The Impact of Deregulation on Regional Carriers

The Impact of Deregulation on Regional Carriers

            During pre-1980s, the government of United States, through its aviation arm (Civil Aeronautics Board) regulated numerous commercial aviation areas. These areas included fares, schedules, and routes. The difficulties that ensued prompted an introduction of a deregulation policy. In 1978, the congress passed a bill that brought the Airline Deregulation Act into effect. The Act rejected most of controls hence leading to radical changes in the US aviation industry. The paper, therefore, will explore the impact of deregulation with a focus on the regional carriers.

The Civil Aeronautics Board

            According to Williams (1994), the main objectives of Civil Aeronautics Board (CAB) included ensuring air safety to the American public, ensuring efficiency in flight and lowering the cost of air travel. These objectives were accomplished through dictation of airfare, flight paths and regulation of regional carrier subsidies.  Regulation proponents argue that CAB utilized its power appropriately. According to most regulation experts, elimination of regulation ushers in a new era where the regional airlines will concentrate on high volume flights on highly profitable routes.

            At the time, there were fears that the regional airlines' concentration on lucrative routes would stir an unfairly competitive business environment. As such, a sluggish economic growth in the aviation industry seemed inevitable. Even worse, dominance of powerful regional carriers would lead to a monopolistic aviation industry, hence high fares due to a low level of competition (Freeman, 1978).

             One of CAB regulation policies involved picking regional airlines from a pool or carriers ready to operate a given domestic route. This eliminated the role of market forces to determine a most suitable airline to fly a particular route. The unhealthy business environment characterized by CAB would cease to exist when the deregulation act would be effective. Besides, the new regional carriers found it hard to penetrate a highly regulated aviation industry. It was not surprising to realize that the influence of dominant regional carriers had spilled over to the regulatory board, given the dislike for new waves of competition.

            Jimmy Carter appointed a vocal supporter to deregulation to head CAB, and Freddie Laker of Laker Airways to head a deregulation committee.  The appointment was in line with the need for success in airfare deregulation, considering Laker Airways' remarkable low-cost regional flights.

Abandoned Low-Income Routes

             In the short run, the regional aviation industry shook. Most regional airlines deemed it fit to abandon low-income routes, especially involving short air distance and transport to smaller cities in the United States (Moore, 1986).  For instance, United Airlines flew half-a-million passengers to Bakersfield, California. Once the deregulation policies were in effect, the same regional airline carrier ditched Bakersfield flights for bigger and more profitable routes like San Francisco and Las Vegas.

Establishment of Regional Hubs

            Secondly, there was an unprecedented surge of ‘hub-and-spoke’ routes--major regional carriers adopted major cities as their centers of operation. As such, the key cities were converted as flight stops, regardless of the fact that some regional airlines lacked a direct route between the endpoints.  A classic example is the Delta Airlines that had a hub at Atlanta. Similarly, Eastern Carriers operated a hub from Miami. Both regional carriers conducted numerous round trips from their hubs, ensuring that the carriers are in the air for most hours a day, hence keeping most seats filled.  Strikingly, nonstop flights from West Palm Beach to New York skyrocketed from just 5 to more than 23. This elaborates the extent of deregulation impact on regional carriers.

New Market Entrants

            Once deregulation was effective, United States aviation industry witnessed a rise in startup airlines market entry. Deregulation eliminated the need for such startups to bow to the dominant airlines’ demands and market pressures. Donald Burr’s People Express is an insightful instance of a startup carrier. Donald Burr is an entrepreneur famous for his introduction of unconventional management methods including a clique of managers, low salary and maximization of job performance per employee. His seemingly miraculous entrepreneurial skills were applied in his People Express—the tight operation involved passengers paying for meals onboard and charges for check-in baggage.  Thus, the fares hit a record low. In fact, the airfare was comparable to bus line ticket charges. The carrier’s flexibility led to increased revenues during early 1980s peaking at 1985 (1 billion dollars).  Other airlines kept a close watch on people's actions. Most of them launched  a stiff competition that  led to drastic fall in fare and better service provision than People Express. In the end, Burr's airline could not withstand a mounting pressure. Gradually, it phased out of the highly competitive market as losses surged and passengers became dissatisfied (Dresner & Windle, 1996).

            Many scholars conclude that regional airlines welcomed the deregulation policies. The fair competition of passengers would not be possible in the CAB strict rules regime. The no-hoods barred competitive environment led to success for most regional carriers. In addition, benefits to the ordinary passengers as air fares dropped drastically.  In 1979 alone, a remarkable 317 million air passengers crisscrossed US skies. This development led to unprecedented revenues to most airlines.

Rising Fuel Costs and Economic Turmoil

            The positive effects for deregulation could not last forever. The fuel cost rose, triggering an economic recession. As such, the unregulated aviation industry began to show signs of disastrous consequences. Beginning 1981, most startup carriers recorded losses-- some as high as $430 million. There was a drastic drop in passenger records in 1981 to a mere 286 million. PATCO's strike (Professional Air TrafficControllers Organization) in late 1981 escalated industry’s woes. A regional Carrier—Braniff—collapsed in 1982 demonstrating the magnitude of the problems crippling the sector. While other airlines continued to expand during this tough economic time, they certainly faced greater business risks.

            Today, there is an ongoing debate regarding the long –term deregulation impacts, especially to regional airlines. Some analysts agree that there was extreme instability in the post-deregulation era, considering the cases of Eastern Airlines and Continental Carriers. The two airlines suffered setbacks worsened by the poor relationship with aviation labor unions and mismanagement.  On a positive note, deregulation led to a transformation in America’s Aviation industry. There was a phase-out of most staunch rules that curbed the industrial expansion and threatened America’s core pillar (freedom). Notably, other countries followed America’s leadership in minimizing controls. Resultantly, the global aviation industry transformed for the better. A new era dawned, where cooperation among the aviators worldwide became imperative (Reynolds-Feighan, 1995).

            It is hard to imagine a development in a highly regulated aviation industry. While there are negative consequences as a result of deregulation, it is clear that positive impact outweighs them. However, the deregulation policies should be reviewed periodically to incorporate the changes in a modern business environment. Without periodic updates on the rules, new market would possibly incur heavy losses given the dynamic nature of America’s economy. Back at the time when the deregulation act was passed, America was a key global player in the industry. Today, countries like China and India are rising rapidly. Their booming economy allows for their heavy investment in America’s Aviation industry, threatening the local carriers.

References

Dresner, M., Lin, J. S. C., & Windle, R. (1996). The Impact of Low-Cost Carriers on Airport and Route Competition. Journal of Transport Economics and Policy, 309-328.

Freeman, J. W. (1978). State Regulation of Airlines and the Airline Deregulation Act of 1978. J. Air l. & CoM., 44, 747.

Moore, T. G. (1986). US Airline Deregulation: Its Effects on Passengers, Capital, and Labor. Journal of Law and Economics, 1-28.

Reynolds-Feighan, A. J. (1995). European and American Approaches to Air Transport Liberalisation: Some Implications For Small Communities.Transportation Research Part A: Policy and Practice, 29(6), 467-483.

Williams, G. (1994). The Airline Industry and the Impact of Deregulation.