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The expected results of the airline deregulation act signed by president carter

Baily 2010 claims that the 1978 Airline Deregulation Act was one of the greatest microeconomic policy accomplishment. Since the airline deregulation, the airline industry of the United States experienced fierce competition, mergers and acquisitions, financial losses and bankruptcies, and union issues and disputes until 2008.

  1. Approved October 24, 1978.
  2. Frequent-flyer programs, operating agreements and mergers with regional feeder airlines, and deeply discounted discriminatory fares have all put smaller competitors at a severe disadvantage and contributed to the demise of many of them. Travel agents using the systems to check schedules and fares for clients, as well as to print tickets, also pay various fees for those conveniences.
  3. It was the first thorough dismantling of a comprehensive system of government control since the Supreme Court declared the National Recovery Act unconstitutional in 1935. In 1998, many press reports and customer advocates reported the practice of predatory pricing by the major airlines, but the Department of Transportation and Justice Department sided with the major airlines.

However, the United States Justice Department announced that they are investigating the major airlines for possible price fixing or collusion of airfares in 2015. We know that when airlines merge, there is less price competition. Did airline deregulation actually help domestic airline industry to form an oligopoly in the U. In general, the oligopolies, the few major airlines in the United States in this case, are competitors, but they tend to cooperate with each other to benefit as an oligopoly while consumers pay for their gains.

The purpose of this study is to explore and examine the effects of airline deregulation in the United States and South Korea. The study focuses on identifying and analyzing the purpose of airline deregulation including its benefits and consequences. Airline Deregulation Although there were many reasons, such as rising fuel costs, recession, and inflation, for transforming the United States airline industry, below the target rate of return of the industry in 1970s was the major reason to enact the Airline Deregulation Act in 1978 McDonnel, 2015.

Additionally, stagflation, which is the combination of high rates of both inflation and unemployment over the period, and the economic inefficiency generated by the massive regulated economic sectors during the 1970s were some of the other reasons for the airline deregulation.

Accor-ding to Brown 2014there were three major sectors extensively regulated by the government: FIRE sector finance, insurance, and real estatepublic utility sector, and transportation sector, including the airline industry. The reason for the extensive regulation was to prevent moral hazard problem, natural monopoly, price discrimination, and fierce competition. Furthermore, the policies associated with economic regulation were suppressing competition among regulated industries, including the airline industry.

This deregulation movement ensured the incoming president and its administration to plan and implement industry deregulation. Alfred Kahn and his altered CAB policy to protect airline flexibility was the groundwork of enacting the Airline Deregulation Act of 1978. The flexibility made airfares to fall and airlines to increase revenues and promote pro-competitive reform, and the Congress approved and President Carter signed the bill on October 28, 1978.

The bill gradually removed regulatory authorities, and the route entry became free. Post-Deregulation In general, overall performance of airline industry after the Airline Deregulation Act of 1978 improved, especially in the significant entry of airlines and cutting of airfares. The airlines used the pricing flexibility to offer frequent flyer programs and supersaver rates to create competitive advantages. However, the initial benefits gradually seemed to dissipate as the largest airlines benefited the most from deregulation.

The computerized reservation system during 1980s gave competitive advantages to the largest and system controlled airlines, and a single major airline controlling the majority of the passenger traffic of a specific hub was another problem create by the deregulation Levine, 1987.

Airline Deregulation

Initially, there were two major expectations from the deregulation: There were many new and low-cost entries, but the major airlines remained strong because of their ability to reorganize the routes and to manage hubs and its network efficiently to crush the new and low-cost entries.

However, if the efficiency in airline industry and airline operations is one of the successful factors of airline deregulation, then the issue of customer service is one of the major negative consequence of deregulation. In the beginning years of the post-deregulation, low-cost competition intensified and this competitive environment stayed for a while until new entrants realized that their resources or markets were shared by everyone in the industry, which made it difficult to compete with the major airlines before deregulation: Low cost carriers have caused the market disruption in the beginning of deregulation, but it was only temporary.

Therefore, maintaining a network of flights and routes is the core competitive advantage in the airline industry, and those airlines with network advantages are likely to charge higher airfares.

She believes aggregated losses, adverse demand oil price shocks, union bargaining are some of the variables that caused volatility in the industry and not related with deregulation. Since 2009, profitability has returned for most airlines, and the four largest U. However, passengers have not seen any changes in customer services or decreases in airfares because the demand is rising and each major airline is charging more for flights at their dominant airports or hubs, e.

Therefore, there is no incentive for the major airlines to cut airfares unless policies or regulations from the Department of Transportation encourage or force them to decrease airfares. After successive mergers in airline industry, the big four airlines account for 80 percent of all domestic seat capacity.

While the Justice Department investigates the possible price collusion among the big four airlines, the major airlines are not increasing seats to meet the demand to maintain the airfares.

Furthermore, these airlines continue to find more ways the expected results of the airline deregulation act signed by president carter increase their profits by charging for preferred seats, checked in bags, priority boarding, and more business class seats in a plane by shrinking legroom in the economy class.

The LCCs, such as Spirit, Frontier Airlines, and Allegiant Air, do offer discounted tickets for specific routes, but the major airlines are not intimidated by these low priced tickets but, in fact, increased their airfares.

Harwell, Halsey, and Moore 2015 indicated that the U. Justice Department is investigating possible price collusion among the major four airlines, keeping airfares high when jet fuel price is at the lowest level.

This is not the first time the major network airlines have behaved anticompetitively, but their anticompetitive conduct this time is strictly against consumers by keeping airfares high. In 1998, many press reports and customer advocates reported the practice of predatory pricing by the major airlines, but the Department of Transportation and Justice Department sided with the major airlines.

One of the predatory pricing examples of the major airlines is when United Airlines decreased their airfares 30 percent below their costs to match those of Frontier Airlines.

United Airlines and then recoup their loss by increasing their airfares at their major hubs, where no competition exist.

The Effects of Airline Deregulation: A Comparative Analysis

Korea Airline Deregulation Before airline deregulation in Korea, the Korean airline industry was characterized as duopolies.

Korean and Asiana Airlines were the two major airlines without LCCs, and these two major airlines were targeted heavily on international routes. Those licensing restrictions, including aircraft size and age, were removed, and Deregulation Act of May 2008 opened the industry.

Both Korean and Asiana Airlines were fined for anticompetitive behavior in 2010: As of 2015, there are seven airlines in the market, two major and 5 LCCs, and the five LCCs focus heavily on domestic market, although some have been able to expand into Asian countries. The airfares provided by LCCs for domestic routes dropped approximately 80 percent compare to those of the major airlines.

  • Pressure for airline deregulation had been building for many years, particularly among economists who pointed out, in numerous studies, that unregulated intrastate airfares were substantially lower than fares for interstate flights of comparable distances;
  • The case of airline deregulation apparently shows more negative effects of removing government policies on a specific service industry that many people rely on to live their daily lives;
  • I certainly agree with you that this is a great day in deregulation of the regulatory structure;
  • Today, it is a market-driven industry, with customer demand determining the levels of service and price;
  • I certainly agree with you that this is a great day in deregulation of the regulatory structure;
  • The Gerald Ford administration supported the Judiciary Committee initiative.

It is almost impossible for LCCs to expand into international market due to the two major airlines and their dominance in international operations. Discussion There is clear evidence of the positive intended effects on airline deregulation e. Many scholars and practitioners overwhelmingly supported the idea of deregulation in airline industry, and they believed removing government regulations was the significant step to promote and establish a free market environment where the market demand and supply are the key factors to determine the price.

However, antitrust and anticompetitive behaviors of the major airlines in America and Korea have led to the opposite effect when the purpose of airline deregulation was to promote free market and not allow major airlines to abuse the system to make more profits at the expense of potential competitors or consumers.

The airline deregulation in the U. Some argue that airline deregulation actually provided legitimate and legal power to the major airlines to monopolize the industry.

Airline Deregulation Act

Is this what Alfred Kahn and the Carter administration expected from their deregulation initiatives? Alfred Kahn 2004an economist and the father of airline deregulation claimed that airline deregulation was a total success despite some unexpected challenges, recession, terrorism, and war. He blamed the government for not enforcing the antitrust laws when the U.

  1. Safety in the Skies Air travel is unequivocally safer now than it was before deregulation. After deregulation, low-cost, aggressively competing airlines, such as People Express, offered the public low fares, with correspondingly lower-cost service—narrower seating, longer lines, and fewer amenities.
  2. Carriers have put more seats on their planes—the average went up from 136. Alfred Kahn and his altered CAB policy to protect airline flexibility was the groundwork of enacting the Airline Deregulation Act of 1978.
  3. Evidence accumulates, however, that full fares on routes served by only one or two airlines, particularly on flights originating or terminating at a so-called hub city dominated by a single airline, reflect some substantial amount of monopoly power. The CAB promoted air travel, for instance by generally attempting to hold fares down in the short-haul market, to be subsidized by higher fares in the long-haul market.
  4. The codesharing agreements also usually tie each airline's marketing and frequent flyer programs, provide for schedule coordination for convenient connections between carriers, and in most cases, permit smaller airlines to paint their planes with markings similar to those used by their larger partners. The Gerald Ford administration supported the Judiciary Committee initiative.
  5. However, schedules are not necessarily coordinated, there are no frequent flyer tie-ins, and there is no sharing of codes in computer reservation systems.

The concept of price competition does not apply to the industry where oligopolies or duopolies monopolize the market: Although Kahn blamed the government for creating the monopolized airline industry today by not enforcing antitrust or anticompetitive laws, consumers are the only ones who are dealing with false promises of deregulators and its supporters.

Traveling through airplanes and using internet, cable TV, and cell phone services are no longer luxury items today. People need these services to satisfy their basic and security needs, and they are part of our lives. The case of airline deregulation apparently shows more negative effects of removing government policies on a specific service industry that many people rely on to live their daily lives.