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Airline After Deregulation

John Francis V. Escabilla

Philippine State College of Aeronautics

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A. Introduction

The passage of Airline Deregulation Act of 1978 and since the Civil Aeronautics Board went out

of existence on January 1, 1985, the time has come to take another look at the effect of airline

deregulation. The act presented the long culmination of a long debate over the efficacy of CAB in

airline industry, particularly in regard of rates to market entry. This legislation substituted a new

policy of open entry and flexible pricing foe the airlines while gradually phasing out the CAB. The

proponents of deregulation believed that under such policy, the airlines would become more

efficient and profitable, airline labor would gain more employment opportunities, and consumers

would benefit from lower fares. The initial experiences under deregulation were quite favorable.

Airline load factors increased substantially following the Act, and airline profitability by the end

of 1978 reached its highest level in over thirty years. Although profitability for major airlines

continued to institute more efficient practices and to improve load factors. Furthermore, the smaller

national airlines continued to enjoy record profits through 1981. In fact, during this period it was

also becoming apparent that the nationals were gaining significant market shares at the expense of

the majors. Deregulation is the process of removing or reducing state regulations, typically in the

economic sphere. It is the repeal of governmental regulation of the economy. It became common

in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic

thinking about the inefficiencies of government regulation, and the risk that regulatory agencies

would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the

wider economy.

Economic regulations were promoted during the Gilded Age, in which progressive reforms were

touted as necessary to limit externalities like corporate abuse, unsafe child labor, monopolization,

pollution, and to mitigate boom and bust cycles. Around the late 1970s, such reforms were deemed

as burdensome on economic growth and many politicians espousing neoliberalism started

promoting deregulation.
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B. Summary of the Articles

If you visit any Australian capital city airport on a weekend, it is amazing how busy it is.

Australians regard flying off to another city for the weekend as quite routine. Yet thirty years ago

leisure travel was much less frequent – mainly because air travel was much more expensive.

It has frequently been claimed that the cost of air travel in Australia has fallen by around 20 per

cent in real terms since the end of the Two Airline agreement. However, this claim rests on a

misinterpretation of price data. In this article, an analysis based on the theory of price indexes is

presented. It is concluded that the representative passenger has probably experienced a small

reduction in the cost of air travel since deregulation. Some additional benefits have flowed from

the expansion of frequent flyer schemes, and from increased frequency of service. The

distributional effects of deregulation are unclear, but are probably favorable on balance. The

Australian airline industry is a natural duopoly and the market is not contestable. There is no

evidence of dynamic efficiency gains arising from deregulation. The observed effects of

deregulation are consistent with the predictions of neoclassical microeconomic theory.

It is easy to forget how much the aviation sector has been transformed in that time. In 1990 there

were two government owned airlines, Qantas which flew international routes and Australian

Airlines (known as TAA until 1986) which flew domestic routes, and one large privately owned

airline, Ansett. The market was heavily regulated and government officials decided which airlines

were permitted to operate – and even what type of aircraft they could own. The policy for many

years was a domestic duopoly – TAA and Ansett – and only carrier allowed to fly internationally,

Qantas.

Since that time the airline industry has been fundamentally transformed, through several major

changes. Qantas and TAA were merged, and subsequently privatized; by the time the Keating

Government left office in 1996 Qantas was entirely privately owned.

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The airline industry was deregulated, so that new airlines were permitted to operate in Australia

provided they met safety standards and other requirements. Since that time a number of airlines

have started up – Compass Mark I, Compass Mark II, Virgin Australia, Tiger and so on.

Compass Airlines commenced operations from 1 December 1990, after raising a $65 million in

capital. It was headed by Brian Grey, the former head of regional East-West Airlines, with a

mission to “operate five large aircraft servicing only seven major airports”. Once Compass began

operations, the two incumbent carriers simply reduced their fares to compete and the subsequent

price wars contributed to Compass running out of cash and going out of business in 1991. Another

challenger, Southern Cross Airlines, decided to take on the defunct Compass branding as the

perception was the public held goodwill towards it. The airline first flew in late 1992 and lasted

just six months due to liquidity problems. Impulse Airlines established in 1992, Impulse was a

profitable regional carrier that decided to obtain five Boeing 717s and challenge the incumbent

carriers from June 2000 on routes between Brisbane, Sydney and Melbourne. Fares featured no

conditions, were fully flexible, and priced 50% cheaper than Ansett and Qantas. It did not have

the low costs of a new startup and suffered cash flow problems by early 2001. Qantas purchased

the carrier and eventually used it to form Jetstar. Ansett Australia established in 1936, Ansett’s

collapse on 12 September 2001 allowed Virgin Blue to expand quickly, holding approximately

30% of the domestic market by 2003, while Qantas also substantially increased its market share.

Limited services resumed between 1 October 2001 and 4 March 2002, however plans to continue

operations failed.

Unsurprisingly, this amount of change in the regulatory settings produced a lot of disruption.

Compass failed soon after entering the market; and in 2001 Ansett collapsed, after more than sixty

years as a stalwart of Australian aviation, throwing thousands out of work and disrupting the travel

plans of tens of thousands of Australians.

Another change which had a big, but less immediately obvious, impact was that the

Commonwealth Government ceased to own and operate airports. Instead, Australia’s big airports

are now owned and operated privately.

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These changes have delivered major benefits. Airfares are very much cheaper than before

deregulation. The Australian Government’s Bureau of Infrastructure, Transport and Regional

Economics maintains an index of the ‘best discount fare’ on key routes across Australia. In August

2016, this index stood at less than half its level in 1992 in real terms.

In turn, the drop in prices has seen very sharp increases in the number of Australians travelling. In

1990 there were 14.6 million domestic trips taken by airline passengers in Australia. By 2015 it

was 57.1 million – almost a fourfold increase in twenty five years.

The airline industry is a telling case study of the consumer benefits which come from reducing

government involvement in an industry. Today, government sets and enforces key regulatory

parameters such as safety, security, flight paths, operating hours and so on.

Otherwise, however, the airlines make their own decisions: which aircraft to operate, which routes

to operate, what fares to charge and so on. The result has been that private capital, not taxpayers’

money, has been at risk in making these decisions; through the operation of competitive forces

prices have come down markedly while service levels have improved; and most importantly, many

more Australians are able to visit friends and relatives, travel for business or pleasure, or for

medical treatment or for many other purposes.

C. Opinion or Reaction to the Article

Man dreams to tour the world, to see every nook and cranny of this magnificent planet. Human

nature seeks to be a nomad, a traveler, an adventurist but often times the dream of reaching every

beautiful edge turns into dust and sadly remains as a dream.

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In an article written by Mr. Paul Fletcher in 2016 entitled Lower airfares, more Aussies travelling:

airline deregulation in the 90s brought big benefits, he discussed the positive impact of airline

deregulation to the traveling lifestyle of the Australians. The said article was also posted in his

blog.

According to Fletcher, there were fundamental changes in the aviation sector through several

major changes during the 1990's which included the merger between the two government-owned

airlines which was later privatized. These changes eventually led to the deregulation of the airline

industry in Australia that opened a lot of opportunities for different changes.

Before we comment on how big was the impact of this drastic change in the aviation system of

Australia, let us first look into what deregulation means.

Deregulation is the reduction or elimination of government power in a particular industry, usually

enacted to create more competition within the industry (Kenton, 2019). Deregulation opens the

door of opportunities for different investors and raising the healthy market competition.

Since the USA deregulated its airlines in 1978, reform of airline regulation has gathered pace and

now is taking hold in developing countries, especially in Asia where there is rapid growth in

demand. However, governments have lacked the opportunity for thorough studies prior to action

and they have been forced into reactive roles. This paper considers whether policy makers in

developing countries can draw on the documented experiences of the developed countries. Some

specific circumstances that need to be taken into account are the size of markets in developing

countries, airline networks dominated by a small number of dense routes, and the concern of

government to subsidies air services in situations where surface transport links are poor. To shed

light on these matters, the circumstances and experiences of Australia and India are compared.

There are parallels between the two in terms of the size and distribution of markets, about the

organization of the airline industry and in the timing of reforms. Conclusions are drawn about the
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relevance of the experiences with airline deregulation in a developed economy for policy makers

in a developing country.

Deregulation has many benefits. First, it generally lowers barriers to entry into industries, which

assists with improving innovation, entrepreneurship, competition, and efficiency; this leads to

lower prices for customers and improved quality. Secondly, producers have less control over

competitors and this can encourage market entry. Third, it benefits the economy because taxpayers

no longer have to pay for the expenses of operating regulatory agencies. This means that consumers

have more discretionary income, and therefore more money to spend on other items. Then,

businesses can formulate their own strategies and processes, without government control. Lastly

and I think the most important benefit is it helps to increase choices and lower prices for

consumers.

In his article, Fletcher stated that the changes in the airline regulations have delivered major

benefits especially pointing the benefit of deregulation on lowering the prices for consumers.

“Airfares are very much cheaper than before deregulation. The Australian Government’s Bureau

of Infrastructure, Transport and Regional Economics maintains an index of the ‘best discount fare’

on key routes across Australia. In August 2016, this index stood at less than half its level in 1992

in real terms. (Fetcher, 2016)

Currently, Australia has five main domestic airline carriers more than double to a number of carrier

in 1996. So how helpful is the deregulation to the economic growth of Australia? Basing on

Fletcher's article, in 1990 there were 14.6 million domestic trips taken by airline passengers in

Australia. By 2015 it was 57.1 million – almost a fourfold increase in the span of twenty five years.

Thus it very important to note that the drop in prices has seen very sharp increases in the number

of Australians traveling.
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To support the idea that an economy can flourish and gain through a deregulation is the study

conducted by Steven Morrison and Clifford Winston. In their study, they analyzed the effect of

deregulation on both the travelers and the airline industry. Morrison and Winston found out that

the lower fares and better service have netted the travelers some $6 billion, while the earnings of

the airline increased by $2.5 billion a year. Obviously, removing some regulations doesn't hurt the

economy at all.

Healthy business competition allows different business minds to create new ideas to compete in

the market. To attract the customers or passengers, the flight promos were born. This allowed

many more people enjoy the luxury of traveling. Such marketing strategy allowed an increase to

affordable flights.

In the US, airline deregulation has been widely hailed as a success by government agencies, several

research organizations and think-tanks, the airline industry itself, and the popular media. Many

government agencies have documented the success of airline deregulation, especially in terms of

lower fares, increased passenger traffic, and more flights since 1978. The airline industry, mainly

through the US Air Transport Association and other trade groups, has also touted the benefits of

deregulation, and has remained publicly supportive (Goetz and Vowels, 2009).

Deregulation is one of the central characteristics of the “golden straitjacket” approach for national

success in the contemporary era of globalization, along with privatization, free trade, reducing

state bureaucracies, opening markets to foreign investment and ownership, and other policies that

favor the private sector. (Friendman, 2002). Five airline carriers in 2019 compared to two in 1996

is a product of deregulation in Australia.

With deregulation, monopoly was ended and a perfect, healthy competition started. The power to

attract the passengers isn't just in the hand of one but rather of many.
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Deregulation made a huge impact not just in the economy of Australia but in its people too. Who

doesn't want to travel? Who doesn't love seeing new places? With the lower fare rate, traveling

may it for vacation, business trip or fun, someone can save and enjoy.

D. Conclusion

The airline deregulation in Australia creates an increase of airline carriers in 2019 which is now

five compared to two in 1996. This means that airline monopoly has been eliminated and give a

positive feedback in success in the contemporary era of globalization, along with privatization,

free trade, reducing state bureaucracies, opening markets to foreign investment and ownership,

and other policies that favor the private sector.

Low-cost entrants have a troubled history in the Australian market. Inadequate capitalization is a

recurring theme. Even Tiger air, now profitable under Virgin Australia, is calculated to have lost

US$226 million in the first seven years of operations in Australia.

Even though deregulation has not resulted in sustained competition by new entrants, there is clear

evidence that competition between the incumbents is much more vigorous than before

deregulation. The structure of the market for interstate air travel has also clearly changed with the

large increase in the 'discount fare' market. The deeper and more widely available discount fares

following deregulation have resulted in a large increase in demand as well as a shift away from

economy fares. In the premium fare market both fares and demand have increased in the two year

period. This is attributed to improving economic conditions over the period, with this market

segment considered to be price inelastic. It is thought that the economy fare market would exhibit

a small degree of price elasticity. The increase in the propensity to travel by air and the growth of

the discount fare market have brought about a fundamental change in the conduct of the two major

interstate carriers. Discounting is used by the airlines to a much greater degree than before

deregulation to stimulate demand in the price sensitive discount market. The carriers are also much

more market oriented and responsive to consumers' needs as evidenced by continuing

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improvements in the quality of service provided to air passengers. Deregulation of interstate

aviation was an essential step and a catalyst for the continuing reform of the aviation sector in

Australia. Subsequent reform initiatives have included the integration of domestic and

international aviation operations, and privatization of Qantas.

References:

 Paul Hooper, Associate Professor, Graduate School of Business, University of Sydney,

NSW 2006, Australia.

 John Quiggin, Professor, University of Queensland, Australian Economic Review, 18

December 02, Australia

 webject.com.au/airlines, 2019

 Milton Friedman, American Economist, A Monetary History of the United States, 1963

 Paul Fletcher, Lower airfares, more Aussies travelling: airline deregulation in the 90s

brought big benefits., 2016

 Wikipedia.org

 https://www.paulfletcher.com.au/pauls-blog
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