Airline Deregulation Act of 1978 - Case Study Example

Introduction: The Airline Deregulation Act is a federal law in the United States that was enacted on October 24, 1978. The rationale behind the law was to get rid of the control of the government on fares, routes and entry of new airlines in the market from money-making aviation. The major objectives of the Act included the safeguarding as the utmost precedence in air commerce, placing highest confidence on antagonism while providing the services of air transportation, encouraging the air services at the urban areas through the availability of secondary or satellite airports, trying to avoid the irrational industry absorption that would eventually lead to increase in prices along with reduction in services, and encouraging the entry of airlines into newer markets thereby strengthening the services of the small air carriers as well. Several restrictions on airline operations were removed as part of the Act. Restrictions on domestic routes and new services were eliminated completely with complete end of the domestic fare regulation. These changes had been quite rapid in process (Airline Deregulation Legislation Act 1978, n.d.). The present study has considered learning on the Airline Deregulation Act of 1978 discussion on the effects of regulation and deregulation and what is still being regulated in the industry. Competition and Regulation in the Airline Industry: The deregulation of the airline industry had begun in the year 1979. Before that, the Civil Aeronautics Board had control over both the routes that airlines took off as well as the prices of the ticket that were charged, where the major goal of the Board was to serve the interest of the public. As the deregulation initiated, airlines that were nationally owned and could be considered as robust, prepared, and competent by the Department of Transportation (DOT) were allowed to fly on any domestic route. The principal regulatory responsibility of the DOT altered from supporting an airline’s operations for the interest of the public to making decisions whether an airline was operating in harmony with the standards of safety and other processes of operations (Competition and Regulation in the Airline Industry, 2002, p.1). From the time when the deregulation started in 1979, the airline industry in U.S. has been obtained to have grown enormously. A growth of around 225 percent was experienced by the country over this period of time. On the other hand, Canada, where airline industry was deregulated later and encountered lesser competition than the United States, experienced a lesser growth rate of 80 percent. Thus, it could be considered that deregulation, predominantly in amalgamation with rivalry, has the ability to stimulate growth in the airline industry (Competition and Regulation in the Airline Industry, 2002, p.1). Since the airline industry is an intricate combination of an aggressive and regulated industry, there are several choices of policy that could have an effect on its level of rivalry. “A central policy choice is the mechanism for allocating airport boarding gates and facilities” (Competition and Regulation in the Airline Industry, 2002, p.3). Many commissions of airport depend on non-market means to deal out the limitations in resources. Alterations in policies by these commissions thereby allowing viable commands for boarding gates and landing rights might promote rivalry among airlines. This might also support the authorities of airport to augment delivery when the values of bid are higher than costs (Competition and Regulation in the Airline Industry, 2002, p.3). Airline Regulation and Its Effects: The primary responsibility of the Civil Aeronautics Board was to decide on which routes could be served by which carriers. This was planned by awarding 16 certificates of public ease and obligation to carriers of the trunk line in the year 1939. These certificates facilitated and compelled the 16 airlines to carry on their services on the airline routes they earlier served. New airlines were not permitted following 1939. Also, there were twenty-one local feeder service providers that were awarded with the certificates in between 1943 and 1950. However, they were forbidden from offering continuous service from terminal-to-terminal, as well as from offering any rivalry to the trunk lines. The exit of the airlines exit from the market was also regulated by the CAB. The purpose of the regulations was to protect the industry where the services of the trunk lines existed (Hall, Sheik & Schwartz, 2008, p.4). Thus, when the regulation prevailed in the industry, the carriers that were certified by the CAB did not leave the market, with the exception of by merger and acquisition by any other carrier. Although most of the Second World War was spent by the CAB making sure that there was cooperation among the airlines in the effort of the war by offering them the armed forces with use of their aircraft, the Board also imposed two considerable reductions in rates in 1943 and 1945. These reductions were described as a typical regulator’s predicament by Douglas and Miller. There was a scarcity of aircraft owing to the efforts in war, with the requirements rising on the other hand. Although this would have led to a swell in the prices of the fares, yet with loads of passenger rising, the cost of the airlines per passenger was declining, raising their profits. “The CAB chose to limit the airlines’ profits, rather than approve a fare increase” (Hall, Sheik & Schwartz, 2008, p.4). Economic Regulation of Airlines: The Air Mail Act of 1925 permitted the government of U.S. to compensate airlines for carrying mails. The McNary-Watres Act of 1930 allowed the Post Office Department to evaluate the practices of accounting of the carriers of these mails and secured certain carriers from viable bidding for their airmail routes. With The Air Mail Act of 1934 being passed the disbursement of money to the airmail carriers conducted by the Post Office was extended. The airline companies that were not under the contracts of the governments for carrying the mails, from 1930 to 1938, developed rapidly, contending for passengers by reducing the fare prices (Mola, n.d.).  In 1935 the Federal Aviation Commission suggested that the whole industry of air transportation needs to be regulated like the Interstate Commerce Commission regulated railroads. Since the enactments of ADA (Airline Deregulation Act of 1978) and IATCA (International Air Transportation Competition Act) legislation, the airlines have been scrutinized by the Department of Justice when they take action in a manner that might engross unjust rivalry. During the period from 1985 till 1993, “many airlines merged or bought other airlines, and these business deals cost some airlines a lot of money” (Mola, n.d.).  The Effects of Regulation on the Industry: There are two customary analyses in present-day financially viable contemplation clarifying the dynamic strength following the regulation of airline industries. The first view, referred as the public-interest theory of regulation, presumes that regulation is recognized mainly for the benefit of society at the cost of the regulated firms. Considering this thought it can be said that the government is the means by which individuals in the nation communicate their requirements to alleviate failures in the market including problems related to public goods, monopolies, and spillover. Moreover, it could be argued that the airline industry was regulated for motives such as national defense or restriction of monopoly influences. Hence, the community benefited from regulation (Chmura, 1984). Another view of regulation, referred to as the private-interest theory, considers that regulation is required to improve the affluence of some at the cost of the other members of a community. Studies assumed that regulation is obtained by the industry and is planned and controlled mainly for its benefit. Considering this thought it can be reflected that the government is the system by which groups of people having similar thoughts relocates riches from the society to the groups of their own particular interest. Thus focusing on this view, it might be argued that the airline firms and aircraft manufacturers benefited from regulation (Chmura, 1984). Airline Deregulation and Its Effects: Before the year 1978, the government of the U.S. government, through the Civil Aeronautics Board (CAB), regulated several areas of commercial aviation including fares, routes, and schedules of flights. The Airline Deregulation Act of 1978, nevertheless, eliminated many of these controls. This in turn altered the features of civil aviation in the country. After the initiation of the deregulation, unregulated competition at no cost steered in a new time in passenger air travel. Among the functions of the CAB, one of the most significant was to select airlines from the existing groups for a particular route such that the market could not decide on which airline should fly on which route. Carriers that were established and already had their routes to serve would usually assess new contenders and often found that the applicant was short of some requirement for flying a route that was already-covered. Consequently, new entrants into the industry were at an immense inconvenience and were “often shut out of key routes since the established airlines did not want new competition. Fare-setting also involved a similarly long process” (Siddiqi, n.d.). There was a wide-ranging dissatisfaction in the airline industry concerning the laws that regulated civil aviation. Moreover, deliberations in Congress tinted the reality that fares for routes within states were generally much lower than those between the states, although the distance between the routes was the same. This was somewhat since national routes were regulated more strictly than flights within the states. The thrust towards deregulation, “or at least to reform the existing laws governing passenger carriers, was accelerated by President Jimmy Carter, who appointed economist and former professor Alfred Kahn, a vocal supporter of deregulation, to head the CAB” (Siddiqi, n.d.). Another force supporting the deregulation measure materialized from out of the country. In the year 1977, Freddie Laker, who was a British industrialist and owned Laker Airways, fashioned the service of Sky train, which provided the consumer with extremely economical fares for the flights. The offers of Laker overlapped with a rumble in economical domestic flights since the CAB relieved some restrictions on charter flights. The big air carriers acted in response by recommending their own lower fares (Siddiqi, n.d.). The Effects: With the effect of the deregulation act, the federal government relaxed its power on the airline industry. Without the controls of the government over airlines and their structures of the routes, the airline business developed into a more aggressive industry. Several airlines dropped the routes that were unprofitable and not supported financially any longer in support of more profoundly travelled, profitable routes. New airlines pounced in the market, some almost immediately with the effects of the act taking advantage of new markets. With intentions to develop efficiency and reduce costs, the airlines built up a hub and spoke system where several airports are used as a point of linkage to the passengers from diverse sources and destinations. A major benefit of this hub system is that a large number of flights are available to the passengers to choose from while flying (Kost, 1988). Deregulation has been found to have an undeviating effect on airports such as Detroit Metropolitan Airport and passengers. Big facilities that are not planned for a hub system have clear objective restrictions which affect their users, along with the increasing problems of congestion. “In effect, the airlines were freed from the burden of government regulation but the airports were not. As facilities must be upgraded and expanded to keep pace with demand, so also must the management and revenue structure of airports further evolve to best meet this demand” (Kost, 1988). Regulation That Still Exists: In the 1990s, the United States had made a rigorous attempt to ease up its global aviation markets. This effort was proved to be successful, and in the present day times of the April 2000, the U.S. had concluded 45 agreements to the Open Skies, which switch over the rights of traffic, devoid of any restraints on the routes, the number of carriers or facility. Also, they provide liberal administrations for pricing, charters, mutual marketing agreements and other profitable prospects. “In cases where the agreements are less liberal and some restrictions exist, it is the task of the DOT to decide which U.S. airlines get those rights through traditional administrative processes” (Hall, Sheik & Schwartz, 2008, p.6). DOT obtained power to support and inoculate contracts disturbing international air transportation; nevertheless, the right over domestic connections failed. DOT had the liability for keeping up air service to small groups of people. The carriers were free to set off anywhere they would like. Hence the Congress predicted “that some of the lightly traveled routes would lose service. To assure appropriate service, it established the “Essential Air Service Program”, which provides subsidies to carriers willing to serve domestic locations that otherwise would be economically infeasible to serve” (Hall, Sheik & Schwartz, 2008, p.6). The safety of the airline is still regulated by the Federal Aviation Administration (Hall, Sheik & Schwartz, 2008, p.6). Conclusion: From the above study it can be concluded that although the act of deregulation had been supported and initiated as a means of removing the regulations and thus the controls on the airlines industry with respect to the fares, and the schedules. However with the deregulation in practice, although some benefits might have been achieved yet the safety along with other issues as discussed in the study reflect on the need for regulation to certain extents. In other words, it can be said that there were certain benefits of the regulations that deregulation may not be able to provide. Hence the government needs to consider these issues effectively and re-regulate certain areas of the industry for betterment in the airline services to its passengers. References 1) Airline Deregulation Legislation Act 1978 (n.d.), avstop, Retrieved on August 29, 2012 from: http://avstop.com/history/needregulations/act1978.htm 2) Chmura, C. (1984). The Effects of Airline Regulation, thefreemanonline, Retrieved on August 30, 2012 from: http://www.thefreemanonline.org/columns/the-effects-of-airline-regulation/ 3) Competition and Regulation in the Airline Industry (2002), Arizona, Retrieved on August 30, 2012 from: http://www.u.arizona.edu/~gowrisan/pdf_papers/airline_competition.pdf 4) Hall, A., Sheik, A. & D. Schwartz (2008). The Delta-Northwest Merger, Retrieved on August 30, 2012 from: http://nexus.umn.edu/Courses/Cases/CE5212/F2008/CS6/CS6-report.pdf 5) Kost, J.M. (1988). Effects of Airline Deregulation, mackinac, Retrieved on August 31, 2012 from: http://www.mackinac.org/6358 6) Mola, R. (n.d.). Economic Regulation of Airlines, centennialofflight, Retrieved on August 30, 2012 from: http://www.centennialofflight.gov/essay/Government_Role/Econ_Reg/POL16.htm 7) Siddiqi, A. (n.d.). Deregulation and Its Consequences, centennialofflight, Retrieved on August 31, 2012 from: http://www.centennialofflight.gov/essay/Commercial_Aviation/Dereg/Tran8.htm Read More