I am working on a paper and wondered what you guys thought on the subject. It is about the Degregulation Act of 1978, and how would the airline industry change if it were reversed? Due to the rising fuel prices and the new security issues since 9/11, would we the consumer be better off if it was once again regulated?
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Deregulation Act of 1978, reversed?
- Thread starter 123Fly
- Start date
I'm no expert in anything, especially the airlines, but we've done alot of airline economics in some of my economics classes. Take the Air Canada model for example, they are run like a private company and basically are, but are given a government owned monopoly and are given subsidies. It's set up similarly to our Amtrak. The difference however is infrastructure, planes don't fly on "tracks," which are costly and inhibit growth in the market and are generally undesireable to a town, but rather operate up high, where there is considerably less disturbance and relative cost. Air Canada is a failing business, but it shouldn't be -- people in Canada want to fly, (ie: there is a demand for it) but they aren't because there is too much government intervention; forcing them to keep prices at certain levels. If you let it be run like our airline industry in America, it would work fine in the long run; eventually, the lowest cost competitors would succeed in creating the largest market niche and would survive. There are other considerations, though, like perhaps service that requires rural routes and don't have much demand, but are perhaps necessary (pretty much why we have a government-runned postal system), but in the United States, this doesn't appear to be a problem, and if it were ever to grow worse, the free market would take care of it by providing supply for that demand (ie: put flights in that rural area). It costs the taxpayers money, it is a terrible bureacracy, and there is no reason why the free market can't take care of itself in the airline industry.
firefriendly said:
Care to elaborate a little more?
I believe that reversing the Airline Deregulation Act would not help the current situation in the aviation industry. Currently the system is in a shakedown that has been a long time coming:
There were and are too many airlines and too many flights. The cost structures are antiquated and need to be changed. Interestingly enough, the cost of an airline ticket has not changed significantly since the deregulation act, but costs have increased substantially. The increase in security and fuels costs has been the catalyst of the current shakedown, and to have the government intervene at this time would prevent the proper outcome from occurring. The deregulation act was made to create a competitive marketplace, one where the strongest airlines would survive. This is why we are now seeing many of the legacy carriers declare bancruptcy and try to cut costs. This is also why a smaller airline was able to take over a larger one (America West & US Air). Don't be surprised if several airlines that have been with us for a long time seem to "disappear" (think about Braniff, Eastern, Pan Am, TWA etc).
In a nutshell, reversing the deregulation act: Not feasible and not going to happen.
Here's my totally unqualified $0.02, you may fire when ready:
IMHO, reversing the Deregulation Act WOULD improve things, simply because it could impose realistic limits on the number of flights between cities, making aircraft loads greater overall (i.e. more lucrative for the airlines.) Right now there are too many companies flying too many planes for too little income, all vying to stay in a commodities market. With everyone is selling essentially the same product, the price war has been generally bad for the whole industry.
Re-regulating *might* also help alleviate the ATC bottlenecks in places like New York and Chicago etc. But re-regulation probably won't happen for 2 reasons:
1.) Because prices would also increase suddenly and that's not good in the near term for the government, which is the single largest buyer of airline tickets.
2.) Regulating the number of flights would prevent new entries into the market, which could cause all sorts of antitrust allegations etc. against the government (who regulates the routes.) It would be political suicide for whomever led the charge to regulate.
More likely, I think we'll see some airlines disappear and/or merge, and a gradual ticket price correction (read: increase) to compensate for inflation and rising fuel costs.
IMHO, reversing the Deregulation Act WOULD improve things, simply because it could impose realistic limits on the number of flights between cities, making aircraft loads greater overall (i.e. more lucrative for the airlines.) Right now there are too many companies flying too many planes for too little income, all vying to stay in a commodities market. With everyone is selling essentially the same product, the price war has been generally bad for the whole industry.
Re-regulating *might* also help alleviate the ATC bottlenecks in places like New York and Chicago etc. But re-regulation probably won't happen for 2 reasons:
1.) Because prices would also increase suddenly and that's not good in the near term for the government, which is the single largest buyer of airline tickets.
2.) Regulating the number of flights would prevent new entries into the market, which could cause all sorts of antitrust allegations etc. against the government (who regulates the routes.) It would be political suicide for whomever led the charge to regulate.
More likely, I think we'll see some airlines disappear and/or merge, and a gradual ticket price correction (read: increase) to compensate for inflation and rising fuel costs.
The results of the past 28 years since the Deregulation Act have fallen far short of what its authors envisioned. Although not a total failure, Deregulation has been far from a success. Of course in any major paradigm shift from the lesser to the preferred, the big trouble always lies in the transition phase.
Unfortunately, we have now had 28 years of that bitter transition phase. What is worse is the end is not yet in sight.
The current airline industry by most observers – financial, labor, consumer, and government – is a disaster. Deregulation is not the reason, but Deregulation certainly shares part of the blame.
Actually, the cost of a ticket has changed substantially. Airline Yields (ticket prices) have increased from 8.49 to 12.06. But in 1978 dollars, those Yields have actually decreased tremendously – from 8.49 to 4.16!
And while inflation adjusted ticket prices have plummeted, costs have, as you suggest, skyrocketed. But not all of them. Recently, Labor costs have fallen drastically, while fuel costs soared. Meanwhile, commission expenses have plummeted.
Airlines of today have a pricing problem that capacity reduction will not solve. Primarily because of the Internet, they have lost forever the high yield business traveler that subsidized profitable airlines within a high cost environment.
As an oligopoly, airlines have great difficulty in pricing their product, because of the "kinked demand curve." Price decreases are easily matched; price increases are ignored. Eventually, the competitive price is forced to below breakeven in a predatory pricing environment. Any successful price increase from there, is extremely difficult.
The industry has changed from a service industry to a commodity industry. While there is overcapacity, that is not the fundamental problem. There has been some industry consolidation over the years, but never at the rate forecast. Current mergers will not solve the industry's fundamental problems, nor will a reduction of capacity.
While I am not really in favor of a return to airline regulation, if the industry is unable to solve its long running problems – and it has yet after 28 years to prove that it can, some re-regulation may indeed be necessary. It may be either that, or collusion . . . . but collusion is illegal.
Unfortunately, we have now had 28 years of that bitter transition phase. What is worse is the end is not yet in sight.
The current airline industry by most observers – financial, labor, consumer, and government – is a disaster. Deregulation is not the reason, but Deregulation certainly shares part of the blame.
nugget81 said:
Actually, the cost of a ticket has changed substantially. Airline Yields (ticket prices) have increased from 8.49 to 12.06. But in 1978 dollars, those Yields have actually decreased tremendously – from 8.49 to 4.16!
And while inflation adjusted ticket prices have plummeted, costs have, as you suggest, skyrocketed. But not all of them. Recently, Labor costs have fallen drastically, while fuel costs soared. Meanwhile, commission expenses have plummeted.
Airlines of today have a pricing problem that capacity reduction will not solve. Primarily because of the Internet, they have lost forever the high yield business traveler that subsidized profitable airlines within a high cost environment.
As an oligopoly, airlines have great difficulty in pricing their product, because of the "kinked demand curve." Price decreases are easily matched; price increases are ignored. Eventually, the competitive price is forced to below breakeven in a predatory pricing environment. Any successful price increase from there, is extremely difficult.
The industry has changed from a service industry to a commodity industry. While there is overcapacity, that is not the fundamental problem. There has been some industry consolidation over the years, but never at the rate forecast. Current mergers will not solve the industry's fundamental problems, nor will a reduction of capacity.
While I am not really in favor of a return to airline regulation, if the industry is unable to solve its long running problems – and it has yet after 28 years to prove that it can, some re-regulation may indeed be necessary. It may be either that, or collusion . . . . but collusion is illegal.
nugget81 said:
Catmando said:
HAL Pilot said:
My original statement about ticket prices was technically wrong, but the fundamental idea behind it was correct.
Over the last few months we have seen airlines start to again pass the costs onto passengers by raising fares. As Catmando mentioned before, this industry has changed from a service industry to that of a commodity industry. As such, passengers are more likely to choose an airline based on price rather than service or anything else.
I stand by my opinion that reversing the Deregulation Act is not feasible.