Essay on Airline Deregulation

Airline deregulation refers to the removal of government regulation over fares, routes and market entry of new airlines from the airline industry. In the United States, airline deregulation commenced when the Airline Deregulation Act was signed in 1978 (Poole Jr & Butler, 1999). The Act eliminated Civil Aeronautics Boards (CAB) regulations such as the issuance of licenses, setting fares, entry, and exit if airline entities, mergers between operators, and controlling where commercial airlines conducted business. The elimination of these constraints led to the expansion of the airline industry in employment, distance flown, and the number of passengers. Nevertheless, weak competitors were eliminated from the industry, which led to a loss of jobs. Therefore, this paper seeks to assess the direct and indirect costs impact as well as the advantages and disadvantages of airline deregulation.

Direct Costs impact of Airline Deregulation

Global liberalization of the airline industry regarding innovation of routes and prices by operators has led to a direct cost result in the form of savings in dollars. Passengers have saved billions of dollars after adjustment for quality and amenities. For example, Poole Jr and Butler (1999) recorded that by 1999, consumers saved approximately $19.4 billion per year because of lower fares. Also, because of deregulation, there has been a growth in the entry of low-cost airline into the industry lowering traditional fares to affordable market-based prices (Morrison & Winston, 2010). Consequently, more people travel by air and with increased frequency. Moreover, the increase in demand for low-cost fares improved transparency through website pricing and eliminated dependence on travel agencies. Similarly, following deregulation, airline operators have adopted an intricate price determination method, which is based on quality per price sensitivity and differential price per quality packages.

Indirect Costs impact of Airline Deregulation

Despite the benefits deregulation has created, there has been increased congestion in airports because of growing numbers of passengers because of affordable airfares. Consequently, for additional growth in the industry, airline operators and airports have had to do technical fixes of travel infrastructure incurring considerable investments in equipment and technology (Mattos & Fregnani, 2016). For example, since deregulation operations at the US airports have doubled a situation that needs a massive upgrading of the infrastructure and traffic control systems. Mainly, this costs and will continue to cost the economy additional resources (Morrison & Winston, 2010). Additionally, deregulation led to the loss of jobs to employees of airlines that scrambled such as People Express and Pan Am. However, the entry of additional operators such as South West countered this vice by creating millions of jobs.

Advantages and Disadvantages of Airline Deregulation

Airline deregulation lowered airfares as it increased the entry of low-cost airlines into the industry, which benefited consumers (Fu & Oum, 2014). Consequently, more people adopted air travel, which led to the expansion of the airline sector. Also, the competition caused by increased entry of new airline operators into the traditionally monopolized industry improved capacity for the use of infrastructural resources. Additionally, growth in the airline market created employment, which developed the well being of millions of Americans. Also, deregulation boosted travel and tourism as it raised both domestic and international travel (Morrison, & Winston, 2010).

Nevertheless, problems associated with the deregulation arose that continue to hurt the airline sector until today. Deregulation reduces the quality of airline services as operators compete on airfares instead of the quality of services. Also, deregulation led to the development of hub and spoke system with an aim in cities to enhance efficiency and reduce costs (Mattos & Fregnani, 2016). However, these hub cities, for example, Chicago and Detroit have congested airports, which is one of the most significant challenges facing the airline sector.

Conclusion

To conclude, airline deregulation has brought significant success in the US economy. It has led to affordability in air travel, expanded the air travel sector enormously and created many jobs since its enforcement. Nevertheless, there is a need for more to be done to eliminate elements that counter the market factors of quality competition. Mainly, this would facilitate the creation a more efficient system and generate more results regarding promoting the quality of services and creating more jobs while reducing the costs of travel across the industry.

References

Fu, X., & Oum, T. H. (2014). Air Transport Liberalization and its Effects on Airline Competition and Traffic GrowthAn Overview. In The economics of international airline transport(pp. 11-44). Emerald Group Publishing Limited.

Mattos, B., & Fregnani, J. A. G. (2016). Effects of the Airline Deregulation Act on Aeronautical Industry. Int J Adv Innovat Thoughts Ideas, 3(161), 2277-1891.

Morrison, S., & Winston, C. (2010). The economic effects of airline deregulation. Brookings Institution Press.

Poole Jr, R. W., & Butler, V. (1999). Airline deregulation: the unfinished revolution. Regulation, 22, 44.