Industry Analysis Since the Passage

Industry Analysis

Since the passage of the Airline Deregulation Act of 1978, the commercial air transportation industry has been going through a tremendous transformation. Where, the increased amounts of deregulation are helping consumers to see: lower fares and more choices among the different carriers. However, to understand the true effects of deregulation on the industry requires: that you examine those forces that will be impacting the industry over the next three years. To determine this you would need to examine: the general environment and task environment of the industry. Together, these two elements will provide the greatest insights, as to what issues will be affecting the airlines within the next three years.

General Environment

Over the last 100 years, the airline industry would undergo tremendous change, as the improvement in technology and economic factors would transform the industry. What happened was: prior to the passage of the Airline Deregulation Act of 1978, the industry was strictly regulated by the government. The idea was that allowing large amounts of deregulation would help select individuals, to create cartels or monopolies that will determine the prevailing market prices for air transportation services. This would lead to the passage of the Civil Aviation Act of 1938, where the government would play a major role in setting fares and determining which airlines could fly select routes. This model would provide stability to the industry, as earnings would remain stable because: the fares and any kind of merger or new route had to be approved by the Civil Aeronautics Board. (Morrison, 1995) However, under this model, competition was limited and fares were higher. This was problematic for the industry, as the government bureaucracy would make it difficult for new airlines to enter the market and fly new routes. At which point, the calls would grow for deregulating the industry, resulting the passage of the Airline Deregulation Act. (Cento, 2009)

In the next three years, the increasing amounts of global competition on a number of different routes will continue to grow. This is because throughout the world there have been efforts to deregulate the airline industry. An example of this change can be seen in Europe prior to the late 1990's. Where, each airline would have specific agreements with the government to fly certain routes in a particular country. This was problematic, because it increased costs and reduce competition. As a result, this would force the EU to deregulate the industry. Where, it would have dramatic effect on competition, as these deregulated markets would allow new carriers to emerge such as: Ryanair and Easy Jet. These were no frills, low cost carriers that would fly the same routes as the major airlines. In the U.S., the increased amounts of deregulation led to the creation of low cost carriers such as: Southwest and Jet Blue. At which point, it would only be a matter of time until a change would take place for international routes. This would lead to the open skies agreement between the U.S. And the EU in 2008. Where, there were several key provisions that this would allow to both European as well as American carriers, to determine what routes they wanted fly between the U.S. / Europe. To include: the recognition of European carriers as community airlines, airlines can fly any point between the U.S. / EU and U.S. airports can be used as a stopover for European airlines. This is significant, because it shows how in the next three years, the airlines are going to face increasing amounts of competition, in a number of different markets. This is because the industry is targeting the same demographics of business and leisure travelers. As a result, the increased amounts of deregulation, will affect the industry in the future, as increased amounts of competition will more than likely mean lower fares. Yet, some of the traditional services that many customers have become use to such as: in flight meals and curbside check in are being eliminated. This is because most airlines are seeking to lower costs as much as possible, in an effort to remain competitive with the low cost carriers and new airlines that have entered the different markets. (Cento, 2009)

Task Environment

Three different specific factors that could be affecting the airline industry in the future would include: fuel prices, labor costs and new technology. When fuel costs increase dramatically, this can have an impact upon the overall bottom line of many carriers. To protect their earnings in the future, some low cost carriers such as Southwest have begun to use hedging, as way to limit their exposure. This is where they will purchase the futures contracts for oil. If the price of crude increases; these futures contracts can be sold, helping to mitigate the effects of higher fuel prices. (Vasigh, 2008)

Labor costs are one of the biggest factors that will be affecting the airline industry well into the future. This is because the cost of a flight crew and other personnel; will cause fares to increase or decline. Within the next three years, you will see the industry continue to place pressure on the unions to maintain this low cost structure, so that the airline can remain competitive in key markets. (Vasigh, 2008)