The airline industry is a unique and interesting industry (Chan, 2000). The reason for this is because it captures the interest of a wide audience because of its glamour, reach and impact on the large and growing numbers of consumers/travelers worldwide (Chan, 2000). The importance of the industry is unquestionable. The industry is worth over US,000 billion (directly, indirectly and “induced”), employs 22 million people, and transports and services over 1.25 billion passengers a year. A quarter of the world’s manufactured exports by value reach their markets by air. The industry also plays an important role in travel and tourism, the world’s largest industry, employing one in nine workers (Chan, 2000).
However, like any other industries, the airline industry also have regulations that it should follow, or in other words, the simple ‘dos’ and don’ts’ that it should comply with. In the case of the United States airline industry, most of the regulations are provided by the industry itself, but the government also plays a great role on how the industry should act. The U.S. airline industry has been deregulated since 1978 and continuously does so but with a few additional acts prior to the September 11 attacks incidents, which heavily involved airlines hi-jacking. This paper will review the history of key regulations in the United States airline industry and will assess how these regulations affect the industry as a whole.
FROM REGULATION TO DEREGULATION
The Airmail Acts
The airline industry has been around ever since the early years of the 20th Century. In the United States, airline history was shaped early in its life by the US Postal Service’s airmail contract system that started in 1918 (Ward, 2000). Ever since then, the industry continued to grow. The first holiday airlines started in 1926 with Aeromaritime Airways. It began its history flying people from Miami to Havana and to Nassau, often so that the passengers could avoid the Prohibition for a while. However, the airline industry didn’t actually begin with them. It only began after the Airmail Act of 1925 or the “Kelly Act” was passed (Ward, 2000). This act was the first act given for aviation, which specifically gave the air mail service over to private airmail operators for four-year periods under a bidding scheme (Ward, 2000). It authorized the awarding of government mail contracts to private carries, established the rates for transporting mail and it set the airmail rates. Contracts were awarded through the United States Postal Service, and contracts were awarded through a bidding process. The effect of this act was dramatic as it dramatically increased the number of companies that offer airmail services within the United States. The first airliners include Ford Motor Company, Western Air Express, Colonel Air Transport, Florida Airways, and the Boeing Air Transport. It has grown bigger and bigger with the following years, particularly in the mid-to-late 1920’s, when the “big four” domestic airlines of America were born. This includes American Airlines. The complete list include: TWA, United Air Lines, Eastern Airlines and American Airlines (Ward, 2000).
The Airmail Act of 1925 was implemented because mainly of the political pressure to increase the performance of aircraft carriers by turning them over to private owners that could have the ability to expand the industry. Politically, it can be seen that the aim of the US was to create a possible industry that could boom anytime soon. The whole country would benefit from it as it will make transaction faster. However, the Kelly Act, despite giving way to the growth of an industry, was not sufficient to encourage airlines to provide air passenger carriage as the carriage of mail was much more profitable and aircraft were limited in gross weight, roughly around 3,500 pounds. The solution was to create the Airmail Act of 1930. This act encouraged airline carriers to purchase larger aircraft, increasing the likelihood of being awarded airmail contracts. It also stimulated the carriers to fill space on the aircraft with passengers. The only problem with this act was that it was highly political in nature as it is an issue of management control on the booming industry. Basically, it gave the nation’s postmaster general the authority to manage the industry (Thomson Gale, 2006). The Postmaster General arranged a meeting wherein the airlines negotiated territories among themselves. This resulted in the establishment of three primary routes—north, middle, and south—across the United States, with United, American, and TWA controlling one route each (Thomson Gale, 2006). Finally, the Roosevelt presidency enabled the Airmail Act of 1930 to be replaced with the Air Mail Act of 1934. In this act, the postmaster general’s power over the industry was diluted, and measures to ensure truly competitive bidding were established. New airlines as well as established ones made low bids in an effort to snare market share, and as a result of the fierce competition, no carrier was able to make a profit (Thomson Gale, 2006).
Air Commerce Act of 1926
Another important regulation in the US airline industry is the Air Commerce Act of 1926. This act had much political color in its sleeves because it was the first act that defines the airline industry as a commercial sector. Developed under the Coolidge presidency, this act along with the Civil Aeronautics Act of 1926 underwent research before being implemented, in the form of the Morrow report. The Part I of the Morrow Report posed and answered six essential questions concerning aviation. This include: the relation between civilian and military aviation; promoting the civil use of aviation; the country’s military air policy; the danger of air attack from menacing enemies; and the establishment of a Department of National Defense; and if there should be a separate Department of Air equivalent with the Departments of War and the Navy. Regarding the first question, the board of the report urged that civilian and military aviations should remain separate and that there is no need for civilian aircraft to be armed with armaments since it begets its kind. In second question, the board emphasized that people must recognize the non-military value of aviation, of which the airmail service of the Post Office was a good example. They recommended the creation of a Bureau of Air Navigation in the Department of Commerce to address the issue. For the third question, the board noted that the Navy was adequate to keep an aerial menace away, and that the military establishment should determine the level needed for an economical defensive force. For the fourth question, the board believed that the United States was not in danger with any menacing aerial attacks if ever if would commercialize airlines within its country because only Canada and Mexico are near its boarders. In the fifth question, the board emphasized that a separate department for the defense of commercial and military aviation would be disadvantageous because of the fact that it would just increase unwanted bureaucracy. For the last question, the researchers concluded ‘no’ because they argued that both the Army and Navy needed integral air arms in order to fulfill their missions, and the air force had yet to demonstrate its value as an independent instrument of war.
The report received more praises than criticisms because it did not only present a coherent conclusion, but also provides some recommendations based on its findings such as: the standardization of aircraft types; regularly scheduled replacement of aircraft types; continuity of equipment orders; orders of reasonable size given to companies with active design staffs; proprietary rights given to companies for their designs; orders for experimental, competitive designs; the rationalization of government procurement laws and regulations, and the continuation; and encouragement of government and private research and innovation. The report supported the view of former president Coolidge because it also looked at aviation as a moral issue. Shortly after, members of the Morrow Board quickly introduced bills into Congress designed to turn its recommendations into legislation. It was passed into the Senate and then later into Congress, and finally promptly signed by President Coolidge. The Air Commerce Act became Public Law 254 in May 20, 1926 (Downs, 2001).
The effects of this act was first, it separated military aviation from commercial aviation. This was a necessary step to create a booming industry, free from military restraints. Second, the effect of this act is that it regularizes practice and procedures finally making aviation as a commercial industry. Because of the act, it became a concentration of commerce and is expected to contribute to US’s GNP. This pattern was also followed by other countries as well (Downs, 2001).
The Civil Aeronautics Act of 1938
The next important act that should be noted in the US airlines industry is the Civil Aeronautics Act of 1938. The Civil Aeronautics Act of 1938 led to the establishment of the Civil Aeronautics Board. This act was created because of the need to regulate passenger fares and airmail routes, monitored acquisitions and mergers, and distributed routes to airlines. These tasks were of course performed by the CAB.
Other tasks the CAB performs include: airways, navigational facilities, control towers and ensuring compliance of aviation regulations. The CAB helped the industry become more civil in a sense that many of its aspects are ensured not to exceed the limit that may be harmful to the future of the industry. It also contributes slightly to safety procedures and risk management within the industry.
After 20 years, the Federal Aviation Act of 1958 was created and was assigned with the task to control air traffic. The FAA was renamed Federal Aviation Administration (FAA) in 1967 and was put under the control of the U.S. Department of Transportation (DOT), which was also created that year.
These laws basically helped US airline companies both in the past and present to improve their standard of service. These also help them formulate fair pricing as well as obliging with several key safety and security measures. They did not only contribute to the marketing of the airline services but contribute to the ethical side of the business as well.
The Airline Deregulation Act of 1978
Chan (2000) stated that 1978 was a watershed year for the airline industry. The reason for his statement is because it was the year airline deregulation was first introduced in the USA (Williams, 1994). From the outset, airline deregulation had attracted much attention because of its mass impact on the large numbers of consumers/travelers.
The advantage of the act is that it lifted government-imposed barriers that had prevented airlines from entering new markets. New areas of competition within the industry were explored because of this act. For instance, airlines with low costs compete with price, while “local service carriers,” which had provided largely regional service under regulation, competed on the basis of service (The Congress of the United States Congressional Budget Office, 1988).
Deregulation might have been a good idea but no real growth yet has been seen for the airline industry ever since its implementation. However, this allowed the firms to recreate the industry and contribute for its development as a structure and as a process. The marketing condition was affected because of it (Driver, 1999). He explained that as airlines have had to become more competitive, they have striven to reduce costs, primarily through the reduction of staff and the outsourcing of non-core activities (Driver, 1999). Their prime competitive advantage is the network and scheduled flights, and consideration of these is the key criterion of consumer choice (Driver, 1999). Network rationalisation and expansion have been a dominant strategy and this has widened the basis of competition as airlines, dominant in some areas, seek to penetrate or expand in new ones (Driver, 1999). Driver (1999) added that to aid this marketing competition has been concentrated on corporate branding both to attract customers and to ascertain strong distribution. Branding has become important in being competitive in the industry because it has tended to permeate marketing oriented airlines and has served as a focus for staffing initiatives as services ancillary to the core product of transportation act as discriminators between airlines.
This act also enabled the development of the Frequent Flyer Program to promote brand loyalty to consumers. In other words, the deregulation act has given the industry the marketing revolution it needed. It also allowed the competition within the industry grows positively.
The political scope of this act is that it was made not only for the industry but also for the consumers paying high fares within a regulated airline industry. As a solution, the deregulation was thought of, and was based on the contestable market theory (Baumol et al., 1982) which suggested that governments should seek to promote contests for markets, even those where large firm size and limited competitors existed. Regulation was believed to encourage competition based on service quality rather than price, limit operational flexibility, and create no incentives for improving efficiency and productivity. However, this has been argued that deregulation has shifted competition from service to price (Rhoades et al, 1998).
CONCLUSION
We can observe that the development of the US airline industry was made possible by the different interactions that took place between the government and the business owners, as well as the concern for the consumers. Discussions about changes and reforms have been always made through diplomatic legal means that involves the congress and the different bodies that control the airline industry. Research plays an important part in the interaction and agreements were developed through in-depth discussions. In terms of policies, the government influences business decisions little because of the deregulation policies. However, the latest rules implemented by government prior to the September 11 attacks can be seen as a great influence on how US airlines operate today. Although those latest acts were not discussed in the body of this paper, the well-documented and publicized issue shows that most airline companies complains because of the high costs and hassles of complying with those regulations for both the consumers and the employees of the airlines. However, those were just on safety issues. The rest, they can still formulate their own regulations at their will.
At this time of our society, businesses try to influence the decisions of the government by presenting arguments and press releases that criticize a particular act that former issued. Of course, there are other means like presenting research results as discussed earlier. Pleas of airline companies can also be submitted to the government. However, in the overall view, it is still the government who controls all the main areas of airlines business. For instance, they can impose new security standards at the height of red alert level. They can also decide on whether or not to take or reject a particular reform or request that some airline companies want – like a bailout from bankruptcy. The issue of merger and acquisition is also one important area to look at. Because it the aim of the government to balance the air fare services, they will not allow any merger or acquisition that may affect that balance.
Credit:ivythesis.typepad.com
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