Aviation Deregulation - Research Paper Example

 Aviation Deregulation Author note: First paragraph: Complete departmental and institutional affiliation Second paragraph: Changes in affiliation (if any) Third paragraph: Acknowledgments, funding sources, special circumstances Fourth paragraph: Contact information (mailing address and e-mail Abstract This paper reviews a number of published literature on aviation deregulation and its effects on the airline industry. Most of them agree that the effects have been detrimental to the economy and have resulted to gross customer dissatisfaction, delayed flights and congested airports (Servitopoulos, 2003; Bamber, Gittell, Kochan, & Von Nordenflycht, 2013). However, one major advantage of aviation deregulation that has been felt in the industry is the reduction of airline ticket prices. This has contributed to consumers saving up to $19.4 billion per year (Poole & Butler, 1998) as a result of the ensuing competitive airline marketplace. Other writers however still maintain that lower fares should not be the only goal of deregulation since new entrants find it difficult to compete with the existing companies thus making it hard to eliminate the monopoly in the industry, which was the main aim of deregulation. The paper also reviews some of the solutions suggested by the writers who agree that the process of deregulation was hurried and was not done fully (Poole & Butler, 1998) although going back to regulation may not be a good option (Kahn, 2004) Keywords: aviation deregulation, federal regulation Aviation Deregulation Deregulation is the process through which the government removes or reduces certain limitations of running business to have a more competent operation of markets. Deregulation can have both positive and bad effects to the country’s or even the global economy depending on the business in question. Aviation deregulation became law in the United States in 1978 with the signing of the Airline deregulation Act by President Jimmy Carter. This was as a result of an exponential growth experienced in the airline industry in the past two decades thus making it difficult for the federal regulators to deal with the complex nature of the business. Since airline deregulation was enacted, many changes have happened in the industry. However, most of the airlines today complain that the effect of deregulation is not what was initially anticipated. Before deregulation, only a few companies controlled the airline industries, and the government restricted new entrants into the market so much thus preventing competition. However, with implementation of deregulation, the market is expected to be run by the demand-supply forces and this becomes beneficial for the consumer and other businesses in the industry, especially the small ones since monopoly by the larger companies is eradicated thus providing a better business environment (Dempsey & Gesell, 2013). This in turn leads to more airlines reaching most places hence more people are able to access air travel, which was once a luxury of a few citizens. Competition leads to diversification of air travel. Airlines come up with creative ways of offering their services thus facilitating innovation in the industry. The end result is better quality of service to the customers. Better quality of service comes in terms of comfort, timeliness of the flights, number of aircraft departures and total miles flown among others (Kahn, 1988). Since the airline with the best services will most likely attract the most customers, each company strives to offer the best and the ultimate beneficiary is the consumer. The price of air travel naturally drops significantly as a result of the competition. Statistics shows that by 1998, prices had decreased as much as 40% as compared to 1978 before deregulation. According to Poole & Butler (1999), customers save up to $19.4 billion annually as a result of lower air ticket prices. This drop in air ticket prices has led to a massive escalation in passenger miles flown, increasing from 250 million in 1978 to 750 million passenger miles in 2005 (Bamber et al., 2013). This is perhaps the biggest advantage of airline deregulation with the customer benefiting most in terms of reduced prices; especially those consumers targeting low air ticket prices. Deregulation has also facilitated innovation in the aircraft manufacturing industry. Manufacturers have had to create new models of aircrafts that are more economical to run. This is due to the stiff competition that makes airlines opt for such planes that cut costs and increase revenue. Modern airplanes now carry more passengers and travel even further than before thus utilizing the economies of scale. Fuel effective planes reduce costs of operation of the airlines while also contributing to less pollution of the environment. Airlines are now safer than when they were being regulated. Safety has been increased especially after September 9, 2011 and airlines are becoming even more safety obsessed primarily because the commercial consequences if they were seen to be operating in an unsafe environment are detrimental. Although regulation would also cover their security, most people today are wary of leaving their safety solely to the government. Insurance companies have also benefited massively from deregulation due to the airlines taking as much precaution as necessary to promote safety in their operations. However, most of these benefits of aviation deregulation have been proved to exist only theoretically. For instance, although deregulation facilitated entry of new firms, it was difficult for them to stay in the market and ended up forming alliances with the existing companies. Of the 52 new entrants since deregulation, none of them were in existence by 2013 (Bamber et al., 2013), with some of them dropping out due to bankruptcy and others forming alliances with larger companies. Deregulation came with a “hub and spoke” effect where airlines would make one airport, the hub, as the terminal point for flights from several cities, the spokes. This has actually reduced the competition that is supposed to be encouraged by deregulation because this system favors the airline that is dominant in the hub thus promoting some sort of monopoly (Servitopoulos, 2003). Furthermore, the people living around the airport that is not the hub of a particular airline are at a disadvantage, as they have limited access to most cities compared to those living close to a hub airport. This system also brought congestion in airports chosen as hubs. Even though the quality of service is expected to increase, statistics shows that it has deteriorated dramatically. Not only are the customers dissatisfied with the services offered to them but also are the employees complaining of poor working conditions and having to deal with disappointed consumers all the time (Bamber et al., 2013). Customer dissatisfaction can be attributed to many factors such as the companies having to reduce the number of flights to fill planes and to cut off certain services to save money. Employees also had to deal with lay-offs, retrenchment and reduced wages. Employee strikes and low performance due to these issues also contribute to worsening of the quality of service offered by the airlines. Implementing aviation deregulation was aimed at eliminating monopoly as one of the key elements. However, the current situation is no different. The stiff competition makes it difficult for new entrants to sustain themselves in the industry and end up either merging with the larger airlines or simply being bought. This way, market choices are removed, and it brings us back to an oligopoly market consisting of just a bunch of airlines (Kahn, 1979). Several writers have given their opinions on the way forward. One major reason why deregulation has failed miserably is because the economists advocating for it failed to see the end outcome, and were treated to several ‘surprises’ shortly after its implementation (Kahn, 1988). However, regulation may not be a viable solution for the current problem because it also has its challenges which may prove difficult to deal with right now. For instance, the airline industry has high potential for rapid innovations and therefore firms will try to circumvent regulations that cost them profits by finding actions that increase their profits and are not covered in the regulation rules. This makes it difficult for the federal government to control all aspects of the industry (Rose, 2012). Regulation also comes with many other disadvantages such as encouraging monopoly and inhibiting competition as earlier stated. The consumers also carry part of the blame. Airlines compromised the quality of service for cheaper air travel in order to increase their profits, and the customers showed that they were okay with it by going for the cheap mediocre services as opposed to quality. The most preferred airline became that which offered the cheapest rates and as airlines struggled to lower the prices, most of the services offered were removed. The airlines should also consider other aspects of the market that can attract customers apart from low ticket prices (Bowen, 2002). Since return to regulation is not an option as Kahn (2004) suggests, the best way would be to complete the deregulation process. Airline infrastructure remained pretty much the same even though they were anticipating an expansion in the industry after deregulation due to new entrants and new routes. This has been the main cause of the congestion in airports leading to more delays, crowded flights and low-quality service. Airports and air traffic control systems ought to be upgraded to accommodate the rapid growth that is set to continue. Airports also need to be given the chance to expand as they need to while certain restrictions on access to major airports should also be reviewed (Poole & Butler, 1999). In conclusion, I see that aviation deregulation is far much better than government regulation and a return to regulation would be detrimental to the industry. However, deregulation is a continuous process and requires that all stakeholders, from the government to the airlines, change with the trends. Studies have shown that the major impediments to a successful airline industry include outdated technology, infrastructure and restrictions imposed on certain airports and routes. Restrictions such as the perimeter rule and slot system have not borne results as expected and the government should scrap them off completely. The government also needs to build new airports or expand existing ones to ease the congestions, a move that should have been done immediately the bill was passed since it was expected that there would be more entrants into the market. Airlines on their part need to increase their point to point routes as opposed to hub centers because these routes have shown to be more economical. Updating their air control systems would also be beneficial to them since it would help in better management of airlines and decrease instances of cancelled or delayed flights. They should also be innovative and begin targeting other avenues of attracting customers and not solely by reducing air ticket prices as past experiences have shown the major reason why most companies have filed for bankruptcy or fallen altogether is because they are all competing to offer the lowest prices thus compromising their profits. In fact, consumers are ready to pay more depending on the intensity of demand, which is the case in other industries. The future of the airline market is dependent on deregulation, and this means that it has to be done the right way if results are expected. The airline industry is very crucial and is inseparable from successful entrepreneurship which gives us more reason to ensure it is operating at its optimum. Deregulation is the way forward and every stakeholder has a vivacious role to play in making it a success, beginning with the government down to the consumer. References Bamber, G. J., Gittell, J. H., Kochan, T. A., & Von Nordenflycht, A. (2013). Up in the air: How airlines can improve performance by engaging their employees. Cornell University Press. Bowen, J. (2002). Network Change, Deregulation, and Access in the Global Airline Industry*. Economic Geography, 78(4), 425-439. Dempsey, P & Gesell, L. (2013). Public Policy and the regulation of commercial aviation. Chandler, AZ. Coast Aire Publications Kahn, A. E. (2004). Lessons from deregulation: telecommunications and airlines after the crunch. Brookings Institution Press. Kahn, A. E. (1979). Applications of economics to an imperfect world. The American Economic Review, 1-13. Kahn, A. E. (1988). Surprises of airline deregulation. The American Economic Review, 316 322. Kahn, A. E. (1988). The economics of regulation: principles and institutions (Vol. 1). Mit Press. Poole Jr, R. W., & Butler, V. (1999). Airline deregulation: the unfinished revolution. Regulation, 22, 44. Rose, N. L. (2012). After Airline Deregulation and Alfred E. Kahn. The American Economic Review, 102(3), 376-380. Servitopoulos, F. (2003). The US Airline Deregulation and Its Effects on Industry Structure and Competition: How Much Did They Affect the Range, Nature and Frequency of Airline Services. Universal-Publishers. Read More