The Airline Deregulation Act was passed in 1978. Previously the government had control over the fare prices, entry, exit, routes, and schedules under the Civil Aeronautics Board (CAB) Sunset Act. The Civil Aeronautics Board act limited airline competition. Customer service through cabin crew and food with the only things the airline companies were able to compete in. The public was not flying as much and the fare prices were high, as a result the Airline Deregulation Act was passed. The government still regulates certain factors of the industry, such as, air traffic safety. The Department of Transportation (DOT) and Department of Justice (DOJ) regulate laws and review mergers and acquisitions to make sure one company does not have control over …show more content…
Some of the main airline merger and acquisitions are: North Central Airlines, Southern Airway and Hughes Airwest merged and became Republic Airlines in 1979. Pan Am Airlines acquired National Airlines in 1980. Texas Air Corporation merged with Continental Airlines in 1982. Southwest Airlines acquired Muse Airlines in 1985. In 1986 Republic Airlines merged with Northwest Airlines and Delta Airlines acquired Western Airlines in 1986. [3] Many airline companies have undergone financial concern after Deregulation Act in 1978. The companies are unable to cover their costs and as a result have filled for bankruptcies. Although throughout the years the demand for flying has increased, it is still difficult for airlines meet their costs. [4] “Since deregulation in 1978, the financial stability of the airline industry has become a considerable concern for the federal government due to the level of financial assistance it has provided to the industry through assuming terminated pension plans and other forms of assistance. Since 1978 there have been over 160 airline bankruptcies.” [4, page 9] Even though the industry has experienced tremendous bankruptcies and mergers, the market share has only been low during the years United States suffered economic recessions. Many airlines have expanded and new airlines have entered the market, which has increased the capacity. The figure below shows the capacity and the main mergers and …show more content…
This system allowed airlines to travel to more areas and allowed them to travel to their customer’s final destination instead of having to switch to other airline carriers. The Hub and Spoke system necessitated airline carriers to have larger terminals and invest in technology systems which instead their fixed costs, however, the system also reduced their unit costs. [5] Entry barriers were made easier after the Deregulation Act. New airline carriers were able to enter the industry without having to meet the demands of legacy airlines. Low Cost Carriers (LCC) such as Southwest Airlines entered the market, which increased the competition in the market. With high competition, it caused flight prices to decline by 35 percent since the Airline Deregulation Act.[5] The Airline Deregulation Act of 1978 has increased competition in the industry and made it easier for newcomers to enter the market. As a result, many airline carriers have competed with flight prices and have experienced an increase in bankruptcies and mergers. [2] “…the airline industry succeeded in (1) increasing productivity, (2) reducing average fare, and (3) increasing the frequency of airline service to most cities.” [2, Page 135] Although the Airline Deregulation Act has had positive impacts on the industry, it has also caused substantial threat to the industry, such as higher operation costs and price wars. Throughout the years
The Department of Commerce had the regulatory authority over commercial aviation. They began by regulating aircraft and pilots in interstate and the foreign commerce.
whether or not that city had enough gates for the new carrier, and whether the
The Airline Industry is a fascinating market. It has been one of the few industries to reach astounding milestones. For example, over 200 airlines have gone out of business since deregulation occurred in 1978. Currently, more than 50% of the airlines in the industry are operating under Chapter 11 regulations. Since 9/11, four of the six large carriers have filed for and are currently under bankruptcy court protection. Since 9/11 the industry has lost over $30 billion dollars, and this loss continues to increase. Despite the fact that the airline industry is in a state of despair, JetBlue has become the golden example, a glimpse of what the industry could be.
After September 11th, 2001, the airline industry experienced a significant drop in travel. The reasons for the airline industry downfalls also included a weak U.S and global economy, a tremendous increase in fuel costs, fears of terrorist's attacks, and a decrease in both business and vacation travel.
The results of airline deregulation speak for themselves. Since the government got out of the airline business, not only has there been a drop in prices and an increase in routes, there has also been a remarkable increase in airline service and safety. Airline deregulation should be seen as the crowning jewel of a federal de-regulatory emphasis. Prices are down: Airline ticket prices have fallen 40% since 1978. Flights are up: The number of annual departures is up from 5 million in 1978 to 8.2 million in 1997. Flights are safer: Before deregulation, there was one fatal accident per 830,000 flights, now the rate is one per 1.4 million flights. So what's the problem?
According to the International Air Transport Association, 2001 was only the second year in the history of civil aviation in which international traffic declined. Overall, it is believed that the IATA membership of airlines collectively lost more than US$12 billion during this time (Dixon, 2002).
In order to measure the impact of United's price increase, we would need the price elasticity of the demand. The main problem is that there is no agreement as to whether, generally speaking, air transportation is or is not relatively price elastic. There is ample evidence that the introduction of deeply discounted fares by the low cost carriers can be very price elastic, although, each type of traveler has its own price characteristics.
Before we discuss government intervention and its affect on an industry’s competition we must first seek to understand the five forces framework. The theory, discussed in 1979 by Micheal Porter seeks to evaluate the attractiveness of an industry. Throughout this essay I will explore the theory and then relate government action and its well-documented affects on the airline industry.
The FAA is a government agency who provides our country with the safest aerospace system in the world today. The FAA was not easily created though it was formed over many years and through the passage of many different bills and acts. The FAA started to take shape in the early 1900's. When the commercial aviation industry was first getting its start many leaders believed that without proper regulation and safety rules, that were set by the federal government, the aviation industry would not succeed. So to achieve their goal Congress passed the Air Commerce Act of 1926. This act made the Secretary of Commerce responsible for making aviation rules, regulations and certifying pilots and aircrafts. It also created an Aeronautics Branch in the Department of Commerce, which oversaw everything about aviation. This Branch of the Government was headed by William MacCracken, and it was the first predecessor to the FAA.
In the Travel Pulse article "Airlines Leaving Us Little Choice – Like A Monopoly," posted by Rich Thomaselli, the practice of monopolization is observed in the airline industry. The author criticizes large airlines on their growth that has led to at “93 of the top 100 [airports], one or two airlines controlling a majority of the seats” (Thomaselli). The scornful article was written after recent events that have caused the Department of Justice and five States to sue two of the biggest U.S.
Airline and travel industry profitability has been strapped by a series of events starting with a recession in business travel after the dotcom bust, followed by 9/11, the SARS epidemic, the Iraq wars, rising aviation turbine fuel prices, and the challenge from low-cost carriers. (Narayan Pandit, 2005) The fallout from rising fuel prices has been so extreme that any efficiency gains that airlines attempted to make could not make up for structural problems where labor costs remained high and low cost competition had continued to drive down yields or average fares at leading hub airports. In the last decade, US airlines alone had a yearly average of net losses of $9.1 billion (Coombs, 2011).
Shortly after World War I, the U.S. Government discovered the abilities of the modern airplane and created the idea of utilizing aircraft to transport mail across the country. In 1917, Congress approved funding to experiment with the idea of delivering mail by air. By 1920, the Post Office was delivering mail across the entire country, eliminating over 22 hours in delivery times of a coast-to-coast route. With the success of the airmail service and the growing popularity of civil aviation, the U.S. Government recognized the need to develop set standards for civil aviation and in 1926 created the Air Commerce Act of 1926. The Air Commerce Act of 1926 called for the government to regulate air routes, navigation systems, pilot and aircraft licensing and investigation of accidents. The act also controlled how airlines were compensated for mail delivery. Later in 1930, Postmaster General Walter Brown made recommendations which were later known as the Watres Act which consolidated airmail routes and opened the door for longer-term contracts with the airlines. Brown handled the situation regarding new contracts poorly by only inviting a hand selected list of large airlines to the negotiation table. This move pushed smaller airlines to complain and the issue was pushed to Congress. Following congressional hearings President Roosevelt later decided Brown’s scandal was too much to deal with and canceled all mail contracts completely and handed over air mail delivery responsibility to the U.S. Army. That decision was a disaster, and one month later, air mail was handed back over to the private sector. This time, however contract bidding was more structured and fair to all. It was then clear that the airline industry was back in full swing...
Tom, Y. (2009). The perennial crisis of the airline industry: Deregulation and innovation. (Order No. 3351230, The Claremont Graduate University). ProQuest Dissertations and Theses, , 662-n/a. Retrieved from http://search.proquest.com/docview/304861508?accountid=8364. (304861508).
Airline industry is affected by no. of factors such as fuel price fluctuations, high fixed costs, strong influence of external environment and excessive use of marginal costing by carriers. Recessions in the industry tend to last longer, while recovery periods are generally shorter. Over the past nine years, it is observed that industry has made losses for five years and during the profitable years margins were on a lower end. The airlines industry is acutely sensitive to external events such as wars, economic instability, government policies and environmental regulations.
Within the airline industry currently the airlines can be divided into low cost airlines and full service airlines. The low cost airlines targets customers that are seeking no frills connectivity between cities at low ticket prices. The full service airlines provide several add-ons like free meals, on plane entertainment, and communication facilities. The target market for full service airlines are customers who are willing to spend extra for the services that the airlines provides.