Transcript Safeguards and Sustainability of Air Services – Protection for Whom, From Whom? Dr.

Safeguards and Sustainability of Air Services –
Protection for Whom, From Whom?
Dr. Peter P. Belobaba
Concordia University and MIT
March 2003
Deregulated, Not Fully Competitive Open Markets
• Since US deregulation, pressure for less government
control over airline markets has spread worldwide:
– A result of the perceived overall success of US deregulation and
other experiences in Canada, Australia, Europe and elsewhere
• Deregulation has not meant totally free competition:
– Gave freedom to airlines to choose routes, frequencies, and prices in
domestic markets with less government intervention
– But, operational and safety regulations remain, through airline
certification, crew training requirements, maintenance standards, etc.
– Bilateral agreements still limit access to international markets
– Ownership restrictions limit ability of airlines to raise foreign capital
– US airlines still required to operate certain “essential air services”
– Other regulations govern CRS/GDS distribution channels
US Deregulation Experience Generally Positive
• Overall benefits have been clearly demonstrated:
– US domestic air travel more than doubled in first ten years of
deregulation, a growth rate well above pre-deregulation times
– Average real (inflation adjusted) air fares continue to decline today
– Development of some very successful new low-fare carriers, with
rapid growth in recent years (e.g., Southwest, AirTran, JetBlue)
– No statistical evidence of reduced airline safety
• But some parties have suffered:
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Labor unions experienced reduced power, jobs and wages
Greater disparities in fares paid by business and leisure travelers
Small cities saw commuter airlines replace larger jets
Profit volatility and bankruptcies raise questions about airline
investment and sustainability of traditional airline operations
Changed Competition Under Deregulation
• The removal of economic regulations has added new
dimensions to airline competitive strategies:
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Cost cutting and productivity improvement
Economies of scale in operations to reduce unit costs
Price competition and revenue management to increase revenues
New marketing and distribution programs
Increased network coverage and market dominance
• Quite simply, airline managers now actually have to
make management decisions and trade-offs:
– In contrast to regulated times when government control ensured
price increases to cover increased operating costs.
– “Airline management” was relatively easy under government
regulation and subsidization of flag carriers
The March Towards Global Liberalization
• Overall success of the US experiment has led other
countries to deregulate domestic airline markets:
– Australia and Canada were among first to follow
– Japan, Brazil, United Kingdom loosened restrictions
– European Union has also moved toward “open skies”
• Although differences exist, many similar impacts
have been observed in deregulation outside the US:
– New entrants with lower costs and fares, that face stiff competition
and potentially predatory practices from incumbent airlines
– Potential for volatility and destructive competition arises, especially
in periods of reduced demand and excess capacity
– Recent dramatic shifts in airline industry have begun to shift
momentum of change to low-cost, low-fare new entrants
Protection of New Entrant Airlines
• Initial efforts by new entrants to compete were in
effectively rebuffed by larger incumbent airlines:
– Incumbents had significant advantages of frequency, network
coverage, service quality, and frequent flyer programs
– Revenue management systems allowed incumbents to match new
entrant’s fares while limiting revenue dilution, offering better value
• Aggressive responses by incumbents in some cases
raised questions of “unfair” competition:
– Lower fares and/or increased capacity to drive out new entrant
– Potentially predatory actions, subsidized by revenues from other
parts of incumbent’s network
– Hoarding of gates and/or slots to prevent new entry and growth
• Led to serious policy discussion for “re-regulation”
The Remarkable Growth of Low Fare Carriers
• Recent conditions favorable for low-fare airlines:
– Less business travel overall; reduced willingness to pay for
premium services; reduced quality of traditional airlines
– More stable demand for price-sensitive leisure travel, primarily in
high density point-to-point markets
– Greater awareness of low-fare options through internet channels,
and growing acceptance of “alternative” air travel services
• Low-fare carriers now threaten viability of traditional
network airlines:
– Share of US domestic passengers flown by low-fare carriers
increased to 20% in 2002, from 16% in 2000 and only 5.5% in 1990
– Largest low-fare carriers increased both capacity and traffic in 2002,
in sharp contrast to most traditional network airlines
Who Needs Protection Now?
• In North America and Europe, legacy airlines now face
unprecedented operating losses:
– Major airlines are looking for new “business models” to respond to
changed environment and to compete with low-fare airlines
– Low-fare competition, combined with Internet distribution and
inability to support revenue differentials mean no pricing structure
alone can return legacy airlines to profitability
– After 2 decades of deregulation, US Major airlines now finally face
the reality that their cost structures are simply unsustainable in a
competitive environment
• Protection for new entrants has become moot:
– Southwest, JetBlue, RyanAir and EasyJet are among most
profitable airlines in the world, while legacy airlines declare
bankruptcy
– Government intervention to protect legacy airlines now a possibility
When Is Protection Warranted?
• Government intervention to “protect” airline services
might be warranted in limited cases:
– Sustainability of airlines and assurance of air services in
developing countries
– Where tourism-supported economies depend on air services
– Isolated or remote communities requiring air services for movement
of population and goods
– Under conditions of catastrophic national/global events or war
• Even in these situations, not clear that inefficient air
carriers should be supported or protected:
– Government regulations and (even worse) financial support
inevitably cause market distortions and inefficiencies
– In most situations, development of new services, by new airlines,
with more efficient operating models will ultimately fill any void
Sustainability, Not Protection of the Status Quo
• Very real need for sustainable air services must not
be used as an excuse to prolong inefficiency:
– Need for national flag carriers, fear of losing air services often cited
as reasons for government protection
– Yet, highly regulated national flag carriers have been among the
most poorly managed and least efficient airlines in the world
– Experiences throughout the world have demonstrated how open
market conditions ultimately lead to sustainability and efficiency
• A balance between effective safeguards and
unnecessary protection is required:
– Recognize that many essential air services can and will be provided
by more efficient carriers, given reduced regulatory constraints
– In nobody’s long-term interest to support and protect inefficient air
carriers – emphasis should be on sustainability AND efficiency