NAME Abinay Rana

USN NO 21MBAR0263
SECTION AVIATION
SUBJECT AIRLINE ACCOUNTING
AND COST
MANAGEMENT
SUBMITTED TO Dr. SHIVAPRASAD G
TOPIC BEFORE AND AFTER
DEREGULATION OF
AIRLINES (Act of 1978)
 IMPACTS ON DEREGULATION:
INTRODUCTION
Commercial aviation was the first transportation mode in the United
States to be deregulated. In 1977, air cargo rates and services were
deregulated by President Jimmy Carter he signed the Airline
Deregulation Act in 1978, freeing passenger airlines to control their fares
and services. The next year there would be a debate among industry
leaders, economic prognosticators, and government regulators which
congress has passed the Airline Deregulation Act of 1978, which
deregulated passenger aviation fares and services.
The impacts in the aviation industry affect all stakeholders airlines,
airports, airplane and engine manufacturers, investors, travel agents,
shippers, and the traveling public. Winners and losers came and went as
the industry responded to the demands of the new marketplace. This act
was passed into a U.S.A law in 1978 in an effort to disable the
government’s influence on air ticket price, flying routes and the entrance
of novel airlines. The rules introduced by the Civil Aeronautics Board
(CAB) were to be done away with leaving the consumers open to the
elements of market forces. Nevertheless, the act did not lift the
regulations of FAA which were meant to ensure the safety of
passengers. CAB was responsible for balancing the fare during high and
low season at the same time making sure that the airlines got rational
profits. The CAB was known to delay requests made by the airlines,
mostly regarding changes of price and new flying routes, and eventually
declining them later (Bilstein, 1994). From the beginning of 1970s, the
aviation industry was under pressure to lift the regulations imposed by
the CAB. The pressure came from the oil crisis and the slow economic
growth which resulted to inflation and low employment. However, the bill
faced opposition from established airlines, employee unions and the
safety board. The established airlines feared competition, labour unions
were worried about disunited workers while the safety regulatory board
feared emergence of poor safety standards. Some scholars believed
that the new regulations would make the industry inefficient, and the
prices would go up since many airlines will focus only on certain routes.
Others believed that by allowing new airlines, it will boost competition
and the airline charges would go down. However, the public was not in
favour of the CAB regulations, and that was enough to put an end to
those regulations (O’Connor, 2009).

Effects on Deregulation :
Most of the analysts observed that declared deregulation in general a
success, even though the process left many victims in its wake, coz.,.
Shareholders lost billions of dollars, employees were laid off, small
towns lost services, and many old and new companies went bankrupt
and others. In the airline industry, fares and rates decreased
significantly, more people began to travel which resulted in seats
becoming smaller and less comfortable, and tightening security which
created additional burdens for travelers.
All these changes occurred as the industry achieved unprecedented
levels of safety—surprising many of deregulation’s early detractors.
Because deregulation was and still is an experiment, declaring it a
success cannot be done objectively; that is, no one can be sure how the
deregulated industries would have evolved in its absence. It is difficult,
however, to imagine that the many pricing and service innovations that
followed deregulation would have been matched in a regulated structure.
Since 1978, the hold of CAB in the airline industry began to loosen and
in 1984, it was completely scraped. Initially, the then operating airlines
were granted subsidies as a result of the market shifts. Also, the
employees who lost their jobs as a result, were granted unemployment
remuneration. Immediately after the act was enacted, many airlines
deserted routes that flew people to small towns which were less
populated; the reason being that those routes had little returns. One of
those areas abandoned was Bakersfield; they were denied access via
air to cities like San Francisco. This town was abandoned by United
Airlines since it had a small population of about 226,000. Another result
was the emergence of hub and spoke flying paths. The already
established airlines made some of the major cities to be their operations
point. This meant that some flights were not using direct routes since
they had to deviate to these cities. For example, one of Delta’s chief hub
point was in Atlanta and Eastern’s point was in Miami. This was done to
increase the hours of the plane on air and also ensure that there were
less empty seats. This eventually increased the number of flights
between major cities. For example, the number of flights from New York
to Miami increased by 360% (Bilstein, 1994). Since new airlines could
enter the industry without adhering to set regulations by major airlines, it
allowed cunning businessmen like Donald Burr to enter the industry. Mr.
Burr founded the People’s Express which operated on unusual ways of
management. The methods included low wages to employees, small
number of managers, employees possessing a reasonable number of
stocks and employing workers who could carry out numerous tasks.
Consumers had to pay for their edibles during the flight and also pay for
their luggage. As a result, the airline ticket became cheap, almost as
cheap as a bus ticket for the same distance. The company’s profits
augmented radically between 1980 and 1985. Other established airlines
also reduced their prices as a result, but their services were better than
those offered in People’s Express. Also, the established airlines offered
their consumers the choice of buying the tickets in advance. Obviously,
Burr was put out of business in 1986; this was after massive losses and
continuous customer complains (O’Connor, 2009). With the lifting of the
regulations, many airlines increased their number of routes. This lead to
reduction of flying cost which lead people to travel by air more often. The
airlines experienced massive profits and in 1979, 318 million people flew
in America; it marked the boom of the airline industry (Bailey & Graham,
1999). However, in 1981, the airline industry as a whole suffered a
colossal amount of losses totalling up to US $422 million. This was a
consequence of the rising costs in fuel, economic downturn and
meaningless extensions of the airlines. The crisis worsened later in the
year when the air traffic controllers went on strike in every part of the
country. Some airlines like Braniff declared bankruptcy as early as 1982
while others proceeded on the risky expansion plans. The continental
and the Eastern airlines were both in major financial crisis, to make
matters worse; they had poor management and terrible links with the
labour unions. Inevitably, they were broke in 1989 and they shut down
their businesses. The same fate was faced by the Pan American airline
which closed its doors in 1991. Without the regulations of the CAB, the
airline was forced out of the market by novel airlines like the Paper’s
Express. In 1978, there were 6 major airlines but after thirteen years,
only 3 were left. Even though they survived that period, they generated
very little revenue and they had to let go a fair percentage of their
employees (Dempsey, 1998). Despite of that, there were still benefits
that resulted from the deregulation. The cost of flying reduced by 33%
for the 14 years that followed 1978; the figure has been adjusted to cater
for the inflation. In total, the passengers were able to save up to $100
billion that they could have spent on purchasing the air tickets. Since the
major airlines had abandoned the short routes, the emerging smaller
airlines started operating on those routes. In the end, these smaller
airlines were not adversely affected with crisis. Surprisingly, the smaller
airlines gained a lot from flying to less populated areas since there was
less competition (Bailey & Graham, 1999). There has been a major
concern on the level of safety in the airline industry after the enactment
of the deregulation act. The Federal Aviation Administration was still
responsible for maintaining safety in air travel. The organization is
responsible for certifying new airplane, regular aircraft check-ups, tuition
and providing mode of operation. Despite of the presence of FAA, there
were warnings that the safety level will reduce due to the competitive
nature of the industry. There is no conclusive proof that the deregulation
act deteriorated the safety of the flying. Despite of this, some
researchers have used statistics collected before and after the
deregulation to hint that the act has lead to increased accidents. From
the records, there has been a slight increment in airplane disaster
especially in smaller airlines. It has been claimed that the regularity of
airplane maintenance has reduced because of the tight flight schedules.
However, it is scientifically impossible to prove that the act affected the
level of safety. This is because other factors have manipulated the
statistics of accidents. They include improved technology and increased
level of expertise (Heppenheimer, 2006). After the 9/11 incident, security
at the airports has been tightened to protect the passengers from
terrorist attacks. Passengers were screened for the first time in 1970s
after there had been rampant highjackings throughout United States.
The introduction of screening had no effect on the air ticket price.
Nowadays, the security systems that have been introduced have
become more sophisticated and costly. This cost has obviously been
transmitted to the consumers. After the terrorist attack on the Twin
Towers, there was a reduction in the number of passengers due to fear
and the continuous annoying check points at the airports (Wyckoff,
2008). Because of the increased number of passengers, the airline
system experienced overcrowding and delays. The congestions
increased the time needed to fly from one spot to another. This was as a
result of airlines increasing the number of routes with the same
infrastructure as before. This obviously altered the time of arrival; for
example, ten years after deregulation, over 21% of all flights reached
their destination after 15 minutes (Dempsey, 1998). After the
deregulation, the aviation industry was saturated with airline companies.
At this time, airline industries were merging with each other to have a
competitive edge especially during the crisis. During the middle years of
1980, the industry saw the highest number of companies merging; this
was during the period when the antitrust laws were still sloppy. At around
1990, the antitrust laws were tighter than before and this resulted to
decreased mergence of companies. The antitrust laws were made
tighter after there were concerns regarding rivalry and increment of hub
control. Afterwards, attempts to merge companies were met with serious
opposition (Wyckoff, 2008).

Expectations of Change :
The primary objective of airline deregulation was to ensure market-
focused as many economists argued that the regulatory environment
created and administered by CAB limited which highly competitive to the
airline of travelers, which resulted in high prices and unresponsive
service. Economists also argued that deregulation would bring about a
more robust airline industry, whose profitability had been eroded
because of the high inflation and oil prices of the 1970s as well as the
general economic crisis.
Initial Effects :

New Business Models :

After the 1978 act was passed, airlines began to adapt to their new
world. Within the first two years, many new airlines were formed. Nearly
all the new start-ups focused on a low-fare business model, others
following new business models, which the wanted to predict market
diversity and dynamism.

An example of a new business model was People Express Airlines,

founded in 1980 by longtime airline executive Don Burr. Its business
strategy focused on a “low-fare with good service” concept. The airline
also made every employee an owner, each with the power to make
operational decisions. People Express grew rapidly, both organically and
through acquisitions. However, when its debt load got too big and its
workforce reached a size that hindered the coordinated decision-making
needed for efficient operations.

Pricing Concepts :

American also introduced yield management, a variable pricing scheme

concept first developed by Boeing to maximize the amount of money
collected from passenger ticket sales on each flight. The Sophisticated
tools allowed Americans which eventually, almost every other airline to
price seats on the same flight at different levels, using fares restrictions
to segment passengers. Today, most airlines consider yield
management to be a critical core capability.
Intermediate Effects :

Five to ten years after the Airline Deregulation Act passed, its biggest
impact could be seen on airline labor relations. Although industry leaders
and labor groups argued for high wage rates, outsiders generally
acknowledged that industry wages were above economically justifiable
levels. There is an incumbent carrier that had to reduce employee wages
or staff levels to stay competitive with new entrants. Outsourcing of
services became the main strategy for labor cost reduction, resulting in
large-scale layoffs of airline employees. Competition between incumbent
airlines and new start-ups many companies’ balance sheets, and
shareholders and bondholders suffered as the failing carriers either went
into bankruptcy or were absorbed by other carriers. Mergers picked up in
the late 1980s and have continued through the present.

Long-Term Effects :

The early 2000s once again caused an economic struggle for airlines.

The events of 9/11 accelerated the consolidation of the airlines into the

few carriers that dominate today. The surviving carriers, along with their

alliance partners, focused on financial survival in the following years. By

the time the financial crisis hit in 2008, airlines had restored their balance

sheets to profitability, transformed their fleets to a market-appropriate

mix, and increased load factors to unanticipated levels. Some airline

industry has become consistently profitable in contrast to much of their

history since recovering from 9/11 and its immediate aftermath.

Longtime industry observers scratch their heads as to whether this is the

new normal or merely a manifestation of the current long economic

recovery since the Great Recession in the late 2000s.

AFTER DEREGULATION IN THE AIRLINE

INDUSTRY:

Most disinterested observers agree that airline deregulation has been a

success. The overwhelming majority of travelers have enjoyed the
benefits as expected. Deregulation also has given rise to a number of
problems, including congestion and a limited reemergence of monopoly
power and, with it, the exploitation of a minority of customers.

Benefits of Partial Deregulation :

Even the partial freeing of the air travel sector has had overwhelmingly
positive results. Air travel has dramatically increased and prices have
fallen. After deregulation, airlines reconfigured their routes and
equipment, making possible improvements in capacity utilization. These
efficiency effects democratized air travel, making it more accessible to
the general public.

Health of the Industry :

The airlines have not found it easy to maintain profitability. The industry
as a whole was profitable through most of the economic boom of the
1990s. Consumers became more price-sensitive and gravitated toward
the lower-cost carriers. High labor costs and the network hub business
model hurt legacy airlines’ competitiveness. Hub-and-spoke systems
decreased unit costs but created high fixed costs that required larger
terminals, investments in information technology systems, and intricate
revenue management systems. The LCCs have thus far successfully
competed on price due to lower hourly employee wages, higher
productivity, and no pension deficits. It remains to be seen whether the
LCC cost and labor structures will change over time.

Remaining Domestic Economic Controls:

As a form of regulation, antitrust laws inhibit post-deregulation

restructuring efforts, making it harder to bring salaries and work rules
into line with the realities of a competitive marketplace. The antitrust
regulatory laws inhibit the restructuring of corporations and block needed
consolidation. The antitrust authorities view with suspicion efforts to
retain higher prices. Historically, the CAB had antitrust jurisdiction over
airline mergers. When Congress disbanded the CAB in 1985, it
temporarily transferred merger review authority to the Department of
Transportation (DOT). In 1989, the Justice Department assumed merger
review jurisdiction from the DOT that, when combined with its antitrust
authority under the Sherman Act, makes it the primary antitrust regulator
of the airline industry.
Reservation Systems :

During the regulatory era, rates were determined politically and changed
infrequently. The CAB had to approve every fare, limiting the airlines’
ability to react to demand changes and to experiment with discount
fares. After deregulation, airlines were free to set prices and to change
them frequently. That was possible only because the airlines had earlier
created computer reservation systems (CRSs) capable of keeping track
of the massive inventory of seats on flights over a several-month period.

Airports :

The number of federal requirements associated with airport finances has

grown considerably in recent years and is tied to the awarding of grants
from the federal Airport Improvement Program (AIP). Since 1978, only
one major airport has been constructed (in Denver), and only a few
runways have been added at congested airports. Airport construction
faces significant nonpolitical barriers, such as vocal “not in my back
yard” (NIMBY) opposition and environmental noise and emissions
considerations. Federal law restricts the fees airports charge air carriers
to amounts that are “fair and reasonable.

Air Traffic Control :

Air traffic control involves the allocation of capacity and has a complex
history of government management. Unfortunately, the Federal Aviation
Administration (FAA), which manages air traffic control, made bad
upgrading decisions. The advanced system funded by the FAA was
more than a decade late and never performed as hoped. The result was
that the airline expansion was not met by an expanded grid, and
congestion occurred.

National Ownership :

National ownership laws are an archaic barrier to a more competitive air

travel sector. These rules seem to reflect a concern for national security,
even though many industries as strategic as the airline industry do not
have such restrictions.

Conclusion :

Airline deregulation has worked. It would be ironic if, by misdiagnosing

our present discontents, we were to return to policies of protectionism
and centralized planning at the very time when countries as dissimilar as
China, the Soviet Union, Chile, Australia, France, Spain, and Poland are
all discovering the superiority of the free market. The CAB tried to attain
a sustainable airline industry that was to help the customers and the
economy. As a result, fares increased, the system was incompetent and
the revenue was unpredictable. The United States became the premier
nation to enforce this act on its local airline industry. What followed was
a never ending economic turmoil in the industry, on the other hand, the
fares went down and the system became more efficient. The instability in
the industry continued and the mean revenues have been decreasing
since 1978. Even though the industry is unstable, there has been
indication that investment in the industry will cease or the consumers are
dissatisfied. The Twin Tower incident caused a huge financial dent on
the industry. Surprisingly, even after this incident, the number of flights
remained identical after just a year. There were more direct routes
afterwards, for example, the year 2005 recorded the highest number of
direct routes than any other time in history (Dempsey, 1998). It seems
that the demand for air travel will never end despite of its instability.
However, some of the causes of the instability can be controlled; like the
cost of labour. Changes in the cost of labour can be achieved slowly
through fresh labour contracts in airlines that are dexterous. There has
been no clear way of managing the airlines even after over 70 years of
commercial aviation. Maybe by now we should have learnt, but as long
as the deregulation act is present, passengers will continue enjoying the
benefits, and the airlines will continue looking for management solutions.