Question

Please discuss the development of the U.S. airline industry in the era of economic regulation and the factors leading to deregulation. Describe the post-deregulation expansion, consolidation, and concentration of the industry, as well as the current trend of intra-industry agreements.

Answer 1

Prior to 24th October, 1978, Airlines were regulated by the Civil Aeronautics Board (CAB). The CAB essentially controlled where an airline could fly and what fares they could charge. This meant that airlines had a guaranteed rate of return prior to deregulation and the only point of differentiation (POD) between airlines was service. Airlines competed on service alone since the fares were regulated by the government. This could be called, in a way as the golden era of aviation as airlines were offering top class service in order to gain and retain customers and were profitable too.

The Airline Deregulation Act was signed by President Jimmy Carter which eventually dissolved the Civil Aeronautics Board (CAB). This led to several airlines shifting strategy from being service oriented to price orientation. A new kind of airline called Low Cost Carrier rose up, which competed primarily on price and offered bare minimum service.

One of the success stories resulting from Deregulation was Southwest Airlines. Prior to 1978, Southwest Airlines was only allowed to fly within Texas by CAB rules. Today, Southwest is the largest domestic U.S. Carrier in terms of passenger traffic.

Another effect of deregulation has been that success for airlines has majorly come only with scale. There has been massive consolidation in the U.S. airline industry, resulting in 4 major carriers - Delta, United, American and Southwest. They have successfully combined existing domestic networks with the international networks acquired by them.

Deregulation has basically allowed airlines to innovate new business models. It has allowed people to fly more often. Earlier, airlines were a fancy mode of travel for the rich man but deregulation has democratised travel.