Airlines after the Deregulation Act of 1978

Introduction

This act was passed into a U.S.A law in 1978 in an effort to disable the government’s influence on air ticket price, flying routes and the entrance of novel airlines. The rules introduced by the Civil Aeronautics Board (CAB) were to be done away with leaving the consumers open to the elements of market forces. Nevertheless, the act did not lift the regulations of FAA which were meant to ensure the safety of passengers. CAB was responsible for balancing the fare during high and low season at the same time making sure that the airlines got rational profits. The CAB was known to delay requests made by the airlines, mostly regarding changes of price and new flying routes, and eventually declining them later (Bilstein, 1994).

From the beginning of 1970s, the aviation industry was under pressure to lift the regulations imposed by the CAB. The pressure came from the oil crisis and the slow economic growth which resulted to inflation and low employment. However, the bill faced opposition from established airlines, employee unions and the safety board. The established airlines feared competition, labour unions were worried about disunited workers while the safety regulatory board feared emergence of poor safety standards. Some scholars believed that the new regulations would make the industry inefficient, and the prices would go up since many airlines will focus only on certain routes. Others believed that by allowing new airlines, it will boost competition and the airline charges would go down. However, the public was not in favour of the CAB regulations, and that was enough to put an end to those regulations (O’Connor, 2009).

Effects

Since 1978, the hold of CAB in the airline industry began to loosen and in 1984, it was completely scraped. Initially, the then operating airlines were granted subsidies as a result of the market shifts. Also, the employees who lost their jobs as a result, were granted unemployment remuneration. Immediately after the act was enacted, many airlines deserted routes that flew people to small towns which were less populated; the reason being that those routes had little returns. One of those areas abandoned was Bakersfield; they were denied access via air to cities like San Francisco. This town was abandoned by United Airlines since it had a small population of about 226,000. Another result was the emergence of hub and spoke flying paths.

The already established airlines made some of the major cities to be their operations point. This meant that some flights were not using direct routes since they had to deviate to these cities. For example, one of Delta’s chief hub point was in Atlanta and Eastern’s point was in Miami. This was done to increase the hours of the plane on air and also ensure that there were less empty seats. This eventually increased the number of flights between major cities. For example, the number of flights from New York to Miami increased by 360% (Bilstein, 1994).

Since new airlines could enter the industry without adhering to set regulations by major airlines, it allowed cunning businessmen like Donald Burr to enter the industry. Mr. Burr founded the People’s Express which operated on unusual ways of management. The methods included low wages to employees, small number of managers, employees possessing a reasonable number of stocks and employing workers who could carry out numerous tasks. Consumers had to pay for their edibles during the flight and also pay for their luggage. As a result, the airline ticket became cheap, almost as cheap as a bus ticket for the same distance.

The company’s profits augmented radically between 1980 and 1985. Other established airlines also reduced their prices as a result, but their services were better than those offered in People’s Express. Also, the established airlines offered their consumers the choice of buying the tickets in advance. Obviously, Burr was put out of business in 1986; this was after massive losses and continuous customer complains (O’Connor, 2009).

With the lifting of the regulations, many airlines increased their number of routes. This lead to reduction of flying cost which lead people to travel by air more often. The airlines experienced massive profits and in 1979, 318 million people flew in America; it marked the boom of the airline industry (Bailey & Graham, 1999).

However, in 1981, the airline industry as a whole suffered a colossal amount of losses totalling up to US $422 million. This was a consequence of the rising costs in fuel, economic downturn and meaningless extensions of the airlines. The crisis worsened later in the year when the air traffic controllers went on strike in every part of the country. Some airlines like Braniff declared bankruptcy as early as 1982 while others proceeded on the risky expansion plans. The continental and the Eastern airlines were both in major financial crisis, to make matters worse; they had poor management and terrible links with the labour unions.

Inevitably, they were broke in 1989 and they shut down their businesses. The same fate was faced by the Pan American airline which closed its doors in 1991. Without the regulations of the CAB, the airline was forced out of the market by novel airlines like the Paper’s Express. In 1978, there were 6 major airlines but after thirteen years, only 3 were left. Even though they survived that period, they generated very little revenue and they had to let go a fair percentage of their employees (Dempsey, 1998).

Despite of that, there were still benefits that resulted from the deregulation. The cost of flying reduced by 33% for the 14 years that followed 1978; the figure has been adjusted to cater for the inflation. In total, the passengers were able to save up to $100 billion that they could have spent on purchasing the air tickets. Since the major airlines had abandoned the short routes, the emerging smaller airlines started operating on those routes. In the end, these smaller airlines were not adversely affected with crisis. Surprisingly, the smaller airlines gained a lot from flying to less populated areas since there was less competition (Bailey & Graham, 1999).

There has been a major concern on the level of safety in the airline industry after the enactment of the deregulation act. The Federal Aviation Administration was still responsible for maintaining safety in air travel. The organization is responsible for certifying new airplane, regular aircraft check-ups, tuition and providing mode of operation. Despite of the presence of FAA, there were warnings that the safety level will reduce due to the competitive nature of the industry. There is no conclusive proof that the deregulation act deteriorated the safety of the flying.

Despite of this, some researchers have used statistics collected before and after the deregulation to hint that the act has lead to increased accidents. From the records, there has been a slight increment in airplane disaster especially in smaller airlines. It has been claimed that the regularity of airplane maintenance has reduced because of the tight flight schedules. However, it is scientifically impossible to prove that the act affected the level of safety. This is because other factors have manipulated the statistics of accidents. They include improved technology and increased level of expertise (Heppenheimer, 2006).

After the 9/11 incident, security at the airports has been tightened to protect the passengers from terrorist attacks. Passengers were screened for the first time in 1970s after there had been rampant highjackings throughout United States. The introduction of screening had no effect on the air ticket price. Nowadays, the security systems that have been introduced have become more sophisticated and costly. This cost has obviously been transmitted to the consumers. After the terrorist attack on the Twin Towers, there was a reduction in the number of passengers due to fear and the continuous annoying check points at the airports (Wyckoff, 2008).

Because of the increased number of passengers, the airline system experienced overcrowding and delays. The congestions increased the time needed to fly from one spot to another. This was as a result of airlines increasing the number of routes with the same infrastructure as before. This obviously altered the time of arrival; for example, ten years after deregulation, over 21% of all flights reached their destination after 15 minutes (Dempsey, 1998).

After the deregulation, the aviation industry was saturated with airline companies. At this time, airline industries were merging with each other to have a competitive edge especially during the crisis. During the middle years of 1980, the industry saw the highest number of companies merging; this was during the period when the antitrust laws were still sloppy. At around 1990, the antitrust laws were tighter than before and this resulted to decreased mergence of companies. The antitrust laws were made tighter after there were concerns regarding rivalry and increment of hub control. Afterwards, attempts to merge companies were met with serious opposition (Wyckoff, 2008).

Conclusion

The CAB tried to attain a sustainable airline industry that was to help the customers and the economy. As a result, fares increased, the system was incompetent and the revenue was unpredictable. The United States became the premier nation to enforce this act on its local airline industry. What followed was a never ending economic turmoil in the industry, on the other hand, the fares went down and the system became more efficient.

The instability in the industry continued and the mean revenues have been decreasing since 1978. Even though the industry is unstable, there has been indication that investment in the industry will cease or the consumers are dissatisfied. The Twin Tower incident caused a huge financial dent on the industry. Surprisingly, even after this incident, the number of flights remained identical after just a year. There were more direct routes afterwards, for example, the year 2005 recorded the highest number of direct routes than any other time in history (Dempsey, 1998).

It seems that the demand for air travel will never end despite of its instability. However, some of the causes of the instability can be controlled; like the cost of labour. Changes in the cost of labour can be achieved slowly through fresh labour contracts in airlines that are dexterous. There has been no clear way of managing the airlines even after over 70 years of commercial aviation. Maybe by now we should have learnt, but as long as the deregulation act is present, passengers will continue enjoying the benefits, and the airlines will continue looking for management solutions.

References

Bailey, E. E., & Graham, D. R. (1999). Deregulating the Airlines. Cambridge: The MIT Press.

Bilstein, R. (1994). Flight in America: From the Wrights to the Astronauts. Baltimore: The Johns Hopkins University Press.

Dempsey, P. (1998). The Social and Economic Consequences of Deregulation. Westport: Quorum Books.

Heppenheimer, T. A. (2006). Turbulent Skies: The History of Commercial Aviation. New York: John Wiley & Sons.

O’Connor, W. E. (2009). An Introduction to Airline Economics. Westport: Praeger.

Wyckoff, D. D. (2008). The Domestic Airline Industry. Lexington: Heath and Co.