Introduction

A call out to increase regulation of the U.S. airline industry has been made by a prominent investment bank, arguing that a financially healthy industry is crucial to the well being of the United States’ economy. The airline industry’s myriad problems have been well documented, Hector J. Cuellar, president of RSM EquiCo Capital Markets, said, noting that the seven largest U.S. carriers reported a combined loss of $1.3 billion for the first quarter of 2008 – with a turnaround nowhere in sight. Re-regulation on pricing structure, labor laws and bankruptcy laws could provide the industry with financial stability.

Original article by Vicky Karantzavelou (July 14, 2008)

Essay by Paul Reehorst
Master in Tourism Destination Management student 2008/2009

After the second world war the passenger aviation industry became highly regulated. Untill 30 years ago this was still the case. The national airlines were thought to act as factors of economic modernization which provided a stable and regular transport service, facilitated regional development and promoted international (tourism) recognition. Papatheodorou (Buhalis and Costa, 2006) mentions that in practice, however, this protectionism resulted in inefficient carriers, which constantly sought subsidies while offering low quality services at unjustifiably high fares.

Liberalization and deregulation became the new trend starting with the deregulation of the US domestic market in 1978. Similar practises soon followed worldwide. The result of this deregulation was that market economics and competition came to the forefront  of aviation policy making. Nowadays in almost every western country and many other countries in the world the aviation industry is highly liberalized. There are many advantages that go along with this change, but recently there are some voices calling out for re-regulations.

With aviation being a highly competitive industry airlines needed to improve their quality of services and lower their rates to attract customers. This was benificial for especially flying customers. Now with a sharp increase in fuel costs, many airlines, as well as in the US are facing financial problems. Cuellar (Buhalis and Costa, 2006) states that international carriers are in many cases wholly owned or heavily subsidized by their governments and are therefore not yet facing these problems.
The deregulation of aviation has caused some other issues as well. Safety and security for example is an area in which some airlines are failing to produce good quality standards. This has for instance to do with expensive advanced technological systems. These systems put cost pressures on airline companies according to Papatheodorou (Buhalis and Costa, 2006). Robert Crandall, the former chairman of American Airlines, noted the following: “The consequences (of deregulation) have been very adverse. Our airlines, once world leaders, are now laggards in every category. Airline service, by any standard, has become unacceptable.” (USA Today, Bill McGee, 2008)

Re-regulation in some areas of aviation can help airlines overcome their financial problems. Cuellar mentions three main areas for re-regulations, these are: pricing structure, labor laws and bankruptcy laws.

A counterpoint comes from Michael Levine, currently a senior lecturer at New York University’s School of Law. He states: “…Their (sceptics who don’t think the liberal market economy can be made to work in the airline industry) theoretical argument is an old one: that an industry with substantial fixed or common costs will be unsustainable as competition drives prices to levels that don’t allow the common costs to be recovered. This argument proves much too much: If we really believed it, we’d have to regulate virtually every industry, because virtually every industry has some fixed and common costs.” (USA Today, Bill McGee, 2008)

It is quite evident that there are problems existing in the aviation industry. One can however argue about ways to deal with these issues. In my view re-regulation, still only  modest, can in certain areas help airlines. A fixed pricing floor for instance can cause airlines to avert their attention to other competitive areas, like service, safety and security. The aviation industry just need some guidance to insure a healthy financial position in the future as well as a healthy competitive industry.

References:

Papatheodorou, A. (unknown) Liberalization and deregulation for tourism: Implications for competition. Published in Buhalis, D. and Costa C. (2006). Tourism management dynamics: trends, management and tools. Elsevier, Oxford.

Karantzavelou, V. (14-july-2008) Investment Bank calls for congressional action on airline re-regulation. Published on TravelDailyNews.com

McGee, B. (9-2-2008) Why airline reregulation is no longer taboo. Published on USAToday.com