Airline Deregulation

Airline Deregulation Blues

In 1978, the United States government decided that deregulating the airline industry was in their best interest. Practices from deregulation have hindered the industry from significant growth and earnings.

Synopsis of the Case

Prior to 1978, the airline industry was controlled by the government, and regulated by the Civil Aeronautics Board (CAB). All aspects of air travel were under control, to include entry, route allocations and fare structures (Grant, 2013).

Relevant Factual Information about the Problem or Decision the Organization Faced

The airline industry faced problems such as competition, new entrants, price discrimination practices and transitional adjustments. Competition grew significantly, as rates became increasingly competitive. Practices that stemmed from deregulation have prevented the industry from maintaining profitability.

Explanation of Relevant Concepts, Theories and Applications Derived from Course Materials

The airline industry faced issues of transitional adjustments after over 50 years of government regulation. During this regulatory time, unions gained much strength and became very powerful. Even though flight schedules were observed to be not profitable, they weren’t able to cut routes because existing contracts didn’t allow employment or hour cuts, nor flight schedule cuts (Econolib). This issue cut deeply into revenues.

Once governmental entry barriers no longer existed, another issue arose from deregulation; new entrants into the market. New competitors had absolute cost advantages because they didn’t have the strict union contacts to deal with that legacy airlines did. Low Cost Carriers (LCC’s) began to enter the market and cater to price sensitive consumers. LCC’s were able to compete on price with help that legacy carriers couldn’t, such as lower hourly wage employees, and higher productivity (Econolin). Before regulation, 10 major airlines controlled 90% of the market. After regulation, 4 major airlines controlled 85%. This was due to merges of multiple airlines that could no longer compete and faced Chapter 11 Bankruptcy (Grant, 2013). Open entry saturated the industry.

Price discrimination was widely practiced after deregulation. A shift in power allowed airlines to set their own prices and change them frequently, according to willingness to pay. New practices such as advance purchase, round trip requirements, minimum stays, and non-stop flights are common techniques used (Object). David Richards, formerly of the CBA and FAA, research determined that “the grant of pricing freedom to the airline industry has generally resulted in average prices being higher than they would have had regulation continued” (Huffington, 2013). New systems had to be implemented in order to stay