial air transport regulation (Haanappel, 2001). So far, most tangible results have been achieved by bilateral open-skies agreements as well as by the regional common aviation areas. There seems however to be a little agreement of how to handle air transport relations between large economic blocs, such as the European Union and other large air transport market. Conclusion Air travel can be described as a network industry. On the contrary, and judging from the above analysis, only its flow elements (the airlines) are economically liberalized. The industry appears to be still adjusting to a more competitive situation and therefore remains subject to various regulations. What we are therefore seeing are the types of internal restructuring among airlines that were anticipated from deregulation. For this reason, governments still have a lot to do in order that the airline market thrives in the coming future. In this case, land slots and airport spaces ought to be allocated by means of market prices in place of administrative fiat. As a result, international competition will increase, and rules related to national ownership ought to change accordingly. Reference Bingham, Richard.D. (1998).Industrial policy American style: from Hamilton to HDTV, M.E. Sharpe. Edwards, A. (2003).The International Legal Framework for Aviation Regulation, Retrieved on April 26, 2011, http://www2.tech.purdue.edu/at/courses/at300/course%20materials/unit%20documents/bilateral%20vs%20multilateral%20agreements.htm FRBSF Economic Letter. (2002).Competition and Regulation in the Airline Industry. Furlan, C. (2002).Air Cargo Foreign Ownership Restrictions in the United States. Haanappel, P. (2001).International Aviation Framework and Implications for Canadian Policy. Milke, M. (2010).Why Airfares in Europe are lower than in the U.S, Retrieved on April 26, 2011 from http://www.theglobalist.com/storyid.aspx?StoryId=8553 Madore, O & Shaw, D. (1993).The Canadian Airline Industry: Its Structure, Performance and Prospects, Retrieved on April 26, 2011 http://dsp-psd.pwgsc.gc.ca/Collection-R/LoPBdP/BP/bp329-e.htm Morrison, S & Winston, C. (1995).The Evolution of the Airline Industry, Brookings Institution Press. Smith, F & Cox, B. (2008).Airline Deregulation, Retrieved on April 26, 2011 from. Tanguay, R. (2010).Pervasive Issues in the Airline Industry Affecting United States Aviation Law and Policy. Read More