deregulation and 9-11

[Ryan]

I’m just finishing a research paper for my mba on deregulation and the effects on the airline industry(particularly labor relations, pricing, service, and safety). My thesis was that deregulation has largely improved the industry in all areas. Now, after several weeks of research and writing, I’m still in favor of my thesis but no longer do I think deregulation has helped the industry as much as I originally thought. I’m curious to know what you all think of deregulation.

Also, after 9-11, do any of you feel the industry in some ways has been regulated again? And if not do any of you feel the industry should be regulated again but perhaps this time under a slightly different style than CAB?

Thanks for any and all thoughts.

Ryan

 

[mar]

In ten words or less...

...compare and contrast the pre-Galilean and post-Galilean explanations of the universe.

Include a bibliography.

Holy cow man. We're just pilots, not economists. It would take pages (as I'm sure you know) to do justice to your question.

Maybe "Publisher" could come in here and make some broad sweeping over-simplification? (Sorry man, but you know you deserve it.)

On second thought, here's my sweeping over-simplification:

Prior to 1978, maybe the industry was too regulated. But I believe deregulation went too far.

As I understand it, the hub-and-spoke system is largely a result of deregulation. Good for the airline; bad for the customer.

Hourly departures: Good for the customer and bad for the customer (congestion).

Mergers: Good for the airlines; bad for the customer.

Arbitrary and capricious ticket pricing: Good for the airlines; bad for the customer.

Essential Air Service: Mixed feelings. Subsidies are good for airlines *and* customers but I think it's safe to say that since 1978 the smaller communities have seen a degradation of service (in terms of larger more sophisticated aircraft being replaced on those routes with smaller, older turboprops)....but lately this has changed with the advent of RJs and LCCs like JetBlue and Southwest who have thrived after specializing in unprecedented city-pairs...but I'm not telling you anything new.

Generally, I think deregulation has been a negative for the airline customer. Was it good for the airlines? For a few it was GREAT.

But to be perfectly honest I think the airlines *need* to be regulated like a utility.

As a rule, competition is good. It's good for the customer (for obvious reasons) and it's good for the industry because it refines and improves the product or service.

But imagine if your electric company had to compete with five or six or seven different companies to send electricity to your home. It would be a mess!

It's much more efficient to have just a couple choices where each one is managed (regulated) in a responsible manner in the best interest of the consumer.

If the government were to be totally hands off and encouraged a free-for-all in the spirit of a free market, well, sure, you'd have intense competition and the environment of a Persian bazaar.

Exactly like the check-in counter at your favorite Super-Hub!

To the second part of your question: Obviously after Sept 11th regulation has increased but I'm not sure it's been in the economic arena--except for new taxes.

Mostly it's been in terms of operations: Security/RVSM/Training/etc.

Geeze. How'd I do? Now that the ball's rolling I'm sure people will fire away about what a freakin' commie I am and What college brainwashed me with all that liberal contamination...????

Embry-Riddle Business Administration '90

 

[Foobar]

Regulation "regulates" a market.

Deregulation gives you super saver fares, limited services to cities that are not profitable and too much service to cities that are. Deregulation also gives you those outrageous last minute fares that make up for the super saver fares. The competition in profitable cities leads to lower prices in those key areas.

As for pilots, it creates wages that skyrocket in good times and plummet in bad times.

Regulation gives you ticket prices that are probably the same if its purchased a day ahead of time or a month ahead of time. It would force airlines to take some profitable and some unprofitable routes. So you’d have less service to Dallas and higher prices. If you live in Podunk Texas, population 1000, then you’d get reasonably priced flights as opposed to outrageous process or no service at all.

The pilot will make a wage that is between the best and worst wage scales in a deregulated environment.

Is it good or bad? That depends on where you live and how much airline stock you own. If you live in Dallas or Chicago deregulation means higher prices. If you live in a small town deregulation means you don’t have to drive 2 hours to Dallas to get a flight. If you own lots of airline stock or you are a pilot deregulation is good during good times and sucks in the bad times.

As for me, I think transportation, like electricity and phone service, ought to be available to everyone everywhere at a reasonable price.

 

[Timebuilder]

Prior to 1978, maybe the industry was too regulated. But I believe deregulation went too far.

I started flying on airlines in the sixties, and at no time did I think that we needed to deregulate transportation.

I like competition, and in a few more years we may see relative stabiltity in pricing and wages. I don't like the aspect of a free for all, or as mar put it, a persian bazaar.

I think the idea of re-regulation is something to ponder, but the deed is done, and it may be as difficult to get a genie back into a bottle, just like entitlements.

The primary effect of 9-11 is one of culling out the weakest competitors, and establishing a new floor for industry wages as travellers exploit the internet as a tool for determining the lowest cost of travel and hotels. In an environment of economic strife and reduced seat miles, every company is put to the test.

I think a very good question is "what would the airline industry be like if it had not been deregulated, in a post 9-11 environment"? I'll leave that question for the modellers and economists.

 

[bart]

I believe that the industry is still evolving from deregulation. Look at the companies that have continually churned out economic profit (cash generated less an operating capital charge) and that will tell you where the industry is headed. The capital markets will not allow those with negative economic profit to survive indefinitely.

As to whether it is good or bad, you would need to stake out a specific definition of good or bad. I think that airlines are more productive (more output per unit of input) than they were under regulation, however the industry has not finished adjusting to the changes brought by deregulation.

In the long run, the industry will certainly benefit, as will the consumer of their product. Their will be industry participants and practices whose fortunes were dictated by the regulations that may suffer and perish, but overall the system will be better off.

 

[Foobar]

Regulating the industry does not mean socializing the industry. If the government owned the airline then there would be no competition. If the government allowed airlines to bid on the route from New York to Miami, and required the airline that took that route to also fly Podunk Iowa to New York then the industry would be regulated. That would keep every carrier from trying to fly the exact same routes and engaging in destructive price wars. It would also force carriers to serve the less profitable areas.

The industry is already subsidized on a massive scale. Why not just regualte it?

 

[RockyMnt1]

An example of over regulation

Before deregulation:

FedEx had to fly 3+ Falcons wingtip to wingtip to some destinations. Used more fuel, crews, and more wear and tear on the equipment.

After deregulation:

B727s took the place of the mulitple Falcons and the Falcons could be used on the smaller routes so more cities could be served. When needed, DC-10s took the place of multiple B727s. More flexibility.

 

[bart]

Lord knows, we don't want destructive price competition. How can we expect to pay bloated wages (to everyone in the organization) if we have to compete on price?

Why not just type out a request to the American people to mail a check to the industry each week so that they can continue to pay out more money than they make? Oh, right, we already did that once. The market will straighten it all out, only the inflated organized labor wages might not be there (nor the inflated management wages either). A poorly run organization is exactly that... it is fixed by either getting effective management that can make decisions or by going out of business.

OR you can bandaid the problem by staking out a market for the inefficient organization and protecting it from its own bad decision making. In the long run, more than likely the urge to innovate disappears and costs go up, relative to other prices. And we all lose when that happens (unless you are one of the ones pocketing that money).

More Americans fly in planes than pilot them, so I would expect their interests to take priority. And those interests are low cost, efficient, safe travel. So if decisions of your company are not focused there, expect to be out of business in a few years.

 

[SkyWestCRJPilot]

Before deregulation an airline had to seek approval from the government to change a flight schedule, reduce or increase capacity or frequency and change fares. This often took months or years and wasn't always approved. You had the situation where airlines were flying 737s into places that can now only support a B1900 under essential air service subsidies. The airlines weren't allowed to leave a market because it was unprofitable so said airline was forced to fly the 737 on a route that would have 3 passengers. Because of deregulation we have the option of going nonstop and paying a high fare or taking a connection for a third of the price. The consumer isn't hurt, rather the consumer gets the choice. Because of deregulation airlines have increased capacity, there is more air service to more cities more often. There are more major airline jobs overall even considering the present furloughs. There are such things as regional airlines and the subsequent creation of the RJ explosion. Because of all of this competition there are more choices for the consumer, fares have gone down, only the profitable airlines survive, and unfortunately wages have gone down.

The airlines are still regulated to some degree. Essential Air Service (EAS) is an example of the government subsidizing unprofitable routes in order to provide air service to smaller communities that would lose service otherwise. Also all of the FARs are regulations that inhibit the free market to somewhat. Most of the FARSs though are safety related and the government and consumer agree that regulatiing the airlines for safety is critical. Imagine an airline that didn't have to undergo any federally required maintenace inspections, didn't have to have any required minimum pilot training, or didn't have to have any of the required equipment onboard (TCAS, EGPWS, etc.) That airline would have a competetive advantage initially. But in the end consumers wouldn't fly on them because of safety related crashes and fatalities. Fortunately no one advocates deregulating the safety measures (FARs) we currently have in place.

Reregulation (ie. pre Reagan) will never happen. The average consumer won't allow it. The only ones who are for it is labor groups that want to return to higher pay and the prestige that flying used to be. I'm all for higher pay but there is a point where the competetive environment of capitalism and the free market just doesn't allow for it. The only way to combat the free market is to create a monopoly on labor, an all encompassing labor union that all pilots in the country belong to. That changes the supply/demand curve of the commodity called pilot labor, thus increasing wages but decreasing the supply of labor. You have higher wages but fewer laborers (pilots). Since deregulation unions have lost power, wages have gone down, but also the supply of laborers is higher (more pilot jobs). The total pilot compensation, including the new pilot jobs created, is even greater than before deregulation (ie. share the wealth). Everyone at a regional airline job owes their job to deregulation. If it weren't for deregulation only high paying passengers would be flying, pilots would be making more, but fewer of us would even have jobs. Flying wouldn't be for the masses anymore and it would return to only the wealthy being able to fly to fewer cities at less frequent times. And many of us would be out of a job.

 

[dmspilot00]

Now, after several weeks of research and writing, I’m still in favor of my thesis but no longer do I think deregulation has helped the industry as much as I originally thought.

You said "as much" so this means you still think deregulation helped the industry at least somewhat. The thing is that deregulation isn't supposed to help the industry. Under regulation, the government watched out for and protected the industry. Deregulation is supposed to help the economy, and an industry under deregulation is more fair to all.

This is a general response to no one in particular...

Regulation of the industry was actually designed for the purpose of actually preventing competition. The government tried to prevent every possible means of competition. When regulating prices did not prevent competition, they regulated routes. That wasn't enough, so they regulated flights, airplanes, and times. That wasn't enough, so they regulated seat pitch. That wasn't enough... and eventually they were regulating the precise size of sandwiches served during meals (seriously).

Deregulation of the airlines was good for the customer and for the airlines. As soon as they were deregulated, the number of passengers skyrocketed. Is an extreme increase in passengers a sign that deregulation was bad for consumers? I think not. But fares also fell dramatically. Were lower fares bad for consumers? I think not. But profit for the airlines also increased. Was that good for the airlines? Yes. For the consumer? What do they care, they now have much more accessable air travel at cheaper prices.

If you're looking at the problems the majors are having and are blaming it on deregulation, look somewhere else. The major airlines are being subsidized by the government...they might as well be still regulated. Instead of fixing their problems, they spend money on lobbying for help. Thus they have a soft budget constraint and have no incentive to improve anything about their company.

BTW I'm an Economics major.

 

[Publishers]

deregulation

It would be my opinion that deregulation was something needed in the industry and for the most part has been beneficial to the flying public.

That said, the relatively short period of time for the onset of deregulation had a severe impact on some existing carriers. In fact, an argument could be made that a brand new carrier had an advantage over one wrongly placed in the market.

The main reason for this is that being as capital intensive as it is, this industry always has a hard time adjusting in a short time frame. You buy the equipment or even lease it and expect a life of 25 or more years. Mistakes take a long time to cure.

Another factor was labor. During the regulated period, wages probably got out of hand. The reason is that it was easier to give in back then as you had a protected route structure.

You could win or lose the airline lottery more by what routes you were given than controlling costs.

Fares-- If I remember correctly, the CMH-ORD fare back in the 60-early 70's period was about $450. United was you first and last choice. Since deregulation, you have been able to take that trip for less than that.

Another factor--- American Airlines handling of deregulation made it the number one airline in the US. Companies such as Braniff and Eastern were never able to deal with the problems effectively. In short, those with the best management did best.They took advantage of the new business model.

 

[fr0g]

posted by bart:

The market will straighten it all out, only the inflated organized labor wages might not be there

Current Position: Director of Finance

Any Questions?

(sorry man, couldn't resist)

 

[A Squared]

Re: deregulation

Fares-- If I remember correctly, the CMH-ORD fare back in the 60-early 70's period was about $450. United was you first and last choice. Since deregulation, you have been able to take that trip for less than that.

That's what all the "please regulate the airlines and make life wonderful again" proponents lose sight of. If the airlines were still regulated the vast majority of you wouldn't have a job. Flying would be too expensive for most of the people travelling.

Assuming that Publisher's recollection is correct, it now costs about a quarter of that to fly from Columbus to Chicago .... thirty years later. I just did a travelocity search and found several fares for $113. The price has been reduced by 75% even if we ignore inflation. If we adjust for inflation using the consumer price index, that $450 becomes $2147. How many people are going to pay $2147 to fly from Columbus to Chicago? Probably not too many, right? After all, it's only 300 miles, you can drive it in a day. I know I'd sure as hell drive a day to save $2147. That's a month's take home pay for a lot of middle class folks.

How many airline jobs do you think there would be if the airfare from Columbus to Chicago was 2147?

Do you think you'd have one of them? Are you sure?