Economics of USA Airline Deregulation

In this paper I will make a research about economics of airline deregulation in USA and consider the concept of airline deregulation, the reasons of airline deregulation, what effects airline deregulation made on the US airline industry in general, on the competition in the airline industry and its affect on airlines’ fares, its effects on demand and supply of the airline industry and why it executes such effects, advantages and disadvantages of airline deregulation on the consumers.

1) The concept of airline deregulation and the reasons of its acceptance. I suggest to make a short historical excursus in the airline origin in order to understand the concept of airline deregulation. In the middle of 20th century all domestic air transport was completely controlled by the Civil Aeronautics Board (CAB in abbreviated form), which regulated all aspects of air transport beginning from the selecting airplanes, setting fares, projecting routes and schedules up to the selecting of personnel. The fares were determined accordingly to the length of the fly. In other words, air transport was under complete governmental control. The functioning of CAB was accompanied by bureaucracy and ineffective decision-making. During the second middle of the 20th century such field of economics as air transport developed in up-tempo and could not wait long with the decision-making process. At last in 1977 US president appointed Alfred E. Kahn, a professor of economics, to be chair of the CAB , which insisted upon deregulation of US airlines. In other words, he proposed to deduce airlines from the governmental control and regulation and substantiated its positive influence on the US economics. As a result on October 28, 1978 US president signed the Airline Deregulation Act (ADA in abbreviated form). After acceptance of ADA airlines become a completely commercial field of economics. Commercial airlines entered the market conditions, characterized by free and significant competition.

2) Effects of the airlines deregulation on the USA airline industry, on the competition in this industry and airlines’ fares. In general US airline deregulation was a very significant and successful step to the development of commercial airlines. It means that airlines can develop their own policies and standards; they can add new routes, which expected to be profitable, and remove old routes, which considered unprofitable. Airlines received the opportunity to vary amount of airplanes on each route, to set fares by themselves without government interference and to make managerial decisions themselves. Airlines deregulation attracted many new competitors – some of them bankrupted, some merged and some prospered: “When deregulation began, United, TWA, Eastern and American were the largest carriers. Three of them have gone bankrupt, along with Pan American, Allegheny, Braniff, Southern, Ozark, Piedmont, National, Frontier, TransTexas, Continental... “. US government decided to prevent some companies from bankruptcy and grant them credits within 10 billion dollars. As a result we can see that modern airlines prospered until the 11th September when terrorists hijacked airplanes and destroyed the skyscraper. After these terrible events airlines suffered many losses: “American Airlines is burning cash at the rate of $1.1 million per day. Continental Airlines' burn rate is $1.2 million per day, as is Delta's. Northwest is burning $2.3 million per day ”, which were caused by the fear of passengers to fly because of hijackers. Nowadays the situation is much more stable and airlines do not suffer losses related to the fear of acts of terrorism. Virginia Postrel, a journalist from New-York Times, discussed this issue with many economists and described the consequences of airlines deregulation in the following way: “After the 1981-82 recession, the airlines bounced back. But during the good times of the mid- and late-1980's, they bought far too many planes. That gave them too much capacity when the economy turned down in the early 90's, leading to fare wars and financial losses… They have fundamental challenges matching capacity with demand — both in getting that capacity and predicting what that demand will be — and adjusting to business cycles… for 40 years, they had no practice at it and no incentive to do anything about it ”. So after deregulation airlines faced many problems and difficulties, but many of them survived and now prosper. The fares on their services declined substantially. “Eliminating restrictions on entry into new markets has increased the number of competitors at the route level - by 70 percent for flights over 2,000 miles ” - the competition in the airline industry increased and led to consumers’ benefits.

3) Effects of airline deregulation on the demand of the airline industry. Demand is an amount of goods and services, which consumers want and can purchase at the point of time. In the case of airlines it is the amount of passengers for the route. Demand depends on the following factors: - consumers’ income; - consumers’ tastes and preferences; - prices (fares); - inflationary expectations; - future perspectives of customers etc. In order to understand how airlines deregulation affected the demand of the airlines we need to analyze these factors. Below I will analyze the first three of them. Since the 1978 American consumer’s income increased significantly. Thereby they can afford more goods and services since the 1978. Consumers’ tastes and preferences can vary from year to year or day from day etc, but they depend on the quality of goods and services which customers receive. If one airline suggests better service (I do not take into consideration other factors) the customer would prefer it to the others. Thereby increased competition leads to increased quality of services rendered. When a consumer was serviced on the best quality level he will probably order this service again. From this point I want to start an analysis of price. This factor is the most important. One of the basic laws of microeconomics is the law of demand, which states: if price declines, then the quantity demanded of the product increases and on the contrary if price increases the quantity demanded declines.

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