Airline Deregulation

International Experiences

Kenneth Button, Kenneth Button

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351814461
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

The end of the twentieth century saw remarkable changes in the way that economic regulation was viewed. There occurred a liberalization of attitude and something of a withdrawal of the state from its interventionist role. These changes were particularly pronounced in the context of transport, where the long-standing tradition had been one of market intervention by the government. The aim of this book, first published in 1991, is to examine the outcomes of deregulation on the international airline industry, and to consider whether the experiences of market liberalization reveal any common threads. In particular, whether they reveal any universal indications of how underlying transport markets function; how management responds to new stimuli; the degree of protection needed by transport users; and nature of the transition process from regulation to liberalization.

Chapter 1
Introduction

Kenneth Button

The past two decades have seen remarkable changes in the way that economic regulation has been viewed, for example, see Swann (1988) and the papers in Button and Swann (1989a). Countries have varied over time in the extent and the ways in which they have intervened in economic markets, particularly in terms of price and entry controls, but the tradition of regulation is well established. What has happened in recent years has been a liberalization of attitude and something of a withdrawal of the state from this interventionist role. In North America this has been viewed as a period of 'deregulation' although the UK terminology of 'regulatory reform' is in many ways more appropriate. While many economic regulations have been removed in some cases there have been tightenings of controls of quality factors related, for instance, to safety. Equally, in countries such as the UK and France where there has been privatisation of formerly state-owned industries, economic controls have actually been reinforced to replace the direct control of ownership formerly exercised over these large-scale undertakings. There has also been, in some instances, a tightening of broader industrial policy and labour protection laws as individual sectors have been liberalized – the new mergers policy of the European Communities (EC) from 1989 is an example. The gradual 'greening' of attitudes towards industry has also brought forth new regulations governing the ways in which we treat the natural environment.

While these changes extend across many spheres of economic activity they have been particularly pronounced in the context of transport. The longstanding tradition in transport had been one of market intervention by government to regulate entry and/or price with the intent, on the one hand, of protecting consumers, third parties and those working in the industry together with, on the other hand, the achievement of social objectives such as service to remote communities and the integration of spatially disparate markets. Indeed, in many countries, and especially on continental Europe, transport has traditionally been seen as an input into a wider socio-political-economic process embracing regional, social and industrial policies. As such it has been manipulated to achieve aims which transcend issues of simple efficiency in transport supply.

With one or two notable exceptions (e.g. the deregulation of the UK trucking industry in 1968 and partial deregulation of the railways in 1962), the controls which had been built up from the nineteenth century and developed and rationalized in the inter-war period continued to dominate into the 1970s. The 1930s had been a particularly active period for regulators (Button & Gillingwater, 1986) and much of the change which has occurred in recent years effectively rolled back the legislation of that time. A considerable part of this earlier legislation can be explained in terms of society trying to come to terms with new modes of transport (especially the automobile and aeroplane) which not only offered new technical challenges but also began to have a very considerable effect on the way people lived. In some ways, therefore, one could view the legislation as a form of social engineering. Equally, however, transport has associated with it a wide range of externalities – it is dangerous, pollutive and affects a wide range of other economic activities ranging from residential land use to international trade patterns. Issues of overall social efficiency were, therefore, also at the forefront of the debates of the time.

From the mid-1970s economic liberalization has spread through transport markets with supplying industries being freed from price and entry constraints and privatisation taking effect in many sectors. The reasons behind the change vary from country to country and sector to sector. The USA is often seen as the initiator of most of the reforms with a combination of demonstration effects and bandwagon effects, together with some clear spillovers into international markets, causing other countries to imitate. Of course one could debate the claims of the US to be at the forefront of change in transport policy – the UK in particular may feel it has some precedence – but it was certainly the experiences of the US which have received the greatest attention.

During a period from 1976 to the early 1980s the Airline Deregulation Act (1978), the Staggers Rail Act (1980), the Motor Carrier Act (1980), and the Bus Regulatory Reform Act (1982) essentially liberalized inter-state transport in the USA with knock-on effects rippling through to intra-state regulation. Following lags, similar pictures emerge for most other industrialized countries although the timing and intensity of change has varied enormously. There are many reasons for this diversity of pace. In part it is explained by the different starting points from which liberalization began, but equally one must consider the nature of the political systems involved – some simply do not have the mechanisms for rapid change, the political philosophy of the different countries, the direct links with other, liberalized transport networks, and the degree to which regulations were functioning effectively.

The aim here is not to delve in great detail into the causes of change in various countries or why the outcomes in each are unique. These are issues which are brought out in the contributions to the book. Indeed, one of the objectives of this collection is to consider whether our experiences of market liberalization reveal any common threads. In particular, whether they reveal any broad, universal indications of how underlying transport markets function; how management responds to new stimuli; the degree to which transport users and third parties really need protecting from the antics of supplying industries; and the nature of transition processes from regulation to liberalization.

These are not just issues of academic interest. As we have said, liberalization has been pursued at different rates in different countries and for different modes and there has clearly been something of a bandwagon effect in operation. Separation of the general effects from the contextual, therefore, seems important for on-going policy development. There are, in particular, possible lessons, for those still framing liberalizing codes, to be learned from countries which have set the pace in reform. Ideally, in this context, one would seek to cover all modes in such an analysis, if for no other reason than that modal substitution can influence the behaviour of a particular sector, but pragmatism leads us to focus primarily on aviation.

The choice is not a random one. First, aviation is an international industry and therefore changes are of international importance (Kasper, 1988; Doganis, 1989). Second, from an analytical perspective, we now have considerable experience of the effects of liberalization from the happenings in the USA since the passing of the Airline Deregulation Act (Morrison, 1989; Kahn, 1988). This, in particular, helps our understanding of the dynamics of the post-liberalization phase and the reactions of supplying airlines to it. From a more topical perspective we have the important debates and developments which are going on within the EC as a common Community approach to aviation evolves (Button & Swann, 1989b; Argyris, 1989; McGowen & Seabright, 1989). There are also on-going developments in other countries. Australia, for instance, is radically modifying its domestic aviation strategy as it moves away from the long-established two-airline policy (Kirby, 1981). Conversely, Canada is struggling with what has essentially become a two-airline domestic industry since deregulation (Gillen et al., 1988; Barone et al., 1986).

While the contributions to this volume are not designed to be overly theoretical, they do address some interesting theoretical, as well as policy-orientated, issues, They, for example, shed some light on the on-going debate about the underlying nature of the aviation market. The up-rising of 'contestability theory' in the late 1970s led many to believe that ultra-free market entry and exit would ensure efficiency in the sector with maximum benefits being conferred on users. The empirical evidence has not always supported this rather idealized view of the outcome and now we find those who feel the market could more usefully be described as: 'imperfectly contestable' (Morrison & Winston, 1987; Levine, 1987), 'workably competitive' (Keeler, 1990), broadly oligopolistic (Kahn, 1988), etc. This in turn leads onto questions of optimal regulatory regimes and the difficult trade-offs which must be made between the implications of markets failures and those which often accompany government intervention and regulation.

The chapters in this volume cover these main themes in the context of four substantive case studies – of the USA, Australia, the UK and Canada. Each of these sets out the development of aviation policy in the subject country, the specific reasons behind subsequent moves towards liberalization and, where appropriate, comments on the impacts of these changes. There is also some forward thinking as to where the changes are likely to lead in the longer term.

References

Argyris, N. (1989) 'The EEC rules of competition and the air transport sector', Common Market Law Review, 26, 5-32.

Barone, S. S., Javidan, M., Reschenthaler, G. B. & Kraft, D. J. H. (1986) 'Deregulation in the Canadian airline industry: is there room for a large regional carrier?', Logistics and Transportation Review, 22, 421-48.

Button, K. J. & Gillingwater, D. (1986) Future transport policy, Routledge: London.

Button, K.J. & Swann, D. (eds) (1989a) The age of regulatory reform, Oxford: Clarendon.

Button, K. J. & Swann, D. (1989b) 'European Community airlines – deregulation and its problems' Journal of Common Market Studies, 27, 259-82.

Doganis, R. (1989) 'Regulatory changes in international air transport'. In Button, K. J. & Swann, D. (eds), The age of regulatory reform, Oxford: Clarendon.

European Communities Commission (1985) Completing the Common Market, COM (85), 310 Final, Brussels, European Commission.

Gillen, D. W., Stanbury, W. T. & Tretheway, M. W. (1988) 'Duopoly in Canada's airline industry: consequences and policy issues', Canadian Public Policy, 14(1), 15-31.

Kahn, A.E. (1988) 'Surprises of airline deregulation' American Economic Review, Papers and Proceedings, 78, 316-22.

Kasper, D. M. (1988) Deregulation and globalization: liberalizing international trade in air services, Cambridge, Mass: American Enterprise Institute/Ballinger.

Keeler, T.E. (1990) 'Airline deregulation and market performance: the economic basis for regulatory reform and lessons from the US experience. In Banister, D. & Button, K. J. (eds), Transport in a free market economy, London: Macmillan.

Kirby, M. G. (1981) Domestic airline regulation: the Australian debate, Sydney: Centre for Independent Studies.

Levine, M. (1987) 'Airline competition in deregulated markets: theory, firm strategy, and public policy' Yale Journal on Regulation 29, 393-494.

McGowan, F & Seabright, P. (1989) 'Deregulating European airlines', Economic Policy, 9, 283-344.

Morrison, S. (1989) 'US domestic aviation'. In Button, K. J. & Swann, D. (eds), The age of regulatory reform, Oxford: Clarendon.

Morrison, S.A. & Winston, C., (1987) 'Empirical implications and tests of the contestability hypothesis', Journal of Law and Economics, 30, 53-66.

Swann, D. (1988) The retreat of the state-deregulation and privatization in the UK and the USA, Hemel Hempstead: Harvester-Wheatsheaf.

Chapter 2
The regulation and deregulation of US airlines

Donald Pickrell

2.1 Introduction

Throughout its history, regulation of airline service in the United States sought to suppress the threat of competition. Although regulators' motives for doing so varied over their fifty-year reign, from promoting nationwide air service to stabilizing the fledgling industry and ultimately to protecting the financial interests of individual carriers, their actions systematically foreclosed entry into the industry while progressively narrowing the opportunities for competition within the industry. In an abrupt reversal of its own historical policies, the industry's regulatory body took the first steps to relax its tight controls over fares and service during the mid-1970s.

Emboldened by the results of this experiment with 'deregulation' (as it came to be called), the Congress codified these and even more sweeping reforms –including eventual elimination of the regulatory agency itse...