Airline deregulation

Airline deregulation is the process of removing government-imposed 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

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.[1] 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.The onset of high inflation, low economic growth, falling productivity, rising labor costs and higher fuel costs proved problematic to the airlines.[2]

Although most industry scholars agree that the purpose behind government regulation is to create a stable industry,[3][4] in the decades leading up to deregulation many airline market analysts expressed concerns with the structure of the United States' passenger air transport system. Concerns included high barriers to entry for fledgling airlines, slow government response to existing airlines entering to compete in city-pairings, and monopolistic practices by legacy airlines artificially inflating passenger ticket prices.

In order to address these growing concerns airline deregulation began in the USA in 1978. It was, and still is, a part of a sweeping experiment to ultimately reduce ticket prices and entry controls holding sway over new airline hopefuls. Airline deregulation had begun with initiatives by economist Alfred E. Kahn in the Nixon administration, carried through the Ford administration and finally, at the behest of Ted Kennedy, signed into law by President Jimmy Carter.

Globally, state supported airlines are still relatively common, maintaining control over ticket prices and route entry, but many countries have since deregulated their own domestic airline markets. A similar but less laissez-faire approach has been taken by the European Union, Australia, United Kingdom, Scandinavia, Ireland and select South and Central American nations.[5]

In the United States

The beginning of federal government regulation of the interstate airline industry can be traced to the Air Mail Act of 1925 and the Air Commerce Act of 1926. Additional federal regulation of commercial aviation was imposed with the passage of the Civil Aeronautics Act of 1938.[6]

That 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, to investigate accidents, certify aircraft and pilots, to create rules for air traffic control (ATC) and to recommend new rules to prevent repetition of previous accidents.[6] Additional airline safety regulation would come later with the passage of the Federal Aviation Act of 1958,[6] which created the Federal Aviation Administration (FAA) [6]

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 [7])

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.[8]

Airline Deregulation Act

The Airline Deregulation Act of 1978 removed many of the previously mentioned controls. Prior to deregulation, it was required that airlines first seek regulatory approval to serve any given route. Thus incumbent airline operators could raise barriers to the challenge of new competition. This system was dismantled as a result of the Airline Deregulation Act. (See also the US Centennial of Flight Commission [7]) It also dismantled the notion of a flag carrier.

Post-deregulation

In the wake of deregulation, airlines have adopted new strategies and consumers are experiencing a new market. Below are the marquee effects of deregulation.

Hub and spoke

Airlines quickly moved to a hub-and-spoke system, whereby an airline selected an 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,[9] 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 scale and pricing advantages.[10]

Price

Base ticket prices have declined steadily since deregulation.[11] The inflation adjusted 1982 constant dollar yield for airlines has fallen from 12.3 cents in 1978 to 7.9 cents in 1997.[12] Along with rising US. populations[13] 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.[14] As such, some think tanks and the U.S. airline trade organization, Airlines For America,[15] argue that deregulation has provided benefits to the average air traveler.

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, seating comfort, aesthetic appearance of cabin crew, 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.[16] 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).[17]

In 2011 Congress finally responded to repeated calls for the United States government to pass an "Air Passenger Bill of Rights" to provide specific requirements about what must happen to air passengers in certain conditions.[18] The push for the bill stemmed from several high-profile passenger strandings over the last several years. On April 25, 2011, the Enhancing Airline Passenger Protections rule, 76 Fed. Reg. 32,110, was enacted.[19] Amongst other items, the rule includes raising the minimum "denied boarding compensation" to customers with valid tickets yet still not allowed to board the aircraft. The legislation further penalizes airlines up to $27,500 a passenger if left stranded aboard an aircraft, on a tarmac for more than three hours.[20] In 2010, the largest trade associations representing airline management interests before Capitol Hill, Airlines for America and the Regional Airline Association, opposed this legislation stating that they could self-regulate themselves and they already had begun implementing systems by which to mitigate any tarmac delays.[21][22] Later American Eagle, an RAA airline member, was the first airline to be fined under the new legislation. A total settlement including fines and compensation paid to passengers totaled $800,000 for tarmac delays incurred in Chicago in May 2011.[20]

Deregulation advocate Alfred Kahn noted a deterioration in the quality of airline service following deregulation, including the "turmoil" of massive restructuring of airline routes, price wars, conflicts with airline employee unions, airline bankruptcies, and industry consolidation.[23] He also noted unexpected congestion and delays "that have plagued air travelers in recent years".[23] However, he also argued that such congestion and delays was also a sign of deregulation success (because it indicated a large increase in passenger volume due to decreases in the price of airfares).[23] Kahn considered the turmoil, congestion, and delays to be unforeseen "surprises" from deregulation and continued to support deregulation in spite of these events.[23]

Competition between carriers

A major goal of airline deregulation was to increase competition between airline carriers, leading to price decreases. As a result of deregulation, barriers to entry into the airlines industry for a potential new airline decreased significantly, resulting in many new airlines entering the market, thus increasing competition.[11]

Easy entry/easy exit

Many airlines responded to deregulation and new competition with frequent-flyer programs and the implementation of a hub-and-spoke system described in detail above. The result are "fortress" hubs wherein one airline is dominant, at each hub, and tends to have greater control over ticket prices at that particular hub. These developments actually decrease competition between airlines, by (in hub and spoke systems) allowing a particular airline to have greater control of in-hub pricing, and through frequent flier programs large airlines offer incentives for customers to stick with one airline rather than to shop by airfare alone.[11] In addition, many airlines have formed airline alliances in order to offer larger route networks.[11]

Industry consolidation and reduction in competition between carriers

After airline deregulation, many airlines in the United States are purchased by other airlines and merged into fewer airlines "after thirty five years and hundreds of new startup airlines, hundreds of bankruptcies, liquidations, reorganizations, and mergers", wrote Richard Finger equities trader and finance business analyst at Forbes.com.[24] This has resulted in four major airlines (United Airlines, American Airlines with its recently acquired US Airways, Delta Air Lines, and Southwest Airlines) controlling a near-monopoly at certain regional airports in the United States and controlling 90% of domestic airline flights at those airports in the United States.[24] In particular, Finger notes that United Airlines (with its recently purchased Continental Airlines) now controls over 90 percent of domestic travel in and out of Houston Intercontinental Airport.[24] Finger states that "many flights have been consolidated so travelers have fewer choices", resulting in increased fares.[24] Finger argues that the current situation in the airline industry benefits the airlines and corrupt top union officials, by decreasing competition among airlines, increasing fares for airline passengers, decreasing airline employee pay and benefits (especially pensions), and creating an oligopoly of only four major airlines that was never intended (unintended consequences) by the framers of airline deregulation act.[24]

Effects on airline staff

A key indicator to the volatility of deregulation;[3][4] from 1976 to 1986 the US. airlines saw a 39% increase in employees (according to Alfred Kahn),[23] and saw continued but less rapid growth throughout the 1990s.[11] Subsequently, between 2000 and 2008, the same industry shed 100,000 jobs - approximately 20% - and formerly busy hub airports (such as Pittsburgh and St. Louis) have reduced staffs due to a significantly decreased number of flights.[11]

Immediately following the September 11th attacks, the Air Transportation Safety and System Stabilization Act bestowed the US airlines with $15 billion in loans and an additional $5 billion in grants by the US. government. Regardless of these loans and grants, nearly every major carrier fired 20% of its staff, with United and American both cutting 20,000 jobs.[25] This makes it very difficult to trace exact job losses to the effects of deregulation. Although then retired former CEO of American Airlines, Robert Crandall states that "I'm not sure 9/11 by itself had any particular profound impact [on the industry], but it exacerbated the problems they had before 9/11."[26]

Although regular pay-cuts had become quite normal in the years following deregulation, of the employees remaining after September 11, 2001, the average pay cut has been 18%,[3] with many of the highest earners seeing as much as 40% pay cuts, virtually every regularly scheduled airline has shed its pension obligations to its employees.[27]

According to a study by economist David Card, deregulation resulted in the shift of approximately 5,000 to 7,000 airline mechanic jobs from the major trunk airlines to smaller carriers between 1978 and 1984.[28] Because such smaller carriers typically pay less than the major airlines, the average hour wages of airline mechanics decreased by up to 5 percent; however, the author considered this decrease to be relatively small.[29]

Open Skies

Main article: Open skies

Beyond the domestic liberalization of the airlines in the USA, 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 first major Open Skies agreements were entered into in 1979.

The U.S. has Open Skies agreements with more than 60 countries, including fifteen of the 27 EU nations. Open Skies agreements have been successful at removing many of the government implemented barriers to competition and allowing airlines to have foreign partners, access to international routes to and from their home countries and freedom from many traditional forms of economic regulation. 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.[10]

Criticisms

With long standing companies like Braniff, TWA, and Pan Am disappearing through bankruptcy since 1978, the years since 2000 have seen every remaining legacy carrier file for bankruptcy at least once. US Airways has filed twice in the same number of years. During the same time period, Southwest Airlines continued to expand its route structure, buy new airplanes, and hire more employees, while remaining profitable,[30] JetBlue, a new airline that started up in 1999, "was one of only a few U.S. airlines that made a profit during the sharp downturn in airline travel following the September 11, 2001 attacks.... For many years, analysts had predicted that JetBlue's growth rate would become unsustainable. Despite this, the airline continued to add planes and routes to the fleet at a brisk pace.... JetBlue is one of the largest airlines in the Northeast United States."

Unions contend that airline management now uses bankruptcy as a tool to liquidate labor contracts. Progressives view this as union-busting, allowing management to throw out contracts already agreed upon while still receiving exorbitant bonuses themselves, regardless of work quality.[31] In doing so, according to the labor union view, airline executive management has created what many are calling the great race to the bottom[32] with one company filing for bankruptcy after the next, leaving only those who have not filed for bankruptcy, paying their employees what was contractually agreed upon.[33]

One of the key elements deregulation sought to end were airline oligopolies and monopolies. However, since 2010 the number of major airlines has receded dramatically. With Delta merging with NorthWest, American merging with US Airways, Continental merging with United, SouthWest with AirTran, and Frontier being purchased by Republic who also owns Chautauqua and Midwest Express and bought Shuttle America in 2005,[34] it has been suggested that the old monopolies and oligopolies still exist regardless of regulation. Instead of using their political connections to keep competition out, now, larger airlines simply price-war new entrants out of business, or simply buy them.[35] This leaves the weaker airlines to merge, eliminating market choices and creating an oligopoly market.

Various solutions have been proposed by labor unions, former management and industry analysts, including, for the first time since 1978, federal control over some of the prices charged and routes served by major airlines[36] with a view of increasing price and cost competition.[14][14][36]

In June 2008 former CEO of American Airlines, Robert Crandall stated,

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.[37]

Notes

  1. ↑ "Table 1-37: U.S. Air Carrier Aircraft Departures, Enplaned Revenue Passengers, and Enplaned Revenue Tons".
  2. ↑ Thierer, A. D. 1998, 20th Anniversary of Airline Deregulation:Cause for Celebration, Not Re-Regulation, The Heritage Foundation,
  3. 1 2 3 Bamber, Gittell, Kochan, Nordanflycht (2011). Up in the Air: How Airlines Can Improve Performance by Engaging Their Employees. ILR Cornell University Press. p. 4. ISBN 080144747X.
  4. 1 2 Kaps, Robert W. (1997). Air Transport Labor Relations. Southern Illinois University Press. ISBN 0-80-93-1776-1.
  5. ↑ Bamber, Gittell, Kochan, Nordanflycht (2011). Up in the Air: How Airlines Can Improve Performance by Engaging Their Employees. ILR Cornell University Press. ISBN 080144747X.
  6. 1 2 3 4 Millbrooke, Anne (2006). Aviation History. Jeppesen. ISBN 0884872351.
  7. 1 2 http://www.centennialofflight.net/essay/Commercial_Aviation/Dereg/Tran8.htm
  8. ↑ 1941 CAB reported quoted on Page 32 of "Contrived Competition: Regulation and Deregulation in America" by Richard H. K. Vietor.
  9. ↑ Kahn, Alfred E. "Airline Deregulation". Library of Economics and Liberty. Retrieved 16 July 2015.
  10. 1 2 Smith Jr F. L., Cox B., Airline Deregulation, The Concise Encyclopedia of Economics, Liberty Fund Inc, 2. Edition, 2007
  11. 1 2 3 4 5 6 Maynard, Micheline (17 April 2008). "Did Ending Regulation Help Fliers?". The New York Times.
  12. ↑ "The Heritage Foundation Mission Statement". Retrieved 27 July 2013.
  13. ↑ "US Census Bureau". Census.gov. Retrieved 2013-10-26.
  14. 1 2 3 Bamber, G.J., Gittell, J.H., Kochan, T.A. & von Nordenflytch, A. (2009). "5". Up in the Air: How Airlines Can Improve Performance by Engaging their Employees. Cornell University Press, Ithaca.
  15. ↑ http://www.docstoc.com/docs/document-preview.aspx?doc_id=173460020
  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. ↑ "Sweeping Customer Protection Regulations". Jones Day Publications. May 2011. Retrieved 23 May 2012.
  20. 1 2 Cameron, Doug (Nov 15, 2011). "American Eagle Incurs First Fine". The Wall Street Journal. Retrieved 22 May 2012.
  21. ↑ "RAA Objects to EAPR" (PDF). RAA.org. Sep 23, 2010. Retrieved 22 May 2012.
  22. ↑ Berg, David A. "A4A Fights New Passenger Protection Rules" (PDF). Airlines for America. Retrieved 23 May 2012.
  23. 1 2 3 4 5 Kahn, Alfred E. "Surprises of Deregulation." The American Economic Review. 78 (2): 316–322. JSTOR 1818143
  24. 1 2 3 4 5 Finger, Richard. "Why American Airlines Employees Loathe Management" April 29, 2013. Accessed at: http://www.forbes.com/sites/richardfinger/2013/04/29/why-american-airlines-employees-loathe-management/
  25. ↑ Thomas, Andrew R. (2011). Soft Landings: Airline Industry, Strategy, Service and Safety. Apress. pp. 32, 34. ISBN 978-1-4302-3677-1.
  26. ↑ Thomas, Andrew R. (2011). Soft Landings: Airline Industry, Strategy, Service and Safety. Apress. p. 33. ISBN 978-1-4302-3677-1.
  27. ↑ "Chesley "Sully" Sullenberger To Congress: My Pay Has Been Cut 40 Percent In Recent Years, Pension Terminated". Huffington Post. 2009-03-27. Retrieved 14 August 2013.
  28. ↑ Card, David. "The Impact of Deregulation on the Employment and Wages of Airline Mechanics." Industrial and Labor Relations Review. 39 (4): 527-538 (July 1986). http://davidcard.berkeley.edu/papers/dereg-emp-wage.pdf
  29. ↑ Card, David. "The Impact of Deregulation on the Employment and Wages of Airline Mechanics." Industrial and Labor Relations Review. 39 (4): 527-538 (July 1986).
  30. ↑ "Epidemic of Bankruptcy". Associated Press. Nov 29, 2011. Retrieved 23 May 2012.
  31. ↑ "Executive pay and performance". The Economist. 7 February 2012.
  32. ↑ "WILLIAMS: It's a 'race to bottom' among airlines". Washington Times. 2010-12-26. Retrieved 2012-10-27.
  33. ↑ "United Federation of Teachers ''Bankruptcy is newest union-busting tool'', March 5th 2012". Uft.org. 2012-04-05. Retrieved 2013-10-26.
  34. ↑ "Shrinking Airline Choices". Airlines for America. Retrieved 8 August 2013.
  35. ↑ Kuttner, Robert. "Airline deregulation should be scrapped". The Balitimore Sun. Retrieved 8 August 2013.
  36. 1 2 Poole, R. W. Jr., Butler V., Airline Deregulation: The Unfinished Revolution, December 1998.
  37. ↑ Bill McGee, March 2008. , USA Today.

Source 1 needs updating to Table 1-37: U.S. Air Carrier Aircraft Departures, Enplaned Revenue Passengers, and Enplaned Revenue Tons | Bureau of Transportation Statistics. (n.d.). Retrieved December 11, 2015, from http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_37.html

References

External links

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