Airline deregulation

Airline deregulation is the process of removing entry and price restrictions on airlines affecting, in particular, the carriers permitted to serve specific routes. In the United States, the term usually applies to the Airline Deregulation Act of 1978. A new form of regulation has been developed to some extent to deal with problems such as the allocation of the limited number of slots available at airports.

Introduction

Various solutions have been proposed, including, for the first time since 1978, federal control over some of the prices charged and routes served by major airlines with a view of increasing price and cost competition.

Although finding solutions to some problems, airline deregulation, for the most part, has created mixed results. Deregulation has provided some financial benefits to the average traveler. Economists from the Brookings Institution and George Mason University have estimated that consumers save thanks to the lower fares resulting from a competitive airline marketplace. Specifically:

“

In the decade after this partial decontrol, employment in the industry grew by 32 percent and passenger travel increased by 55 percent. Along with these increases, the real cost of travel dropped by about 17 percent on the major routes and by somewhat less in smaller markets. The second decade after this deregulation brought even more benefits, with ticket prices more than 20 percent lower in real terms and total passengers served up from 275 million to 600 million since 1978. Consumers saved some $19.4 billion per year thanks to the lower fares brought about by a more competitive marketplace.

”

Conversely, in a June 2008 former CEO of American Airlines, Robert Crandall stated,

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The consequences of deregulation have been very adverse. Our airlines, once world leaders, are now laggards in every category, including fleet age, service quality and international reputation. Fewer and fewer flights are on time. Airport congestion has become a staple of late-night comedy shows. An even higher percentage of bags are lost or misplaced. Last-minute seats are harder and harder to find. Passenger complaints have skyrocketed. Airline service, by any standard, has become unacceptable.

”

Airline services were historically heavily regulated, in part because of concerns about monopoly and oligopoly arising from the fact that in most cases, only a small number of airlines provided direct flights between a given "city pair".

In the U.S., the airline deregulation began in 1978. It was a part of a sweeping reduction in price and entry controls in United States transportation begun with initiatives in the Nixon Administration, carried out through the Ford and Carter Administrations, and followed up on in the Reagan Administration.

Many other countries have since deregulated their domestic markets^{[citation needed]}, and a similar process has applied to airline markets within the European Union. Many international airline markets remain subject to regulation^{[citation needed]}.

Airline deregulation in the United States

Although federal regulation of the airline industry can be traced to the Air Mail Act of 1925 and the Air Commerce Act of 1926, serious economic regulation of commercial aviation began with passage of the Civil Aeronautics Act of 1938. This Act created the Civil Aeronautics Authority, which became the Civil Aeronautics Board (CAB), and gave the CAB the power to regulate airline routes, control entry to and exit from the market, and mandate service rates. Airline safety regulation would come much later with passage of the Federal Aviation Act of 1958, which created the Federal Aviation Administration.

Civil Aeronautics Board

Main article: Civil Aeronautics Board

In 1938 the U.S. government, through the Civil Aeronautics Board (CAB), regulated many areas of commercial aviation such as routes, fares and schedules. The CAB had three main functions: to award routes to airlines, to limit the entry of air carriers into new markets, and to regulate fares for passengers. Much of the established practices of commercial passenger travel within the US, went back even farther, to the policies of W. F. Brown, the US postmaster general in the 1920s and early 1930s in the administration of President H. Hoover. Brown had changed the mail payments system to encourage the manufacture of passenger aircraft instead of mail carrying aircraft. His influence was crucial in awarding contracts so as to create four major domestic airlines: United, American, Eastern, and Transcontinental and Western Air (TWA). Similarly, Brown had also helped give Pan American a monopoly on international routes. (See also the US Centennial of Flight Commission [9])

Typical regulatory thinking from the 1940s onward is evident in a Civil Aeronautics Board report. In the absence of particular circumstances presenting an affirmative reason for a new carrier, there appears to be no inherent desirability of increasing the present number of carriers merely for the purpose of numerically enlarging the industry^{[citation needed]}.

Airline Deregulation Act

Main article: Airline Deregulation Act

The Airline Deregulation Act of 1978 removed many of these controls, thus changing the face of civil aviation in the US. Airlines required permission to serve any given route and incumbents could raise many obstacles to the granting of that permission. The system was dismantled as a result of the Airline Deregulation Act. (See also the US Centennial of Flight Commission [10]) It also dismantled the notion of a flag carrier.

A new problem has arisen in that when civil suits are filed against an airline in either state court or federal court, the airline will seek to dismiss the matter under the ADA and this is often granted^{[citation needed]}. The courts will however handle personal injury and breach of contract claims.

The Department of Transportation (DOT) has taken the position that it has neither the authority nor the facilities to try or mediate most disputes between consumers and the airline^{[citation needed]}, leaving many consumers to fend for themselves in a legal "No man's land" with their claims.

Open Skies

Open Skies agreements are bilateral agreements between the US and other countries to open the aviation market to foreign access and remove barriers to competition. They give airlines the right to operate air services from any point in the US to any point in the other country, as well as to and from third countries.

The U.S. has Open Skies agreements with more than 60 countries, including fifteen of the 25 EU nations. Open Skies agreements have been successful at removing many of the barriers to competition and allowing airlines to have foreign partners^{[citation needed]}, access to international routes to and from their home countries and freedom from many traditional forms of economic regulation^{[citation needed]}. A global industry would work better with a globally minded set of rules that would allow airlines from one country to establish airlines in another country and to operate domestic services in the territory of another country. These agreements still fail to approximate the freedoms that most industries have when competing in other global markets.

The need for deregulation

As jets were integrated into the market in the late 1950s and early 1960s, the industry experienced dramatic growth. By the mid-1960s, they were carrying roughly 100 million passengers and by the mid 1970s, over 200 million Americans had traveled by air^{[citation needed]}. This steady increase in air travel began placing serious strains on the ability of federal regulators to cope with the increasingly complex nature of air travel. At the same time, beginning in 1969, there were changes in basic economic conditions and in aircraft technology triggered a sudden decline in the industry's performance^{[citation needed]}. The onset of high inflation, low economic growth, falling productivity, rising labor costs and higher fuel costs devastated the airlines.

Airline deregulation in Europe

The economic liberalisation of air travel was part of a series of deregulation moves based on the growing realization that a politically controlled economy served no continuing public interest. U.S. deregulation has been part of a greater global airline liberalization trend, especially in Asia, Latin America, and the EU. The effects of liberalization in Europe are undoubtedly quite different in scope and magnitude than in the US.

In Europe and North America slower growth of 4% to 6% is expected. The most dynamic growth is centered on the Asia and Pacific region, where fast growing trade and investment are coupled with rising domestic prosperity. Air travel for the region has been rising by up to 9 percent a year and is forecast to continue to grow rapidly, although the Asian financial crisis in 1997/1998 will put the brakes on growth for a year or more. In terms of total passenger trips the main air travel markets of the future will continue to be in and between Europe, North America and Asia.

Nearly three years after the EU lifted most restrictions on routes airlines could fly in Europe and what they could charge. Airfares there are roughly twice as high as those for comparable distances in the U.S. The question is: Shouldn't deregulation spur competition, resulting in lower prices? The answer is that many carriers remain state-owned, like Air France, and are only now beginning to cut operating costs.

Here are some examples of European fares from 1995:

• Sabena and Alitalia both charge $1,600 for a mid-week, economy and round-trip ticket between Brussels and Rome.
• Sabena and Austrian airlines charge $1,400 round-trip between Brussels and Vienna.
• Sabena and Iberia charge $1,450 on Brussels to Madrid round trips.

The EU was scheduled to remove the remaining barriers to competition on European routes in 1997 and a growing number of small but determined carriers are springing up to grab a piece of the busiest routes. Most analysts say that only four or so of the dozen biggest carriers will survive in their present form once deregulation is complete, throwing state-owned airlines into the rough and tumble of the private sector.

Hub and spoke networks

After deregulation, the airlines quickly moved to a hub-and-spoke system, whereby an airline selected some airport, the hub, as the destination point for flights from a number of origination cities, the spokes. Because the size of the planes used varied according to the travel on that spoke, and since hubs allowed passenger travel to be consolidated in “transfer stations”, capacity utilization increased^{[citation needed]}, allowing fare reduction. The hub-and-spoke model survives among the legacy carriers, but the low-cost carriers (LCCs), now 30 percent of the market, typically fly point to point. The network hubs model offers consumers more convenience for routes, but point-to-point routes have proven less costly for airlines to implement. Over time, the legacy carriers and the LCCs will likely use some combination of point to point and network hubs to capture both economies of scope and pricing advantages.

Impact

Price

Prices have declined steadily since deregulation. Quoting the Heritage Foundation, a conservative think-tank, "The inflation adjusted 1982 constant dollar yield for airlines has fallen from 12.3 cents in 1978 to 7.9 cents in 1997. This means that airline ticket prices are almost 40% lower today than they were in 1978 when the airlines were deregulated." Along with rising US. populations and the increasing demand of work-force-mobility, these trends were some of the catalysts for dramatic expansion in passenger miles flown, increasing from 250 million passenger miles in 1978 to 750 million passenger miles in 2005.

It's further stated, "Airline deregulation might be considered a failure if fares at small and medium sized airports had not declined as they did at large airports, but small and medium sized airports have not been denied the benefits of lower prices and better service."

Service quality

The quality of airline service can be measured in many different ways, including the number of aircraft departures, the total number of miles flown, the timeliness of service, other programs and services, and various frills or amenities.

Over the past several years the public's view of airline service quality has shown a significant drop. According to the 2008 American Customer Satisfaction Index, a University of Michigan study of 80,000 consumers’ expectations and preferences, the major US airlines ranked last among all the industries surveyed. In 2009 ,the airlines have moved up to being one point ahead of Cable & Satellite TV and the newspaper industry (though results for all industries were not available at the time of this writing).

Additionally there has been repeated call for the United States government to pass a "Air Passenger Bill of Rights" to provide specific requirements about what must happen to air passengers in certain conditions. The current push for the bill stems from several high profile passenger strandings over the last several years.

Problems

Along with a 40% drop in airfares since deregulation in 1978, airline employees have seen up to a 40% drop in income, affecting approximately 545,000 American workers. Although the gains of economic liberalization have been substantial for the traveling public and airline executives, fundamental problems brought on by deregulation continue to plague the industry and its workers. Even though it's been thirty years since deregulation some of these massive adjustments imposed at the end of a half century of regulation are still being considered transitional problems in their effect. Before deregulation, airline oligopolies received returns on capital that were profitable for executives and employees, but these returns factored in high costs that would not necessarily exist in a competitive market^{[citation needed]}. For example, the airlines' unionized workforce, established and strengthened under regulation and held in place by the Railway Labor Act (RLA), protected worker salaries commensurate to level of education, experience, risk-factor and time away from home. Corporate interests considered these labor costs non-congruent to what they construed as inefficient work rules when compared with what they would theoretically expected in a competitive market^{[citation needed]}. Deregulation problems remain in today's market, especially with the legacy airlines.(See also the US Centennial of Flight Commission [11]) Thus, former airline pilot and hero of The Miracle on the Hudson Chesley Sullenberger has argued before the United States Congress that the U.S. is beginning to realize an industry wide brain drain from the occupation of airline transport pilot.

References

Bailey, E. E.,(1992), Airline Deregulation Confronting the Paradoxes, Regulation: The Cato Review of Business and Government 15, No. 3. [12]

Goetz, A. R., Sutton, J. C., (1997), The Geography of Deregulation in the U.S. Airline Industry, Annals of the Association of American Geographers, Vol. 87, No. 2 (Jun., 1997), pp. 238–262, [13]

Good, D. H., Roller L., R. C. Sickles (1993), US Airline Deregulation: Implications for European Transport, The Economic Journal, Vol. 103, No. 419., pp. 1028–1041.

Kahn, A. E. (1988), Surprises of Airline Deregulation, American Economic Review, Papers and Proceedings 78, no. 2: 316-22.

Morrison, S., Winston, C. (1987), The Economic Effects of Airline Deregulation, Studies in the Regulation of Economic Activity, Brookings.

Morrison, S., Winston, C. (1995), The Evolution of the Airline Industry, Brookings Institution Press.

Poole, R. W. Jr., Butler V., (1999), Airline Deregulation: The Unfinished Revolution, Regulation, vol. 22, no. 1, Spring 1999, pp. 8.,[14]

Smith Jr F. L., Cox B., Airline Deregulation, The Concise Encyclopedia of Economics, Liberty Fund Inc, 2. Edition, 2007, [15]

Stevenson, R. W. (1995), Still Worlds Apart on Air Fares, New York Times, December 1995

Thierer, A. D. (1998), 20th Anniversary of Airline Deregulation: Couse for Celebration, Not Re-Regulation, The Heritage Foundation, [16]

Johnsson, Julie, Airline industry the worst in customer ratings, Chicago Tribune, May 20, 2008, [17]

American Customer Satisfaction Index, Scores by Industry, Sep 14, 2009, [18]

Martin, Hugo, Support is growing for a fliers' bill of rights, Sep 12, 2009, [19]

External links

• http://www.centennialofflight.gov/essay/Commercial_Aviation/Dereg/Tran8.htm
• http://www.econlib.org/library/Enc/AirlineDeregulation.html
• http://www.dot.gov