The Economic Implications of Airline Deregulation in the United States
The 1978 Airline Deregulation Act has only partially deregulated the U.S. airline industry, hindering its progress. This has been indicated by the later sequential resultant effects in the region that have directly and indirectly impacted to the local and global economy. Most of the systems in the airline industry are still partially under the government control while greater conflicts have risen in the industry impacting strong confusion that roots deeper into the different economic sectors of the US. Though economists point out the sobriety and goodwill in the establishment of deregulation, it is clear that the move was loop holed and lacked careful follow up to rectify the resultant externalities to the process (Robert, 207). Cumulatively, the system has resulted to massive losses that need to be holistically addressed for all the effects to subside. Deregulation was aimed at opening the airline industry to forces of the market necessary for ensuring increased growth and development in the quality and services offered to the consumers
(World Trade Organization, 225). Besides, the government saw possible projection into the future with enhanced effectiveness for making airlines in US the best in the world.
2. Protection of Regulation
According to Kenneth (46-47) early economic regulation of airlines were tied to airmail system which allowed the US government to pay airlines for carrying the mail. This was specifically enforced by the Airmail Act of 1925 and McNary-Waters Act of 1930 which allowed the Post Office Department to review the practices of the mail carrier and protect various carriers from competitive binding. However, the Air Mail Act of 1934 saw the main enforcement that strongly stimulated the passing of the later Airline deregulation Act in 1978. Besides extending the money paid to the carrier, the Act prohibited the specific government mail carriers from amalgamating with others a model it strongly linked with possible creation of monopoly. The later amendment in 1935 added weight to the 1934 regulation by further prohibiting the competition in certain modes (Kip, 367). Though the government applied the law aimed at affecting only the airlines that held its contracts, it soon became the benchmark and centre for bureaucratic selection for the government contracts.
To remain in business, other airlines lowered their travel costs which fast reduced their profits making the government to conclude they were unable to offer safe air transport in the country. Worse still, the government created the Civil Aeronautic Authority under the Civil Aeronautic Authority Act of 1938. This authority was mandated to economically regulate all the airlines operating in US. Though the government insisted that it was in public interest in accordance with the demands for public convenience and appropriate necessity, no expounding of the same law was given by then (Peterson, 105-106). Between 1938 and 1958 the congress regulated airfares and decided how many flights which airlines could make between various cities. The overall capacity and periods of the airlines operations were also regulated. Certificates of convenience were issued by the Civil Aviation Board (CAB) and used to determine the number of competing airlines during good and bad economic times (Lawrence, 251). Between 1958 to the establishment of the deregulation act in 1978, the Civil Aviation Authority wrote vast rules that made most of the airlines unable to follow
3. 1978 Deregulation Act
The airline Deregulation Act (Pub.L.95-504) is a US federal law that came to power after signing in 1978. Its main purpose was to remove the government regulations of the market entry for new airlines, air travel fares, and routes for commercial aviation in the airline industry. However, the act did not remove the FAA regulatory powers for all the different aspects in the aviation industry. The act was directly aimed at ensuring higher safety as a major priority in the air commerce while relying maximally on competition in providing air transportation services. It also sought to encourage use of air services especially in major urban regions through secondary satellites (World Trade Organization, 179). Unlike the previous rules, the Act sought to encourage new players in the transportation market while strengthening the present small carriers. To ensure smooth transition, the act was to be operationalized gradually in order to reduce negative effects to the people and the industry. However, the Civil Aviation Board (CAB) was authorized to grant antitrust immunity to different carriers while the Federal Aviation Administration was mandated to develop the safety standards for the commuter airlines (Kenneth, 119-120). Some of the previous aspects like ownership and privatization of airports and structures were also left in the Department of Transport. Besides, the government still holds much more regulations regarding ownership of airlines and safety demands which have been consistently questioned.
4. Hub and Spoke Model
This model involves a system of interconnections for different hubs with the main centre being used as the distribution, reception and take off point by the planes. It connects different regions in a chariot wheel manner which is highly centralized at different hub locations. Hub and spoke operation model was credited with many advantages such as the current reduction in travel prices and increased capacity to handle more people and cargo (World Trade Organization, 227-228). However, scholars have greatly lamented over its negative effects which acts to threaten the whole industry. Though FAA view of the current situation being better than the previous one is still correct, the global demands of the system are far below the expected standards of the 21st century. Due to this high centralization model, day to day operations are relatively inflexible due to the large number of flights taking place at particular hubs. Due to this concentration model system, changes at the Hub or a given route are very difficult to effect and may have vast unexpected consequences. Due to the high preference for this model it has become very hard to handle increased congestions during periods of occasional high demand (Lawrence, 79).
Peterson (121) points out that Route scheduling using this system have turned into a direct complicated work for the operators. The resources available at the Hub must be used effectively to avoid complications for the different hubs. During the high periods, most facilitates are exploited beyond their limit capacities. This is seen as a direct demand and an unavoidable system as commuters must connect to their planes and flights at the different hubs. To keep the hubs operating efficiently, precise analysis and timing is required. These complications have been a major cause of delays and massive losses for different businesses and travellers. With deregulation, all the planes were given the direct freedom of operation which they employed by linking with the most busy hubs for higher levels of business. Therefore, hubs act as direct bottlenecks in the direct network. As a result, the cargo capacity is strongly limited by the Hub’s ability. Besides, mechanical or bad weather strongly impacts on the networks as great losses are assumed from the perishables and other products that cannot wait for the problem to subside (Bijan, 88).
5. Flow and Grid Structures
According to Kip (359) gains of economic liberalizations since deregulation have been substantial with more efficiency in the system compared to the prior regulated period. With competitive market demands where market forces are responsible for all the returns in the system, the resultant systems are supposed to cohere with similar system. Arguably, the demand for air transport and cargo movement increased drastically. However, unlike the old system which used the certificate of convenience to ensure that the correct number of airlines were available in a particular line during different periods of economic highs and low periods, the current system lacks such mechanisms. Though, deregulation is not solely to blame for early 21st century inability to cope, it is considered to offer a paucity of resilience systems for the system (Peterson, 108-109). After the high economic periods of the 1990s, the later economic slowdown and eventual crisis has pushed most of the airlines in tight corners. Profitability has greatly reduced with the customers taking strong shifts towards the Low Cost Carriers. During the years 2001-2003 the industry experienced a net loss of US $ 23.3 billion (Peterson, 131-132). Due to lack of total operation consideration for the airline companies, the much needed flexibility unavailability is evident during the periods of economic downturns. Most of the companies are turning to the government for assistance to address their immediate problems. The market has therefore turned to be highly unpredictable for these companies prompting immediate lack of consumer confidence.
The overall control of the grid by the government is estimated to cost the passengers more than US $5 billion annually. As indicated earlier, the government indirect control of the system acts as a direct base for allowing political interference that imposes poor predictability by the business for effective decision making, lowers the customer confidence, and shift to other options for cargo and personal travel. Government should be supportive to various systems that would raise efficiency and increase its direct revenue while maintaining the highest possible standards of the business operations (Lawrence, 249).
National ownership of the airline companies is still restricted by the department of transport (DOT) with external foreigners being blocked out from the system. It is required that investment in airline industry should be 75% owned by American citizens closing the much needed investment into the country (Peterson, 110). Most of external investors especially from the oil rich Middle East countries have turned to other countries for investment. This has been pointed as part of the main problem that has accelerated the current economic downturns in US while giving other countries with less strict laws like China and Singapore a chance to up come.
6. Privatization of Air Traffic Control
Arguably, the overall management of the airlines through the new structures after deregulation is highly to blame in the current airline problems being experienced in US. Analysts point out that the problem is extended to the global setting with more expounded effects. FAA continued influence has been linked to the high terror vulnerability of the airlines in US. After deregulation, safety standards dimensions and enforcement were not relinquished by the Federal government. Business risks are only taken to an extent where it is easier to predict time, magnitude and to manage (Eldad, 74-75). Since early 1990s, safety and security of the airlines in US have been highly questionable. This culminated in the September 9/11 terrorist attacks via the same airlines emphasised the prior demands for full deregulation in US. The current fears of terrorism have acted to hurt the economy even more as entrepreneurs are less willing to invest in the business. While some economists view it as a direct opportunity for others to venture into the business, the fact has not been seen as they shift to other regions where terrorists’ risks are much lower (Robert ; Martin, 210-211).
To add to that the antitrust laws have inhibited the post-deregulation restructuring efforts for the different companies making it hard for the airlines to come to direct terms with the market place realities of competitiveness. When the congress disbanded the Civil Aeronautic Board (CAB) in 1985, the responsibilities were simply transferred to the Department of Transport (DOT) (World Trade Organization, 229-230). While labour contracts, airport asset management, and other business barriers are themselves highly restrictive to growth and progress in the aviation industry, the antitrust regulatory handles only add to these massive problems. This has been the major cause of effecting unfair competition and giving an elevated platform to some carriers while pushing others to the edge of collapse. It has directly formed the correct recipe for bureaucracy which is an added limitation to the airline business.
Following deregulation of the airlines in US, it was clear that the previously Federal Aviations Administration managed controls required effectiveness for better running to serve the vast consumers in the aviation industry. Most of the developments for the airports are strongly maintained as a direct prerogative of the government and therefore strongly prone to the political changes with time. This has therefore reduced the direct consistency for airports and other flights related facilities development. Whereas, great advancement have been achieved by other states in the world after privatizing their air control, US has lagged behind making its air control systems to hold a back space in the international ratings (Bijan, 49-51). In Australia, where airport privatization has taken place, measures to optimize efficiency were installed from the regional pressures that demanded frequent monitoring and a vibrant reporting system of the direct airport progress. This has assisted the airport fees to rise but not above the uncompetitive levels in the region. To add to that China has used an incremental approach in privatizing its six largest airports since mid 1990’s. This has not only improved airport efficiency in the country, but has acted as the main supporting platform for the Chinas current enviable economic growth (Kip, 367-371).
7. Bankruptcy, mergers and exit
Peterson (109) argues that since passing of the Deregulation Act of 1978, the free system acted to free the individual airlines while giving them space to vastly expand thereby raising their capacity to offer the best services much needed for economic growth. This objective was also attained to a greater extent as the delivered services and security concerns have greatly improved compared to the period before deregulation. However, deregulation formed a direct abyss for the airlines as it is linked to the sharp decline in the total number of carriers in the country through acquisition, mergers and bankruptcy in the industry (World Trade Organization, 233- 234). Though deregulation is not solely to blame for these exits, its partial regulation has been considered to worsen the situation. Between the years 1980 and 2001, most of the previously protected airlines were subjected to massive competition which has culminated to massive losses. Besides, the new revolutionary approach of low-cost-airlines took the system with surprise and partially sabotaged the airlines initial perception of enjoying higher profits via rising market demands. This formed a direct recipe for bankruptcies in the airlines (Eldad, 136-137).
Contrary to the expected coterminous achievements for the different carriers after regulation, Pan Am failed to succeed and reap the much proclaimed benefits. During the regulation regime, the airline was responsible for international routes but was less involved with the domestic routes. Entry of other international carriers took it with surprise starving its main resources and making it impossible to manage and support its work force and establish modern flight systems. As a result it lost over US $ 2 billion the last decade of its operations. Lastly, it survived on selling of its assets in New York, Washington and Japan before disappearing totally altogether (Peterson, 117-118). Though market place has been considered as a basement for punishing poor managers in the business, most of the smaller airlines lamented on the new system as they too were caught up between rocks and a hard places. Considering that failure of different firms indicate that an economic system is working, the economists have been very worried of the high number of the exits of airlines after deregulation. Continental airways and American West airlines went bankrupt while Eastern airlines and Midway airline were liquidated.
Mergers within the local airlines and acquisitions by international airlines formed part of the survival strategy by the airline companies after deregulation (Eric, 214-215). Understanding that most of the consumers preferred to operate with particular airline companies, international companies’ mergers with the local airlines added to the problem of the Hub and Spoke Model as passengers and cargo had to be more concentrated at different hubs. Owing to the market forces, the merged airlines were able to offer much reduced prices at the expense of other airlines (John, 105-107). Exit of carriers especially in the local markets has been directly blamed for uneven growth of different urban airline centres.
7. Conclusion and recommendations
The 1978 Airline Deregulation Act has only partially deregulated the US airline industry, hindering its progress. After deregulation, various systems still remain in the hands of the government but were shifted to the Department of Transport where they are still effective to date. Over the years, the need for a competitive market have been emphatic as a direct system necessary for ensuring better services are available to the people at the correct time and space. This direct and indirect control has been causing massive losses to the passengers, the government, and the entrepreneurs in US through non options and suppression of competition capacity for the different airlines (Marc, 53-54). Besides, lack of cooperation between the government and private sector via privatization has left much work load for the structural development to the government prompting slower development of the same facilities.
Government should ensure that the industry is fully deregulated for ensuring better and effective management of the facilities. Besides, it should establish strong cooperation with the industry and other related private sectors in developing the system. However, it should maintain an upper hand to intervene at different instances necessary for ensuring better performance of the system. Finally, it should establish a strong an effective monitoring systems to assess the progress and development alongside other departments.
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