Airline Deregulation: Economic Effects
Deregulation of airlines involves lifting the price and entry and exit restrictions on airlines. In the past, airlines were strictly regulated by governments in terms of entry and prices, controls on mergers, and the number of seats and carriers. This led to inefficiency in the airline industry, limited consumer choices, and high prices. Many countries have deregulated their airlines like the US and UK. However, airline industries in some parts like the Middle East are still heavily regulated.
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Impact of Airline Deregulation
Since the United States deregulated its airlines in 1978, the travel fares started decreasing and today the fare is significantly lower than that paid in 1978. The fares reduced by approximately 30 percent in 1990. Travelers save about five billion to ten million US dollars every year in air travel (Button 1991). Airline safety also increased. The number of airline accidents has reduced since the deregulation of airlines. There were concerns that airline deregulation would lead to reduced safety due to increased competitive pressures. However, there is no evidence showing the reduction of airline safety. In order to succeed in the competitive industry, airlines understand that they have to maintain a good safety reputation so that they can attract customers (Morrison and Winston 1986).
Deregulation meant that airlines could operate on any route and set their own fares. The removal of the regulatory price controls led to reduced average prices and increased price variation. The entry and exit restrictions were also removed and this led to the restructuring of the airline networks to incorporate alliances and code sharing among airlines (Button 1991).
For the past 20 years, the major focus of US and other airlines has been to reduce costs and improve productivity. This has led to the airlines to try to achieve economies of scale through mergers. However, the government was concerned about the consolidation of the industry and therefore the airlines resorted to making partnerships and alliances with other airlines in order to give uniform services to the customers (Button 1991).
The industry is more efficient and the consumers are getting better services. There is an increase in the number of destinations and scheduled departures available to the customers. The introduction of “the hub-and-spoke” operations has led to more efficient-use of equipment and labor and increased convenience for the customers (Morrison and Winston 1986).
However, deregulation had some negative impacts. After deregulation, airlines were pressurized to cut on travel costs and there was an increase in profit instability. Several airlines merged and others went bankrupt. This led to loss of jobs, less wages and reduced power for the airline labor unions. However, with enhanced productivity, employment levels were increased. Moreover, the fares were not even as business travelers were forced to pay more than the others did (Button 1991).
Many airlines have gone bankrupt due to increased competition and lower travel fares. Increased competition has also made it extremely difficult for new firms to enter the market. Employees’ wages have also been reduced and other airlines have neglected their pension obligations and the airlines incur huge losses when dissatisfied employees go on strike. For instance, British airways lost £ 150 million in 2010 when the cabin crew went on strike.
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There has been an increase in delays, congestion, and discomfort. When airlines started offering low travel costs to the customers, they also offered lower cost services such as fewer facilities and narrower seating (Button 1991).
Button, K. J. (1991). Airline Deregulation: International Experiences. California: Fulton.
Morrison, S. and Winston, C. (1986). The Economic Effects of Airline Deregulation. USA: Brookings Institution Press.