This paper examines the ways in which government intervention has contributed to the decline of the U.S. airline industry. It traces the shift from Civil Aeronautics Board oversight to post-deregulation Department of Transportation control, analyzing how deregulation fostered industry consolidation, "fortress hubs," and reduced competition. The paper also explores how Transportation Security Administration regulations introduced after September 11 created passenger inconveniences that suppressed air travel demand, prompting the Travel Promotion Act of 2010. Additionally, the paper evaluates the severe financial strain caused by rising jet fuel prices and the inability of fare increases to offset those costs. Taken together, these factors — regulatory restructuring, security policy, market concentration, and fuel costs — are presented as compounding threats to the long-term profitability and stability of the airline industry.
In the past, the airline industry has been among the most profitable and successful in the nation and the world. However, in recent years the airline industry has suffered a great deal as a result of government regulations and adverse economic conditions. The industry also suffered greatly in the aftermath of the terrorist attacks of September 11, 2001 — events that forever changed the manner in which people viewed air travel as a means of transportation. The public came to understand that airplanes could be used as weapons, and the attacks prompted a wave of government regulations including the reinforcement of cockpit doors and the placement of air marshals on flights in a less conspicuous manner than had been practiced previously.
These security measures also heightened passenger screening requirements and led to the creation of a new government entity: the Transportation Security Administration (TSA). Through the development of various policies, the TSA has been permitted to operate in all airports and impose screening procedures on passengers with relatively little resistance. In many ways, these regulations and other forms of government intervention have undermined the airline industry and impaired the ability of certain carriers to remain profitable. This paper examines the ways in which government interventions in the airline industry have contributed to its decline, and also explores the impact of gas prices, industry monopolies, and deregulation on the sector.
According to the article "Competition and Regulation in the Airline Industry," even though the terrorist attacks of September 11, 2001 had a profound effect on the airline industry by decreasing the number of people flying and therefore increasing costs, there were additional factors that impacted profitability. Chief among these is deregulation, which many analysts blame for the downfall of the airline industry in recent years.
Prior to deregulation in 1978, the Civil Aeronautics Board (CAB) was responsible for managing the routes airlines flew and the prices they charged for tickets, with the purpose of preserving the public interest. After deregulation, any domestically owned airline that the Department of Transportation (DOT) determined to be "fit, willing, and able" could fly any domestic route. The main regulatory role of the DOT shifted from ensuring that an airline operated in the public interest to determining whether it operated in accordance with established safety standards. As the article explains:
"While route schedules and pricing for the airline industry have been largely deregulated for over 20 years, many other aspects of the industry are still highly regulated. Perhaps the most important regulation comes from local governments, which own and manage the airports in their region and therefore control key bottlenecks to airport services: access to boarding gates and runways. Most local airport commissions allocate gates without a formal market mechanism, such as a bidding process; often they require proof that the airline would operate in the best interest of the public ("Competition and Regulation in the Airline Industry")."
International routes have not been deregulated at the same pace as domestic routes. The deregulation that has occurred in the international arena has taken place through bilateral open-skies agreements, which are designed to permit airlines from two different countries to fly between those countries without restrictions. However, these agreements are not effective at fostering competitive markets, because they do not permit foreign carriers to carry passengers within the United States or within the carrier's own country of origin.
Additionally, certain major airports in large cities — including New York and Chicago — are subject to federal slot regulations, which require airlines to obtain a slot before their flights may depart from or arrive at these airports. These slot regulations were created to limit congestion at the country's busiest airports. However, such regulations are not always consistent with market realities. For example, "the nation's busiest airport, Atlanta's Hartsfield International, is not even covered by slot regulations. Service to some small isolated markets also is subsidized and regulated by the federal government… even though the end-consumer for airline tickets faces a market-driven menu of prices and services, key inputs into the industry are allocated using non-market mechanisms ("Competition and Regulation in the Airline Industry")."
Overall, deregulation had a profound effect on the airline industry by shifting responsibilities from one government agency to another. The policies related to slot regulations and international carriers further illustrate how certain regulatory adaptations have been inconsistent with what the market requires to ensure airline profitability.
Following the attacks of September 11 and subsequent attempts to bring down aircraft, the TSA developed new safety regulations resulting in extensive security measures, including metal detectors, the removal of shoes, bomb-sniffing dogs, and full-body scanning machines at certain airports. The TSA also severely restricted the items passengers are permitted to carry onto aircraft.
Since its creation in 2001, the TSA has been accused of violating Americans' civil rights through unreasonable searches and seizures of passengers and their belongings. These regulations have inconvenienced travelers, who must arrive at airports well in advance of their flights — a burden that has contributed to a measurable decrease in air travel. In response to this decline, Congress passed the Travel Promotion Act, signed into law in 2010. This act was designed to encourage international travel to the United States through the creation of a national tourism board (Fletcher, 2010). The board is responsible for developing marketing campaigns and other strategies to attract foreign visitors, and was intended to reverse a 10% decrease in international visitors to the United States over the preceding decade. As described in reporting on the legislation:
"The board created by the new law would develop advertising and educational campaigns to help potential travelers navigate United States visa requirements and security procedures. The effort is to be paid for by private sector contributions matched by a $10 fee on foreign visitors from countries who do not need a visa to enter the United States. Advocates of the law say it would help attract 1.6 million new international visitors, $4 billion in new spending and more than $300 million in tax revenue each year (Fletcher, 2010)."
The current regulations established by the TSA have diminished the desire of many people to travel by air because of the inconveniences encountered at airports. These frustrations have led many passengers to choose alternative forms of transportation, including driving or taking trains. The Travel Promotion Act represents at least a partial acknowledgment by federal policymakers that the airline industry is suffering, and offers a strategy aimed at reversing the decline in international travel to the United States.
Although some researchers have praised deregulation in the airline industry, many others regard it as the primary cause of the industry's decline. According to Goetz and Vowles (2009), deregulation has produced numerous mergers and consolidations, resulting in a small number of carriers dominating certain markets in the United States. Furthermore, "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, p. 252)."
"Mergers, fortress hubs, and reduced competition"
"Fuel costs, fare increases, and profitability threats"
The purpose of this discussion was to examine the ways in which government interventions in the airline industry have contributed to its decline. The research explored several major areas of intervention. Prior to deregulation, the Civil Aeronautics Board was responsible for managing airline routes and ticket prices. After deregulation, those responsibilities were transferred to the Department of Transportation, fundamentally altering the regulatory landscape. The research also examined the impact of TSA regulations, industry monopolies, and fuel costs on the airline industry.
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