airline deregulation

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  • The Benefits Versus the Detriments

    Nathan DeRosa

  • Have the positive effects of airline deregulation outweighed the negative effects?The role of government in economic affairs is continuously debated

    Trade-offs between freer markets and government intervention

  • The federal government contracted with private carriers to supplement military airmail carriage starting in 1918 (Borenstein and Rose, 2007)Airlines started emerging in the 1920sAirlines became increasingly regulated during the Great Depression

    1938: Civil Aeronautics Board (CAB) was established marking the official beginning of airline regulation (Borenstein and Rose, 2007)

    Severin Borenstein: UC Berkeley professor, CAB staff economist, and DOT Future of Aviation Advisory Committee memberNancy Rose: MIT economics professor*

  • High Barriers to entry into the marketplace

    Carriers established after the CAB had the most difficulty entering the marketCompetition was largely absent

    Competition was based less on price and more on non-price determinants (e.g. legroom, seat quality, in-flight amenities, flight frequencies)Carriers needed approval from the CAB to expandPrice controls were put into place to ensure profitability and kept prices high (Borenstein and Rose, 2011)

  • Major carriers like American, Delta, and United competed in the interstate marketSmaller, local carriers like Pacific Southwest and Texas International flew in the intrastate market (Borenstein and Rose, 2007)

    Competed based on price, charged lower fares, and turned higher profits than the major carriersNot subject to federal regulationProvided a glimpse of a deregulated airline market

  • Regulated airlines turned lackluster profits (Borenstein and Rose, 2011)High prices prompted consumer groups to support deregulationHigh oil prices and stagflation in the 1970s further pushed opinion towards deregulation (Eisner, 2008)The appointment of pro-deregulation officials such as Alfred Kahn paved the way starting with discount price experimentation (Winston, 1998)

    Alfred Kahn was an economist appointed to the CAB and pushed for reformsMarc Eisner: Wesleyan Univ. Chair of Public PolicyClifford Winston: Brookings Institute Senior Research Fellow*

  • In 1978, the Airline Deregulation Act was signed into lawGradually lifted CAB price, route, entry, and exit controlsThe CAB disbanded in 1985 marking the official end of deregulation (Borenstein and Rose, 2007)The Federal Aviation Administration (FAA) would continue to regulate safety as it had done since 1958

  • Overall lowered prices

    Fares are approximately 40% lower than prior to deregulation even when adjusted for inflation (Borenstein, 2011)

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  • Barriers to entry and exit were lowered

    Many existing airlines either have went bankrupt, liquidated, or merged with other airlines while many new airlines entered the market

  • Labor saw a 10% decline in earnings following deregulation (Card, 1996)Aggressive cost-cutting measures amid financial losses and bankruptcies have had a toll on labor-management relations and customer service (Gittell et al., 2004)

    David Card: UC Berkeley economics professorJody Gittell: Brandeis Univ. management professor*

  • Lowered prices and barriers to entry were expected to lead to traffic growth and higher load factorsAirport congestion was not seen as a predictable outcome

    Traffic growth outpaces infrastructure development (Savage, 1996)

    Ian Savage: Northwestern Univ. economics professor*

  • Since deregulation, the airlines collectively lost $60 billion (Borenstein, 2011)

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  • Financial performance is tied to the performance of the national economyPropensity to over invest during economic booms which then lead to drastic cuts in capacity, scheduling, and the workforce during economic downturnsReluctance to raise faresExogenous demand shocks such as 9/11 (Borenstein, 2011)Exogenous cost drivers like jet fuel (Borenstein, 2011)

  • Rise of the hub-and-spoke system (Borenstein and Rose, 2011)

    Centralizing operations in one or more select citiesEstablishment of airline alliances (Borenstein and Rose, 2011)

    Brought about codesharingan agreement where two or more airlines share the same flightResulted in concentrations of market power in select cities (Borenstein and Rose, 2011)

  • Deregulation was successful in lowering prices and barriers to entry and exitThe Airline Industry has nonetheless suffered financially. To ensure financial sustainability, airlines must:

    Invest more moderatelyWork on improving relationships with laborLabor productivity is tied to customer service quality more than cost-cutting measures (Gittell et al., 2004)Raise their price premiums (Borenstein and Rose, 2007)Raising quality and fares to cover operational costs

  • Borenstein, Severin (2011). On the Persistent Financial Losses of U.S. Airlines: A Preliminary Explanation. National Bureau of Economic Research, 1-17.Borenstein, Severin and Nancy L. Rose. How Airline Markets WorkOr Do They? Regulatory Reform in the Airline Industry. National Bureau of Economic Research. 1-82.Card, David (1996). Deregulation and Labor Earnings in the Airline Industry. National Bureau of Economic Research. 1-58.Eisner, Marc Allen (2008). Markets in the Shadow of the State: An Appraisal of Deregulation and Implications for Future Research. Tobin Project Conference. 1-28.Gittell, Jody Hoffer et al. (2004). Mutual Gains or Zero Sum? Labor Relations and Firm Performance in the Airline Industry. Industrial and Labor Relations Review. Vol. 57, No. 2. 163-80.Savage, Ian (1999). Aviation Deregulation and Safety in the United States: The Evidence After Twenty Years. Taking Stock of Air Liberalization. 93-114.Winston, Clifford (1998). U.S. Industry Adjustment to Economic Deregulation. Journal of Economic Perspectives. Vol. 12, No. 3. 89-110.

    Severin Borenstein: UC Berkeley professor, CAB staff economist, and DOT Future of Aviation Advisory Committee memberNancy Rose: MIT economics professor*Alfred Kahn was an economist appointed to the CAB and pushed for reformsMarc Eisner: Wesleyan Univ. Chair of Public PolicyClifford Winston: Brookings Institute Senior Research Fellow*

    *David Card: UC Berkeley economics professorJody Gittell: Brandeis Univ. management professor*Ian Savage: Northwestern Univ. economics professor*

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