Airline Industry Over the Years Research Paper
- Length: 10 pages
- Sources: 8
- Subject: Transportation
- Type: Research Paper
- Paper: #89088410
Excerpt from Research Paper :
These inconveniences associated with air travel have led many passengers to choose other forms of transportation including driving and taking the train. The research also found that the development of the Travel Promotion Act which is designed to specifically assist in reversing the decline in international travel to the United States.
Problems Arising from deregulation in the Airline Industry
Airline Industry dominated by a limited number of players
Indeed, although there have been many researchers that have praised the presence of deregulation in the airline industry, many have regarded deregulation as the primary source of the demise of the airline industry. According to Goetz & Vowles (2009) as a result of deregulation there have been many mergers and consolidations that have led to a small number of airlines dominating the airline industry in some markets in the United States. In addition, "The widespread adoption of hub-and-spoke networks, in conjunction with industry consolidation and barriers to entry, has led to the establishment of "fortress hubs," where a single airline has come to control 70%, 80%, or even 90% of the market in those cities (Goetz & Vowles 2009, 252)."
The article further explains that the domination of a few players in the industry has resulted in what is referred to as monopoly rent or fare premium that passengers traveling from certain cities have to pay. The author also explain that in addition to these fortress hubs there are also some mid-sized and smaller communities that have experienced substantially increased average ticket fares and reduced levels of service, leading to the development of programs to ameliorate these problems (Goetz & Vowles 2009). Additionally certain regions of the U.S., including the southeast Piedmont area, the upper Midwest, and parts of the Northeast, are now referred to as pockets of pain as a result of the high ticket prices that are present and the poor quality and quantity of flights that are available in these areas (Goetz, 2002; Goetz & Vowles 2009 ). In addition during the time of deregulation in the 1990s, smaller carriers claimed that the larger airlines participated in predatory pricing in an attempt to drive the smaller carriers out of lucrative markets or out of business altogether (USDOT, 2001; Goetz & Vowles 2009). The author also reports that deregulation in the airline industry has led to the instability of the airline industry.
The article further explains that deregulation in the airline industry has led to deregulation in other industries. The authors explain that which has caused many different economic scandals. For instance,
"The global economic crisis of 2008 is the most recent and largest crisis that, many analysts contend, had its roots in the deregulation of the financial services industry, serving as an example of why the implementation of deregulation as a universal economic policy panacea is naive and short-sighted. The weakening of New Deal-era financial regulations and regulatory structures in the name of laissez-faire economic policy, has been a contributing factor in the current financial disaster. The abdication of responsible government oversight has led to conflicts of interest and fraudulent abuse that contributed to the collapse of the financial services industry and the need for a federal government bailout totaling at least $700 billion as of September and October 2008 (Kuttner, 2007; Goetz & Vowles 2009, 255 )."
This aspect of the research reveals that the dominance of a few airlines does not provide a good amount of competition. Competition is important because it assist in the development of high quality products or services at lower prices (Morrison & Winston, 2008). However the lack of competition increases prices and decreases the frequency with which people purchase airplane tickets.
In addition to the aforementioned problems caused by deregulation and monopolies, there are also other factors that led to the demise of the airline industry. For instance, the price of gas over the past six years has reached astronomical heights. High gas prices lead to higher ticket prices because airlines have to chare more to make up for the extra cost of jet fuel. Although many companies suffered a great deal during the height of high gas prices Southwestern Airlines was able to keep fare prices low because the company had made an agreement with its supplier and locked in a lower price for gas.
According to Maxon (2008) even many airline companies have steadily increased fares, these increases have not proven effective in balancing out the high price of gas which costs airlines billions of dollars each year. The article further explains that "American Airlines was already complaining loudly about oil prices in its third-quarter earnings statement last October -- about the same time Mr. Boyd spoke of $90 oil. But with oil prices now over $130 a barrel and climbing to uncertain heights, the recent past seems like a dimly remembered dream. "Few of us thought, when we announced those earnings seven months ago, that we would ever look back fondly at $90-a-barrel oil," American's chairman and chief executive, Gerard Arpey, said Wednesday at the annual shareholders meeting of AMR Corp., American's parent ( Maxon, 2008)."
As a result of increased gas prices has led some industry insiders to believe that more bankruptcies are likely to occur within the industry. Additionally, there will likely be more mergers and consolidations in the future. In an attempt to further offset the costs of gas prices, American and other airlines have started charging passengers for checked baggage. American charges $15 for the first checked bag and $25 for the second checked bag. Additionally, "American estimates that each $10 rise in the price of a barrel of crude oil raises its annual jet-fuel bill by $800 million. Consider that oil futures have jumped from $64.97 a year ago to $130.53 a barrel…U.S. airlines will spend nearly $60 billion this year on jet fuel, up $18 billion from 2007…the increase was "equivalent to employing 244,000 airline workers or purchasing 261 narrow-body jets (Maxon, 2008)."
The fluctuations in gas prices can certainly prove detrimental to the ability of airline companies to make a significant profit. The billions of dollars spent each year on gas is likely to continue unless more companies are able to lock in prices. However this seems unlikely.
The purpose of this discussion was to examine the ways in which government interventions in the airline industry have led to the demise of the industry. The research explored several issues related to government interventions in the airline industry. These interventions included the development of deregulation policies led to changes in the agencies that governed flying routes in America. The research found that before deregulation the Civil Aeronautics Board was responsible for the management of the routes that airlines flew and the price for airline tickets. However after deregulation all domestically owned airlines were placed under the control of the Department of Transportation (DOT). The research also explored issues related to the impact of gas prices, industry monopolies and the TSA on the airline industry. Gas prices are not easy to predict and cost the industry billions in expenses each year. In addition many airlines have not been able to mitigate the costs of fuel by increasing fares. This has led to a decrease in profitability. In addition, there is very little competition because there are a few large companies that dominate the industry. This lack of competition leads to higher fares and reductions in the number of people that choose to fly. All of these issues impede upon the ability of the airline industry to make money. Overall the research indicates that the government has played some role in the demise of the airline industry through deregulation and other policies.
Competition and Regulation in the Airline Industry. Retrieved May 5, 2010 from; http://www.frbsf.org/publications/economics/letter/2002/el2002-01.html
Goetz, Andrew R., 2002. Deregulation, competition, and antitrust implications in the U.S. airline industry. Journal of Transport Geography 10 (1), 1 -- 19.
Goetz a.R., Vowles T.M. (2009) the good, the bad, and the ugly: 30 years of U.S. airline deregulation Journal of Transport Geography 17 (2009) 251 -- 263
Fletcher M.A. 2010. Obama signs Travel Promotion Act. http://voices.washingtonpost.com/44/2010/03/obama-signs-travel-promotion-a.html
Levine, Michael E., 2006. Why weren't the airlines reregulated? Yale Journal on Regulation 23 (2), 269 -- 297.
Maxon, T. 2008 Airline industry not designed for $130 oil. The Dallas Morning. Retrieved May 5, 2010 from; Newshttp://www.dallasnews.com/sharedcontent/dws/dn/latestnews/stories/052308dnbusairlines.37d22b7.html
Morrison, S., Winston, C., 2008. The State of Airline Competition and Prospective Mergers. Statement for "Competition in the Airline Industry" Hearing before the Judiciary Committee Antitrust Task Force,…