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The deregulation of the airline industry over the last 28 years has resulted in
How government intervention may impact the airline industry
The deregulation of the airline industry over the last 28 years has resulted in
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Deregulation of the Airline Industry
The airline industry has been subject of intense price competition since it was deregulated, and the result has been a number of new carriers which specialize in regional service and no-frills operations. These carriers typically purchase older aircraft and often operate outside the industry-wide computerized reservations system. In exchange for these inconveniences, passengers receive low fares relative to the industry as a whole. This research examines two low fare air carriers, ValuJet and Southwest Airlines. By investigating these air carriers, we can better understand the economic impacts of price versus service in the airline industry as a whole, as well as, the impacts on passenger and investor confidence.
Until 1978, air transport rates were approved by the government, which meant that price was not a primary competitive factor. Instead, airlines would compete on service and image. The airline industry was dominated by giants
(American, United, TWA) which offered nationwide and some international service, and by regional carriers, such as Southwest, which offered short trips between airports not served by the nationals.
Deregulation of the airline industry brought about in 1978 introduced a situation in which the national and regional carriers were suddenly able to compete in an environment that resembled a free market. Rate schedules were lifted, price fixing was eliminated and route management was removed. The main factors that affected whether an airline could serve a particular city was whether or not that city had enough gates for the new carrier, and whether the carrier was able to afford to purchase them. Companies such as Southwest recognized potential for low fares, and began building a niche for themselves by offering low fares with equivalent low levels of service. Southwest's success gave rise to a new generation of low fare airlines, with ValuJet entering the market in the early 1990's. Unfortunately, ValuJet suffered a string of accidents which brought the future of this air carrier into question.
ValuJet is a low-priced airline that offers inexpensive tickets for regional travel. Based in Atlanta, the airline serves the Southeastern United
States and competes with Continental Airlines as well as with other small regional carriers. It serves 31 cities primarily in the southeastern United
States. The airline began its service with flights to Tampa and Orlando from
Atlanta in 1993. The no-frills strategy paid off for the fledgling airline, which posted half again as many revenue passenger miles in April 1996 as it did in April 1995. However, the company announced that it was slowing the expansion of its services, voluntarily, at the same time that it posted this impressive revenue mark (Cole & Pasztor, 1996, p.
The new trend in airline industry to use fuel efficient, high -tech aircraft is of a major concern for Air Canada. It has been under immense pressure to replace its fleet aircraft with more efficient Boeing 777 aircraft. However, the airline has purchased some Boeing777 aircraft, but these new purchases are used only for more profitable international routes depriving Air Canada’s domestic consumers of the facility. Furthermore, the varied fuel price has affected pricing policy significantly as its promotional policies are more price point based as compare to consumer based.
1978 Airline Deregulation Act On October 28, 1978, President Jimmy Carter signed into law the Airline Deregulation Act of 1978. This law amended the Federal Aviation Act of 1958. According to (Lawrence, 2004) “its purpose was to encourage, develop, and attain an air transportation system which relies on competitive market forces to determine the quality, variety, and price of air services.” The Airline Deregulation Act (ADA) was to be slowly phased in over a four-year period. As stated by (Lawrence, 2004) “it provided, among other things:
The U.S. airline industry experienced year-over-year growth in passenger revenues, in 2013, driven by strong demand for air travel.2 Additionally, on average, fuel costs were down in 2013 as compared to 2012.2 The U.S. airline industry is also a very competitive market. Due to government deregulation in 1978 there are few regulatory barriers to new entrants in the market, although there are other barriers to consider. Starting a new airline is very capital intensive. Purchasing a commercial airplane from Boeing can cost anywhere from $76million to over $300million.4 Another barrier to entry is risk in the industry. Airlines tend to experience volatile costs such as fuel prices, which can be difficult to predict in the long run. A regu...
Spirit addresses “price” by attempting to get the lowest possible fair for their potential customers. They have instituted their “unbundling” strategy that essentially removes all the conveniences that other airlines afford. Fees for checked bags, fees for flight changes, and no complementary in-flight beverages are just a few of the cost-trimming techniques employed. This strategy allows Spirit to come up with impossibly low fares. It also conforms to customers who just want to get from point A to point B without paying extra for services they don’t use. This strategy, coupled with an in-your-face “promotion” ploy, has made Spirit Airlines “the most profitable airline in the U.S.” (Nicas, 2012).
In today's competitive marketplace, all firms are seeking ways to improve their overall performance. One such method of improvement, recently adopted by many firms, is benchmarking. Benchmarking is a technique used to evaluate internal business processes. "In this analysis, managers determine the firm's critical processes and outputs, baseline those processes, then compare the performance of each process against a standard outside the industry" (Bounds, Yorks, Adams, & Ranney 1994). To effectively improve a business process to world-class quality, managers must find a firm that is recognized as a global leader, not just the industry standard. Successful benchmarking requires tailor-made solutions, not just blind copying of another organization. Measurement and interpretation of data collected is the key to creating business process solutions.
On October 24, 1978, President Carter signed into law the Airline Deregulation Act. The purpose of the law was to effectively get the federal government out of the airline business. By allowing the airlines to compete for their customers' travel dollars, was the thinking, that fares would drop and an increased number of routes would spring up.
Before we discuss government intervention and its affect on an industry’s competition we must first seek to understand the five forces framework. The theory, discussed in 1979 by Micheal Porter seeks to evaluate the attractiveness of an industry. Throughout this essay I will explore the theory and then relate government action and its well-documented affects on the airline industry.
The Economist. 2014. Price or quality—pick one. [online] Available at: http://www.economist.com/blogs/gulliver/2014/02/ryanair [Accessed: 26 Mar 2014].
333-355. Hocking and Waud 1992, Oligopoly and Market Concentration' in Microeconomics 2nd Edition, Harper Educational Publishers, NSW, pp. 315-342. Kathleen Hanser, The Secret Behind High Profits at Low-fare Airlines'. a href="http://www.boeing.com/commercial/news/feature/profit.html">http://www.boeing.com/commercial/news/feature/profit.html/a> [accessed 15 May 2003]
Airline and travel industry profitability has been strapped by a series of events starting with a recession in business travel after the dotcom bust, followed by 9/11, the SARS epidemic, the Iraq wars, rising aviation turbine fuel prices, and the challenge from low-cost carriers. (Narayan Pandit, 2005) The fallout from rising fuel prices has been so extreme that any efficiency gains that airlines attempted to make could not make up for structural problems where labor costs remained high and low cost competition had continued to drive down yields or average fares at leading hub airports. In the last decade, US airlines alone had a yearly average of net losses of $9.1 billion (Coombs, 2011).
Shortly after World War I, the U.S. Government discovered the abilities of the modern airplane and created the idea of utilizing aircraft to transport mail across the country. In 1917, Congress approved funding to experiment with the idea of delivering mail by air. By 1920, the Post Office was delivering mail across the entire country, eliminating over 22 hours in delivery times of a coast-to-coast route. With the success of the airmail service and the growing popularity of civil aviation, the U.S. Government recognized the need to develop set standards for civil aviation and in 1926 created the Air Commerce Act of 1926. The Air Commerce Act of 1926 called for the government to regulate air routes, navigation systems, pilot and aircraft licensing and investigation of accidents. The act also controlled how airlines were compensated for mail delivery. Later in 1930, Postmaster General Walter Brown made recommendations which were later known as the Watres Act which consolidated airmail routes and opened the door for longer-term contracts with the airlines. Brown handled the situation regarding new contracts poorly by only inviting a hand selected list of large airlines to the negotiation table. This move pushed smaller airlines to complain and the issue was pushed to Congress. Following congressional hearings President Roosevelt later decided Brown’s scandal was too much to deal with and canceled all mail contracts completely and handed over air mail delivery responsibility to the U.S. Army. That decision was a disaster, and one month later, air mail was handed back over to the private sector. This time, however contract bidding was more structured and fair to all. It was then clear that the airline industry was back in full swing...
When an airline does not have a sustainable competitive advantage, it does not have any properties of differences from there competitor and turns to a dangerous price war. The sustainable ...
service stand point but also for the price of fares and the amount flights offered to the more
Within the airline industry currently the airlines can be divided into low cost airlines and full service airlines. The low cost airlines targets customers that are seeking no frills connectivity between cities at low ticket prices. The full service airlines provide several add-ons like free meals, on plane entertainment, and communication facilities. The target market for full service airlines are customers who are willing to spend extra for the services that the airlines provides.
Economics is an extremely important aspect of the today’s society, especially, since it aids in the allocation of limited resources. Supply and demand are aspects and fundamental concepts of economics, which is considered the foundation of a market economy. In fact, the association between demand and supply underlie the forces responsible for the allocation of resources. Therefore, given the importance of supply and demand and its impact on the market economy, one will elaborate on the law of supply and demand. In addition, one will discuss how these fundamental concepts of economics apply and impact the prices of Airline tickets.