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Airline deregulation

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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.

1 Introduction

2 In the United States


2.1 Civil Aeronautics Board

2.2 Airline Deregulation Act

3 Post-deregulation

3.1 Hub and spoke

3.2 Price

3.3 Service quality

3.4 Competition between carriers

3.4.1 Easy Entry/Easy Exit

3.5 Effects on airline staff

3.6 Open Skies

4 Criticisms

5 Notes

6 References

7 External links

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.[citation needed]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.[citation needed]
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.[citation needed]
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, England,
Scandinavia, Ireland and select South and Central American nations. [5]

In the United States[edit]

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,
which created the Federal Aviation Administration (FAA) [6]

Civil Aeronautics Board[edit]

Main article: 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.[citation needed] 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.[citation needed] Much of the established practices of commercial passenger

travel within the US, went back even farther, to the policies of W. F. Brown, [citation needed] the US
postmaster general in the 1920s and early 1930s in the administration of President H. Hoover.[citation
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).[citation needed] 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 [edit]

Main article: 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. [citation
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.

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[edit]

Airlines quickly moved to a hub-and-spoke system, whereby an airline selected some 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, [citation
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

Ultimately deregulation has certainly provided some financial benefits to the average air traveler.
Prices have declined steadily since deregulation. [10] Quoting the Heritage Foundation, a Conservative
think-tank promoting free-market ideology,[11] "The inflation adjusted 1982 constant dollar yield for
airlines has fallen from 12.3 cents in 1978 to 7.9 cents in 1997. This means that airline ticket prices
are almost 40% lower today than they were in 1978 when the airlines were deregulated." [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]
Economists from the Brookings Institution,[15] a political think tank with both liberal and conservative
members,[16] and George Mason University[17] have also proven and further agree, that indeed
consumers save thanks to the lower fares resulting from a competitive airline marketplace created
by deregulation.[18]

Service quality[edit]

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. [citation needed]
Over the past several years the public's view of airline service quality has shown a significant drop.
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).[20]
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.[21] 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.[22] 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. [23] 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.[24][25] 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. [23]
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. [26] He also noted
unexpected congestion and delays "that have plagued air travelers in recent years". [26] 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). [26] Kahn
considered the turmoil, congestion, and delays to be unforeseen "surprises" from deregulation and
continued to support deregulation in spite of these events.[26]

Competition between carriers[edit]

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.[10]
Easy Entry/Easy Exit[edit]
Many airlines responded to deregulation and new competition with frequent-flier 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 decreasecompetition 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.[10] In addition, many airlines have formed airline alliances in order to offer larger
route networks.[10] As a result, of the 52 new entrants into the airline industry between 1980
and 2000, the last two standing were America West and Midwest Express.[27] As of 2013,
there are no original new entrants from this time period left standing. America West merged
with US Airways Group, keeping the latter's name (and is now in the process of a possible

merger with American Airlines), and Midwest Express was purchased by Republic
Airlines and subsequently closed.

Effects on airline staff[edit]

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),[26] and saw continued but less rapid growth
throughout the 1990s.[10] Subsequently, between 2000 to 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. [10]
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. [28] 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." [29]
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. [30]
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.[31] 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. [32]

Open Skies[edit]
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.
[citation needed]
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, [citation
access to international routes to and from their home countries and freedom from many
traditional forms of economic regulation.[citation needed] 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.[citation
These agreements still fail to approximate the freedoms that most industries have when
competing in other global markets.[9]

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,[33] 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.[34] In doing so, according to the labor union view, airline executive management has
created what many are calling the great race to the bottom[35] 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.[36]
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, [37] it's leaving many market analysts
wondering if we haven't come full-circle. 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.[38] This leaves the weaker airlines to merge, eliminating market choices and bringing us
closer to 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[39] with a view of increasing price and cost competition. [14][14][39]
In a 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

emerging economies


A nation's economy that is progressing toward becoming advanced, as shown by
some liquidity in local debt and equity markets and the existence of some form of
market exchange and regulatory body.
Emerging markets generally do not have the level of market efficiency and strict
standards in accounting and securities regulation to be on par with advanced
economies (such as the United States, Europe and Japan), but emerging

markets will typically have a physical financial infrastructure including banks, a

stock exchange and a unified currency.


Emerging markets are sought by investors for the prospect of high returns, as
they often experience faster economic growth as measured by GDP. Investments
in emerging markets come with much greater risk due to political instability,
domestic infrastructure problems, currency volatility and limited equity
opportunities (many large companies may still be "state-run" or private). Also,
local stock exchanges may not offer liquid markets for outside investors.