The Present Day Advantages and Disadvantages of Airline Deregulation
- Pages: 12
- Word count: 2812
- Category: Airline
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The United States Airline Deregulation Act signed into law in October 1978 has been a milestone in the history of commercial aviation. Its major objectives are to remove government control from the airline industry and integrate commercial forces into the market. With new concepts and practices integrated into the system, the Airline Deregulation Act has brought about changes and effects that are either advantageous or disadvantageous and are herewith described and discussed. The present day advantages of air deregulation include the following:
- Passengers enjoy low airfare and affordable air travel
Deregulating commercial aviation resulted to lower airfares. The price drop among airline companies may be considered as one of the most important advantages brought about by deregulation. This is also contented by deregulation proponents and supporters to be one of the best reasons why the industry should not be regulated. The rate of airfares traditionally dictated and controlled by the government through the Civil Aeronautics Board (CAB) is now in the hands of entities such as investors and airline companies participating in the airline market. Airline companies competed with each other by dropping market prices so as to lure passengers to avail their services. They also offered discounts and other benefits to make their services attractive to the passengers. Hence, deregulation commenced price drop among carriers.
As such, passengers and travelers became the ultimate winners of the deregulation as they are the ones who benefited the most. The airline companies did not only drop market prices, they also introduced such other promotions as mileage programs, travel packages and frequent flyer programs. Airline companies competed in a no holds-barred competition for passengers to avail their services focusing much on diminishing what used to be expensive airfares thereby resulting price drops that benefited the airline customers.
These travel incentives and cheap airfares indeed enticed customers to avail of air travel. Before deregulation, when there was a fixed price of airfare that has to be maintained, air travel can only be afforded by a few and mostly by affluent people. Air travel then was unaffordable because of its prices that are controlled and monitored by the government. Today, many Americans engage in travel and vacation. The market now has a demand for cheap airfares that makes flying among “not so affluent” passengers more affordable and more enjoyable. Nowadays, passengers are paying for airfares that just keep falling thereby giving passengers more options on what mode of transportation to avail during travels. As such, opting for a faster travel means taking passenger airlines. Deregulation has therefore given more Americans more travel choices with airfares that are lower than they should.
- Deregulation has the ability to boost travel and tourism
Commercial aviation does not only benefit the transportation industry. The boom in air travel also means a boom in travel and tourism. The tourism industry has benefited in the price drops of airline companies such that travel has become cheaper and more affordable. Budget for travel and vacation among Americans used to be too costly and difficult to raise. Today, travel and vacation funds can easily be incorporated into the people’s budget, allowing them to enjoy travel and recreation in other places. The attractive pricing schemes, mileage programs, special travel deals and packages offered by competing airline companies lured passengers to take advantage of air travels thereby promoting and boosting travel and tourism.
The type of airline passengers is not limited to tourists; it also includes businessmen. Since the advent of airline deregulation, travel for both business and leisure purposes grew strongly worldwide. This allows people who engage in business to oversee their operations in other parts of the country and even in other parts of the world without worrying too much on costly air travel.
The affordability of airfares made it convenient for people to travel further to new and exotic destinations. The low fares offered by the airline companies along with promotions increased the demand for air travel. People who traditionally cannot travel by air take planes to take advantage of bargain prices and promotional offerings. Moreover, people can now take vacations in affordable packages inclusive of air travel costs. Hence, air travel and tourism spurred.
Deregulation has not only benefited US travelers, it also benefited developing countries. The spurred activities of the travel and tourism industry prompted governments of developing countries to build up their resorts and tourist hubs to lure travelers to their region. Tourism in turn give benefits such as job creation, foreign exchange earnings and new infrastructure while safeguarding cultural heritage and living culture among tourist destinations.
Airline deregulation indeed has its advantages. However, many of these seemed to be applicable only right after the deregulation. Decades after deregulation, the seemingly positive effects of deregulation have evolved to become another batch of chaos and problems in the airline industry. Present day disadvantages of deregulation include the following:
- Deregulation causes congested airports
The airline industry has been freed from governmental intervention on rates and routes, but airports are not. In the United States, most airports are operated directly by government entities or government-created airport authorities. The Airline industry therefore needs to turn to government for interventions and for infrastructure decisions on airports and air traffic control as these areas have not been deregulated. Unfortunately, sparing airports from deregulation has been a disadvantage as airports have to cope up with the changes and effects brought about by the deregulated commercial aviation.
Deregulation has increased flight frequency due to low pricing schemes and the increased number of passengers but it has also caused one major inconvenience- congested airports. Deregulation caused the growth of “hub-and-spoke” routes and major airlines transformed key cities as centers for their operations. These key cities served as stops for most flights. Thus, airports that were originally designed and used to serve a small number of passengers became congested as airlines were given the freedom to fly where they wanted, at times and routes of their own choosing.
Facilities at heavily trafficked airports became heavily overused. Airports and facilities not designed for a hub system affected their users. Congestion disrupts flight schedules and increases taxi time, resulting in more fuel burn. Overcrowded airports lead to delays and cancellations. When a plane is delayed in one city, it cannot make its connecting flight and the whole system becomes chaotic. Overcrowding is worse in times of bad weather. Passengers are the ones affected most severely by such delays thereby worsening the quality of customer service given to passengers.
While airline companies can choose to add additional aircraft so as to cater the growing number of passengers, airports cannot easily expand their area nor can they easily upgrade their facilities. The physical limitations of these airports and inadequate airport facilities cause delay problems, missed connections and saturated government air traffic control system.
- Deregulation decreases the salaries and wages of airline employees
Labor represents the biggest single category of airline costs but the industry’s labor force is also among the most disadvantaged following deregulation. After deregulation, airline companies practiced an entrepreneurial form of labor relations to cope up with tough bargain fare competition. This system was rooted on the entry of non-union carriers.
Non-union carriers who have low wage entry level workers permitted and enabled them to offer much lower fares than unionized carriers. This prompted unionized carriers to do the same and merely increased the productivity of their workers to save on labor costs. The skyrocketing cost of operation like the increasing cost of fuels and food exacerbated by the dramatic decline in air fares have made airline companies to realize that costs and expenses can hardly be sustained and supported by fares that the market dictates.
Hence, since labor is the largest category of airline costs, it has been the target of cost cutting and productivity enhancement schemes of airline companies. Since after deregulation, the management of every major carrier has negotiated with its employees for wage concessions as part of their cost cutting measures. This condition jeopardized the salaries, condition and welfare of aircraft employees thereby resulting to conflicts between airline management and employees. Prior to deregulation, aviation employees enjoy good benefits and good salaries that are attributed to the fixed and predictable income of the airline companies. Nowadays, there have been major clashes between airline company managements and their employees due largely to “diminished” employment benefits and negotiated pay cuts.
- Deregulation encourages emergence of air dominance
Deregulation removed government control and regulations on the industry and therefore spurred more competition as entrepreneurial forces were integrated into the system. Free market is thus introduced. One advantage of having a free market in the airline industry is that new entrants could now enter the airline market. During regulation, one of Civil Aeronautics Board’s functions was to pick airlines from the available pool for a particular route rather than let the market decide which airline should fly that route. New entrants were at a great disadvantage as they were deprived of key routes already served by established airlines that neither wanted new competition.
With the advent of deregulation, bigger and established firms can no longer enjoy the airport dominance they had enjoyed in the past and hence allowed new players to enter the industry. Deregulation also allowed these new start-up airlines to enter the market without having to agree to the demands of the larger established airlines. This may be perceived as allowing fair and equal competition in the airline market but only for a short time after deregulation.
With deregulation came the ability of well established airlines to dominate and make the entry of smaller airlines or new ones very limited. While the government no longer controls the routes of airlines, dominant carriers may do. An airline that controls the majority of the gates at an airport has tremendous power in deciding the entrance of other carriers into the airport. Incumbent airlines at major airport have bureaucratic control because of the financing that said airline brings in. This bureaucratic control therefore leads to a higher degree of control on flight operations. Airport dominance does not only significantly influence an airline’s ability to markup price above cost; it can also lead to a stronger percentage and share of passengers.
- Deregulation increases risks of bankruptcy among competing airlines.
The airline competition became a game not of prosperity but of survival. After air deregulation took effect in 1978, many airlines were formed. However, many of these have either filed for bankruptcy or have been acquired by bigger airline companies.
The airline industry is too expensive and profit margins are too thin to permit smaller airline companies to effectively challenge the big, established ones. Hence many smaller airlines have failed, not being able to compete with the strategies of bigger carriers that include matching the fares and discount originally offered by the smaller airline companies.
Nevertheless, even big airlines were not spared from the damaging effects of deregulation. Fuel costs, economic recession, exacerbated by almost unprofitable airfares began to have serious negative consequences. Many failed airlines used bankruptcy to keep operating while alleviating prior obligations. After a carrier enters bankruptcy, it usually offers lower prices to boost its traffic. However, competitors lower their fares too, diverting traffic and creating equilibrium of passenger share. This system and practice plagued the industry and reduced most U.S. carriers to non-investment-grade credits. Current bankruptcy policies give carriers a chance to remain as competitors. Carriers in bankruptcy do gain a cost advantage from lower capital costs. Nevertheless, they also suffer a diminished reputation among travelers and potential investors such that many passengers become afraid to take flights on airplanes that have filed for bankruptcy.
Following bankruptcy and airline company failures due to intense competition, a notable consequence of deregulation takes place. Deregulation resulted in a shift of airline debt to the public through a federal corporation established to pay a part or whole of the pensions of the employees of airlines driven out of business or forced into bankruptcy.
5. Deregulation reduces profits among airline companies
Airline companies battle for their shares in the market by offering very low airfares. However, cheap airfare has become such a trend that airline companies have difficulty raising their prices despites increased cost of operations and cost of fuels. There has been a balancing force that keeps companies from raising their prices. For example, an airline company that wanted to raise its airfare to cover and compensate for operational expenses is faced with a bigger problem such as losing its customer- passengers to airline companies that opted not to raise their fare. This is due to the fact that it is wiser for passengers to take cheaper airlines that offer almost the same service as the airline with a higher fare. Hence, profits were greatly reduced. Reduced profits greatly increase an airline company’s risks of bankruptcy. This is true especially among airline companies with huge pension obligations that they might not be able to meet, high labor costs, unions fighting to protect pay and benefit levels, and too much capacity.
6. Deregulation initiates risky cost cutting measures
The growing cost of operation and unequally low fares dictated by the market compel airline companies to cost cut to maximize their profits. Cost cutting includes raising staff
productivity, eliminating the services of travel agents and by negotiating discounts from aircraft suppliers.
Cost cutting may also include ignoring the importance of maintenance and disregarding the need to upgrade equipment and airplanes. Cost cutting therefore has its safety implications. In an effort to maximize their profits, airline companies may prefer to cut operational costs like for example, maintaining or continued use of old and “unsafe” airplanes that already need replacements. It may also be assumed that costs on safety measures are also lessened thus, increasing the probability of accidents and crashes.
- Deregulation diminishes the quality of airline services
Deregulation of the industry shifted the focus of airline companies from quality of service and flight experience to quantity of people who can board the plane. During regulation, the government regulated the fares. All fares were the same; all the ticket rules were the same and so, aircraft companies compete by the services they offered. Company advertising then focused on the quality of service. Today, the focus of airline companies is on air travel, maximizing profits and filling passenger seats. Increased number of passengers and security leads to earlier arrival at airports and longer trip times; Planes that are full which is characteristic of many airline company planes is uncomfortable and makes traveling more unpleasant. Prior to deregulation, airline companies promoted and advertised their quality of services. In a regulated industry where the government determines the price, the quality of service is what companies offer to get prospective passengers. With deregulation, the company that offers the cheapest fare becomes the winner. The promotions have relied strongly on discounts and cheap fares and no longer on the quality of service.
Airlines are cutting costs whenever they can and the services offered by airline companies have been included in this cost cutting measures. The focus of airline companies to the popularity of air travel does not motivate airlines to revamp their standards. As long as demand is high and people are willing to pay the price to fly, there’s little incentive for the airline industry to change. Consumer complaints of planes that are overcrowded, oversold, late, delayed and canceled have already risen.
- Deregulation creates investor doubts in the airline industry
Deregulation destroyed the way airlines traditionally financed new airplanes as the economic status of the industry creates investor doubts. Prior to the deregulation act, the federal government, through the Civil Aviation Board, controlled prices by standardizing costs and setting profitability targets. Such regulation kept travel prices relatively stable. CAB also gives subsidies to airlines flying on less profitable routes. Hence, more communities were served by airlines under the system and the income from regulated routes and fares gave confidence to financial institutions and investors that loaned airlines money to buy airplanes.
With the Airline Deregulation Act of 1978, there was am intense competition among carriers. Airlines wage war against each other by offering discounts and bargain fares. Uncontrollable price competition was leading to deep discounts. Airline companies price their product below cost to maintain their share of the market, even if they went bankrupt in the process.
This system caused the demise of many carriers. These competition and low pricing schemes created an economically destabilized industry. Hence, the investors have reason to worry many airlines may not have the money to pay for new planes they order without the government guarantee of airline rates.