Airline Industry Analysis: Deregulation, Competition & Future Trends

Introduction

Since the passage of the Airline Deregulation Act of 1978, the commercial air transportation industry has undergone a tremendous transformation. The increased degree of deregulation has helped consumers enjoy lower fares and more choices among carriers. However, understanding the true effects of deregulation on the industry requires an examination of the forces that will impact it over the next three years. To determine this, one must examine both the general environment and the task environment of the industry. Together, these two elements provide the greatest insight into what issues will affect airlines in the near future.

General Environment of the Airline Industry

Over the last century, the airline industry underwent tremendous change as improvements in technology and shifting economic conditions transformed the sector. Prior to the passage of the Airline Deregulation Act of 1978, the industry was strictly regulated by the government. The prevailing concern was that allowing large-scale deregulation would enable select individuals to create cartels or monopolies that would determine prevailing market prices for air transportation services. This concern led to the passage of the Civil Aviation Act of 1938, under which the government played a major role in setting fares and determining which airlines could fly specific routes. This model provided stability to the industry, as earnings remained predictable — all fares, mergers, and new route applications had to be approved by the Civil Aeronautics Board (Morrison, 1995). However, under this model, competition was limited and fares were higher. Government bureaucracy made it difficult for new airlines to enter the market or fly new routes, and calls for deregulation steadily grew, ultimately resulting in the passage of the Airline Deregulation Act (Cento, 2009).

Over the next three years, increasing global competition on a number of routes is expected to continue growing. Throughout the world, there have been sustained efforts to deregulate the airline industry. A clear example of this can be seen in Europe before the late 1990s, where each airline held specific government agreements to fly certain routes within particular countries. This arrangement increased costs and reduced competition. The EU responded by deregulating the industry, which had a dramatic effect on competition: deregulated markets allowed new carriers to emerge, such as Ryanair and EasyJet — no-frills, low-cost carriers that flew the same routes as the major airlines at significantly reduced fares. Similarly, deregulation in the U.S. led to the creation of low-cost carriers such as Southwest and JetBlue.

It was only a matter of time before similar changes affected international routes. This shift materialized in the Open Skies Agreement between the U.S. and the EU in 2008. The agreement contained several key provisions for both European and American carriers, allowing them to determine which routes they wished to fly between the U.S. and Europe. Key provisions included: the recognition of European carriers as community airlines, the ability for airlines to fly between any point in the U.S. and the EU, and the right to use U.S. airports as stopovers for European airlines. This is significant because it illustrates how, over the next three years, airlines will face increasing competition across a number of markets. The industry targets the same core demographics — business and leisure travelers — meaning that intensifying competition will very likely continue to push fares lower. At the same time, traditional services that customers have grown accustomed to, such as in-flight meals and curbside check-in, are being eliminated as airlines seek to reduce costs and remain competitive with low-cost carriers and new market entrants (Cento, 2009).