Airline Deregulation
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Transcript of Airline Deregulation
The Benefits Versus the Detriments
Nathan DeRosa
Have the positive effects of airline deregulation outweighed the negative effects?
The role of government in economic affairs is continuously debated◦ Trade-offs between freer markets and
government intervention
The federal government contracted with private carriers to supplement military airmail carriage starting in 1918 (Borenstein and Rose, 2007)
Airlines started emerging in the 1920s Airlines became increasingly regulated
during the Great Depression◦ 1938: Civil Aeronautics Board (CAB) was
established marking the official beginning of airline regulation (Borenstein and Rose, 2007)
High Barriers to entry into the marketplace◦ Carriers established after the CAB had the most
difficulty entering the market Competition was largely absent
◦ Competition was based less on price and more on non-price determinants (e.g. legroom, seat quality, in-flight amenities, flight frequencies)
◦ Carriers needed approval from the CAB to expand Price controls were put into place to ensure
profitability and kept prices high (Borenstein and Rose, 2011)
Major carriers like American, Delta, and United competed in the interstate market
Smaller, local carriers like Pacific Southwest and Texas International flew in the intrastate market (Borenstein and Rose, 2007)◦ Competed based on price, charged lower fares,
and turned higher profits than the major carriers◦ Not subject to federal regulation◦ Provided a glimpse of a deregulated airline
market
Regulated airlines turned lackluster profits (Borenstein and Rose, 2011)
High prices prompted consumer groups to support deregulation
High oil prices and stagflation in the 1970s further pushed opinion towards deregulation (Eisner, 2008)
The appointment of pro-deregulation officials such as Alfred Kahn paved the way starting with discount price experimentation (Winston, 1998)
In 1978, the Airline Deregulation Act was signed into law
Gradually lifted CAB price, route, entry, and exit controls
The CAB disbanded in 1985 marking the official end of deregulation (Borenstein and Rose, 2007)
The Federal Aviation Administration (FAA) would continue to regulate safety as it had done since 1958
Overall lowered prices◦ Fares are approximately 40% lower than prior to
deregulation even when adjusted for inflation (Borenstein, 2011)
Barriers to entry and exit were lowered◦ Many existing airlines either have went bankrupt,
liquidated, or merged with other airlines while many new airlines entered the market
Labor saw a 10% decline in earnings following deregulation (Card, 1996)
Aggressive cost-cutting measures amid financial losses and bankruptcies have had a toll on labor-management relations and customer service (Gittell et al., 2004)
Lowered prices and barriers to entry were expected to lead to traffic growth and higher load factors
Airport congestion was not seen as a predictable outcome◦ Traffic growth outpaces
infrastructure development (Savage, 1996)
Since deregulation, the airlines collectively lost $60 billion (Borenstein, 2011)
Financial performance is tied to the performance of the national economy
Propensity to over invest during economic booms which then lead to drastic cuts in capacity, scheduling, and the workforce during economic downturns
Reluctance to raise fares Exogenous demand shocks
such as 9/11 (Borenstein, 2011)
Exogenous cost drivers like jet fuel (Borenstein, 2011)
Rise of the hub-and-spoke system (Borenstein and Rose, 2011)◦ Centralizing operations in
one or more select cities Establishment of airline
alliances (Borenstein and Rose, 2011)◦ Brought about codesharing
—an agreement where two or more airlines share the same flight
Resulted in concentrations of market power in select cities (Borenstein and Rose, 2011)
Deregulation was successful in lowering prices and barriers to entry and exit
The Airline Industry has nonetheless suffered financially. To ensure financial sustainability, airlines must:◦ Invest more moderately◦ Work on improving relationships with labor
Labor productivity is tied to customer service quality more than cost-cutting measures (Gittell et al., 2004)
◦ Raise their price premiums (Borenstein and Rose, 2007) Raising quality and fares to cover operational costs
Borenstein, Severin (2011). On the Persistent Financial Losses of U.S. Airlines: A Preliminary Explanation. National Bureau of Economic Research, 1-17.
Borenstein, Severin and Nancy L. Rose. How Airline Markets Work…Or Do They? Regulatory Reform in the Airline Industry. National Bureau of Economic Research. 1-82.
Card, David (1996). Deregulation and Labor Earnings in the Airline Industry. National Bureau of Economic Research. 1-58.
Eisner, Marc Allen (2008). Markets in the Shadow of the State: An Appraisal of Deregulation and Implications for Future Research. Tobin Project
Conference. 1-28. Gittell, Jody Hoffer et al. (2004). Mutual Gains or Zero Sum? Labor Relations and
Firm Performance in the Airline Industry. Industrial and Labor Relations Review. Vol. 57, No. 2. 163-80.
Savage, Ian (1999). Aviation Deregulation and Safety in the United States: The Evidence After Twenty Years. Taking Stock of Air Liberalization. 93-114.
Winston, Clifford (1998). U.S. Industry Adjustment to Economic Deregulation. Journal of Economic Perspectives. Vol. 12, No. 3. 89-110.