Airline industries throughout the world have been shaped by various government interventions. Traditionally, airline industries were one of the most highly regulated industries. The last twenty years has seen major changes occur within the industry through the introduction of deregulation, the removal of government regulations from most airline practices. The majority of industrialized countries have passed legislation outlining the involvement or lack of government intervention. This paper focuses on the local Australian industry, the United States and European markets and to a lesser extent, the Asian airline industry.
The regulations on the industry, as imposed by external government agents, sparked significant economic debate. Questions such as ‘is there enough competition among airlines to ensure passengers do not pay excessive fares? ‘ and ‘can an unregulated airline industry be profitable? ‘ and ‘is air travel safe? ‘ had been at the forefront of any debate over the airline industry leading up to deregulation. In satisfying economic ideals as well as social ideals, the extent to which governments have and will continue to intervene is derived.
Since the inceptions of deregulation in the airline industry, government agents and economists have debated the true effects that deregulation has had on the airline industry. It has been a very difficult task for all concerned to try to capture and further quantify the impact that deregulation has had. This task is made difficult as a result of the extensive, and sometimes contradictory, amount of critical economic variables that amount to form the substance that binds the industry together.
Factors such as the state of the economy, technological progress, seasonal effects, government intervention through regulatory regimes etc. ll play a part in the general foundation of the airline industries economic environments. General background of Australian airline industry In Australia, regulation of the airline industry commenced in 1952 with the Civil Aviation Agreement. The general purpose of the regulations in place at the time was to enhance the growth of an infant industry using a contractual and legislative framework that would go a long way to ensuring the long-term viability of the industry. At that time, the industry was based on two domestic airline operations, one privately owned and the other fully owned by the Government.
The Airlines Equipment Act (1958) was passed and helped to further guide the extent and forms of government regulation up until the early 1980’s. this act objectively sought to ensure that airline capacity was closely matched to market demand as well as ensuring that the private sector airline was not subjected to anti-competitive practices by the Government airline. Other notable regulatory restraints within these acts included controls over the determination of domestic passenger airfares; the entry by operators to major routes; and the types of aircrafts allowed to be imported.
The airline industry slowly developed into a strong commercially viable industry. Debate however remained as to the relevance of the Governments regulatory regime. In the early 1980’s, a decision was made by the Government to withdraw from detailed economic regulation of the domestic airline industry. This decision was based on the findings of an independent review of ‘Economic Regulation of Domestic Aviation’. Deregulation of the airline industry was on of the Australian Governments most significant actions under its competition policy implementation and microeconomic reform.
Deregulation involved removing restraints and withdrawing from such key regulated areas as the setting of fares, capacity control, aircraft imports and route entry. The general basis of deregulation was an objective effort to expose the airline industry to market forces in an attempt to achieve continued growth in an economically efficient and socially desirable manner. Deregulation was also intended to by the Government to create an economic environment that would see airlines evolve to changing social trends and become more responsive to consumer needs.
The Government hoped that by removing regulatory restraints, airlines would be able to offer a wider range of fares and types of services to consumers as well as continue the high level of safety that Australian airlines had historically been able to achieve. The reform to the airline industry also involved the transfer of infrastructure from the Government to corperatised agencies. These included the FAC (major airports), CASA (safety issues) and Airservices Australia (air traffic control).
Possibly, the most significant objective that the Government intended deregulation to achieve was stimulation of competition between the airline companies. Knowing that competition was sure to be enhanced among incumbent operators through the removal of regulations on fare setting, the desired level of competition was more apparent with the introduction of new entrants into the marketplace. It was believed that the entrance of new operators (namely over time; Compass, Compass2, Virgin and) would help stimulate economically efficient levels of competition within the fast evolving airline industry.
The Government stayed actively involved in the area of terminal accessibility, imposing regulations that would ensure that new entrants into the industry would have access to terminal facilities. A minimum level was established for terminal needs for new entrants and existing competitors were forced into negotiation of their once exclusive rights to the terminal facilities. This ensured, to some extent, that new competitors were able, at least in the short-term, compete with incumbent operators on a level playing field.
The benefits of deregulation of the Australian airline industry can be best represented, in the case of consumers, through the fall in real air fares; approx. 20% since deregulationi. The Government has also reaped significant benefits, in the case of the Australian Government, income taxes and dividends paid by the FAC (approx. $60 million annually) as well as the $2 billion it received from the sale of QUANTAS. A number of problems still remain however. The more significant of these include: 1. High volume airports are cross-subsidizing low volume airports.
If the leases are to be sold without the removal of the cross subsidy, lease payments on major airports will be excessive. ii 2. Airservices Australia is still the sole supplier of air traffic control and fire/rescue services. The cost of these services accounts for about 10% of the cost of running an airportiii. Competitive tendering for these services would help bring these costs down. 3. The costs of setting up a competing airline are sunk costsiv(costs that are not retrievable). This gives existing firms market power as these sunk costs are highly considered to be a barrier of entry to potential rivals.
General background to the United States airline industry Prior to the deregulation of the United States airline industry in 1978, external government agencies played an authorative role in determining the routes each airline flew and the prices that they charged. With concerns mounting that Government regulation had caused fares to become to high in many the heavily traveled markets and subsequently created an inefficient industry with inhibited growth, legislation was passed in an effort to change the underlying dynamics of the industry. The introduction of the Airline Deregulation Act 1978 effectively turned the U.
S airline industry upside down. Under the new act, airlines dissatisfied with some of there less traveled route had the right to end service on those routes. The once essential certificates of convenience and necessity were no longer required. Firms that were facing bankruptcy were no longer going to be rescued by inflows of federal money. It was developments such as these that played a large part in shaping an industry bound by intense price competition, entry of low-cost operators and the development of hub and spoke network. It was hoped and, by some economic experts, predicted, that the U.
S airline industry, subject to these forces of deregulation, would become a perfectly contestable market. General background of European airline industries The European airline industry has historically been highly regulated. Even with the introduction of various liberalization schemes designed to give airlines more freedom of choice over pricing and routes operated, the European airline industry remains highly distorted. There is still a substantial amount of intervention by state and national authorities throughout the industries, most notably through controlling and subsidizing airlines.
General background of Asian airline industries. The Asian airline industry, in terms of deregulation, lagging far behind their international counterparts. The Asian airline industry has the most highly regulated aviation environment. A bilateral system of route allocation has been at the forefront of the industry going back to the inception of air travel. This system still remains, despite the introduction into the market by several dominant new Asian entrants. Whilst international pricing is a function of the deregulated practices adopted by other countries, domestic fare setting is still strictly regulated.
Several significant steps toward abandoning the restrictive regulatory require are slowly being adopted, most notably through open trade agreement through U. S airlines and some Asian airlines. Whilst the benefits for consumers and Government alike are considerable, the deregulation of the airline industries throughout the world has raised a number of issues for the micro and macro economy, as well as society as a whole. The more notable of these include; The issue of safety is one that has generated great concern amongst the Government and consumer public.
There is thought that with all the competition, airlines need to find ways of cutting costs to remain competitive. The structure and maintenance of the aircraft may be compromised in this endeavor, thus jeopardizing both safety of air travel. There has also been speculation and some evidence to suggest that unemployment has been a direct result of deregulation. Again the catalyst for this outcome is increased competition, cutting costs and so forth. Possibly the most significant issue raised over the introduction of deregulation to the airline industry is that of monopolistic behavior.
In considering the effects of deregulation on the airline industry, economists are aware that they need capture the entirety of the impacts of various reforms. It is largely felt by modern economists that deregulation only promotes competition in the early stages of its implementation. It is largely felt by modern economists that deregulation only promotes competition in the early stages of its implementation. It has been argued that in the latter stages, it actually eliminates competition as rivals are driven out of business.
The initial high levels of competition lead to owners feeling a need to cut every corner possible, at which workers and consumers pay the price. With this view in mind, the cycle of the impacts of deregulation can best be summarized as follows. At the initial stage, a period of price slashing occurs as well as better service provision as companies compete to attract more customers. However, over time, the weaker companies are eliminated leaving only the strong ones to compete. At the height of the competition, it need be noted that airline companies are not seeking prosperity, but merely seeking survival.
Companies become increasingly desperate to cut costs wherever possible to maximize profits. At this period, consumer and/or worker safety can be reduced, as can convenience and comfort. Entire markets, for example rural areas, can cease to exist due to a perception or area of low-profit. In the latter stages of this cycle, a monopoly or oligopoly emerges. This subsequently leads to prices being raised, services dropped, quality reduced and furthermore corruption and abuse of power. The fact that airlines have been able, through deregulation to set up operations wherever they feel has also led to monopolistic behavior.
Airlines are able to dominate passenger air transportation in domestic areas, provided, and sometimes the case, that they are the only existing airline operating out of that area. It is accepted among social and economic ideals that competition, eliminating inefficiency and corperate restructuring are all necessary elements for a healthy economy. Whether a regulatory or deregulatory regime is adopted by a countries airline industry, a tradeoff will exist between economic and social ideals. It seems that the most efficient mix of regulations is one that incorporates some areas of the industry that are regulated and others that are not.