As Singapore-based low-cost carrier Tiger Airways prepares to enter the Australian domestic market, the US General Accounting Office is set to once again report to the US Congress on the state of the US airline system.
As Singapore-based low-cost carrier Tiger Airways prepares to enter the Australian domestic market, the US General Accounting Office is set to once again report to the US Congress on the state of the US airline system.
As it has always done since deregulation in 1978, it will report that passenger numbers have gone up and fares have come down, so deregulation is a success.
Wrong, wrong, wrong.
The reality is that passenger numbers have always gone up and fares have always come down – thanks to massive advances in engine and aircraft technology – in the US and across the globe, regardless of deregulation.
In fact, competition has very little to do with the downward spiral of airfares.
The debate on the success or otherwise of deregulation will rage as long as there are economists and universities. Each paper written by an expert builds a compelling case for its success or failure based on numbers from a certain point in time.
Deregulation started in the US in 1978 after the incumbent regulator the Civil Aeronautics Board (CAB) stymied any sort of competition or route development.
In one classic case that underscored the problem, World Airways, a charter airline, applied in 1967 to fly a scheduled service between New York and Los Angeles at discount prices. The CAB “examined the case” for six years and finally dismissed the application. But even if you were a member of the so-called cozy club of incumbent airlines, gaining CAB approval for a new route was difficult.
One of the best examples of this was Continental Airlines, which had to wait an incredible eight years just to add San Diego-Denver to its network and only gained that after the US Court of Appeals instructed the CAB to grant the authority.
Capturing the public’s and government’s notice were small regional airlines such as Southwest, which were not under the control of the CAB because they flew within the state boundaries of Texas and were charging much lower fares and were flying full aircraft.
But total deregulation – later embraced for Australia in 1990 – was a savage change.
The Carter administration deregulated the airline system in 1978 and gave airlines the freedom to raise and lower fares, and to enter and leave markets at will. The results – as they were in Australia – were as dramatic as they were significant.
Many airlines collapsed, fares were slashed in the short term, new airlines entered the market – and failed – and tens of thousands of airline employees lost their jobs.
In the 1990s, media and regulators lauded deregulation, citing the fact that in the 20 years since it was introduced, airfares had dropped 40 per cent in real terms while the number of flights had increased by 50 per cent and passenger numbers soared from 275 million to 581 million.
However, those numbers simply reflected the trend that was in place before deregulation and was continuing despite deregulation. In fact, technology was the major factor responsible for driving airfares down.
Regardless of the arguments for and against deregulation, the facts are indisputable.
There is no question that airfares have come down since 1979 in the US, and that air travel has boomed. But this is true also for the rest of the world where most markets have not been deregulated, although many have been liberalised.
The downward trend in airfares since deregulation in the US is no different from that experienced before deregulation.
Deregulation has not increased the already established growth in passenger numbers.
In the US, more than 1,000 airlines – large and small – have failed or merged since deregulation was introduced.
In Australia, total deregulation has been a disaster, with Compass 1 Compass 11, Impulse Airlines, East West Airlines and Ansett and its subsidiaries all collapsing.
Certainly the cozy two-airline system needed to be freed up, but never deregulated.
There are some sobering points that need to be understood about the airline system.
Unless airlines are profitable they cannot invest in the latest aircraft, such as Boeing 787s that bring genuine and sustainable reductions in airfares
If you have too many airlines competing you cannot get economies of scale for larger, more economical aircraft or more non-stop flights, which both bring fares down. An excellent example of the latter is the Perth-to-Canberra service, which Qantas launched after the demise of Ansett.
One of the major drivers of airfares, particularly to holiday destinations, is what is termed destination competition, whereby the major driver of fares for Broome is competition from Carins, Bali and Phuket.
