The good,the bad,and the ugly: 30 years of US airline deregulation

The US airline industry was deregulated in 1978 and has undergone significant changes in industry structure, profitability, employment, passenger volume, and patterns of service and fares, among other characteristics. This paper sets out to make three contributions to the literature as related to the story of airline deregulation. First, discussion of economic theory will provide the context for an updated overview of the positive, negative, and really negative results of US airline deregulation, summarized in the form of “the good”, “the bad”, and “the ugly”. Second, this paper provides a periodization of the 30-year history of US airline deregulation that is important in understanding the cycles of change as reflected in the industry’s financial performance and other relevant data. Third, this paper contributes to the renewed debate about the efficacy of deregulation and liberalization policies, particularly at a time when the global financial crisis has cast a harsh spotlight on the (un)desirability of these policies. Some of the good results during the 30 years of airline deregulation, from the industry and consumer perspective, include higher passenger volumes, more service to the most popular destinations, and lower fares on average. Bad results include financial and employment instability, diminution in the quality of airline service overall, and fewer flights and higher fares to smaller places. The recent 2000–2005 period has been particularly ugly, as the airline industry has lost over $30 billion, and several high-profile carriers, such as United, Delta, Northwest, and US Airways, were forced into bankruptcy.     

What determines the effectiveness of barriers to entry in liberalised airline markets?

Hypotheses are derived concerning the effectiveness of entry barriers in deterring route entry in liberalised airline markets. Survey data are used to reflect the perception of airline managers in Australia/New Zealand, Canada, the European Union (EU) and the US. We find that industry conditions, and an entrant's objectives, characteristics and strategies influence the effectiveness of entry conditions in hindering entry. The results suggest that effectiveness is a function of the perceived height of the barrier, the perceived ability of the entrant to overcome it, and the reward expected from entry.     

The emergence and effects of the ultra-low cost carrier (ULCC) business model in the U.S. airline industry

The effects of “low cost carriers” (LCCs) such as Southwest Airlines and JetBlue Airways on the competitive landscape of the U.S. airline industry have been thoroughly documented in the academic literature and the popular press. However, the more recent emergence of another distinct airline business model—the “ultra low cost carrier” (ULCC)—has received considerably less attention. By focusing on cost efficiencies and unbundled service offerings, the ULCCs have been able to undercut the fares of both traditional network and low-cost carriers in the markets they serve.In this paper, we conduct an analysis of ULCCs in the U.S. aviation industry and demonstrate how these carriers' business models, costs, and effects on air transportation markets differ from those of the traditional LCCs. We first describe the factors that have enabled ULCCs to achieve a cost advantage over traditional LCCs and network legacy carriers. Then, using econometric models, we examine the effects of ULCC and LCC presence, entry, and exit on base airfares in 3,004 U.S. air transportation markets from 2010 to 2015. We find that in 2015, ULCC presence in a market was associated with market base fares 21% lower than average, as compared to an 8% average reduction for LCC presence. We also find that while ULCC and LCC entry both result in a 14% average reduction in fares one year after entry, ULCCs are three times as likely to abandon a market within two years of entry than are the LCCs. The results suggest that the ULCCs represent a distinct business model from traditional LCCs and that as the ULCCs grow, they will continue to play a unique and increasingly important role in the U.S. airline industry.     

The U.S. Airways Group: A post-merger analysis

America West Airlines acquired the bankrupt US Airways on September 27, 2005 to form the US Airways Group, improving its competitive position in the US airline industry. This paper analyzes the post-merger performance of the US Airways Group using airline operating metrics and financial ratios for the period 2005 to 2013. While the airline has still a long way to go to improve its leverage and liquidity ratios, its capital structure and ability to pay its obligations have improved since 2005. Moreover, although the airline is still inefficient in utilizing its assets, the efficiency improvements achieved since the merger have resulted in profits and positive returns to investors. Its share prices have also largely outperformed the S&P 500 and the XAL since the merger, an indication that investors are pleased with how the merger is developing over time. In view of the US Airways Group's improving financial and operating performance, the merger is, essentially, a success.     

The impact of low cost airline entry on competition, network expansion, and stock valuations

We conduct event studies and statistical analysis to explore the impact of low cost carriers’ entry on legacy airline stock prices. Oligopoly structures, entry barriers, and high fixed costs make the airline industry highly susceptible to competitive and network expansion impact of low cost airlines’ entry. Positive stock returns are observed, which we interpret as the spillover effects of network expansion. Thus, rising passenger traffic and improved connectivity increase the revenues of legacy airlines to sufficiently offset the low cost carriers’ competitive threats.     

Multi-period efficiency and productivity changes in US domestic airlines

This study tracked the static efficiency and dynamic productivity changes of 14 US airlines from 2006 to 2015. Moreover, we estimated the principal economic drivers of the environmental variables to increase the US domestic airlines' efficiency using the double bootstrap regression analysis. The major aspects of this study are as follows: First, network legacy carriers have the highest efficiency, whereas low-cost carriers are lowest. Nonetheless, network legacy carriers still have room to improve scale inefficiency. Second, the fluctuations in technical change, rather than in efficiency change, tended to have greater effect on the fluctuation of Malmquist productivity index for US domestic airlines. Third, M&A between US airlines have both positive and negative effects in terms of efficiency and economies of scale. Fourth, cost environmental factors have a negative effect on US airlines' efficiency, while revenue factor is a positive effect. The results of this study may help US airline industry practitioners to understand the US domestic airline environment from an operator's perspective.     

The demand for US air transport service: a chaos and nonlinearity investigation

This paper examines the behavior of the US airline industry's service demand. Monthly aggregate data for the industry are analyzed. While we find strong evidence of nonlinear dependence in the air transport service time series, the evidence is not consistent with chaos. We also show that GARCH models successfully explain the nonlinear structures in the US airline industry's service series. Finally, within-sample forecasts of air transport demand from the GARCH models outperform those of simple autoregressive models.     

The spatial and temporal dimensions of the interdependence between the airline industry and the Chinese economy

The airline industry contributes largely to the economic development of a region. At the same time, the fortunes of the industry can also be affected by regional economic change. This paper uses geographically weighted correlation analysis to investigate the spatial heterogeneity and temporal change of this interdependence as seen in China over the years from 2005 to 2016. The results show that the interdependence between the airline industry and provincial economies is non-stationary, generally with a spatial variation along the east-west axis across China's provinces. Further, the temporal change in the interdependence was affected by specific economic changes, such as the global crisis of 2008, when it weakened. Specifically, air passenger activities in the eastern provinces were more sensitive to some economic changes of 2012, while air freight activities in the western and central provinces were more sensitive to the global economic crisis of 2008. The size of urban agglomeration and regional GDP also influence the spatial heterogeneity of this interdependence with weaker links as GDP increases. It is possible that liberalization of the airline industry could enhance the interdependence in advanced regions. Thus, our results provide significant policy implications for a joint focus on the development of the regional economy and the airline industry.     

Investigating the effects of economies of scope on firms’ pricing behavior: Empirical evidence from the US domestic airline industry

This study investigates to what extent cross-product (belly cargo) output affects (passenger ticket) prices in the US domestic airline industry. The empirical analysis indicates that greater cargo volumes generally result in lower air fares, presumably as a result of the airlines’ realization of economies of scope. This magnitude of this price effect, however, depends on certain firm and route market characteristics. The findings of this study add to extant research on economies of scope, multi-product yield management and airline pricing and provide important insights for policy makers and airline managers alike.     

Economies of scale in the US airline industry after deregulation: a Fourier series approximation

This paper analyzes the cost structure of the US airline industry after deregulation, finding that there exist economies of scale at moderate levels of output but that they die off at high levels. The cost–share system is estimated using the Fourier functional form. The global approximation property of the Fourier form allows consistent inference throughout the range of the data. The existence of economies of scale suggests that airlines will try to grow to the efficient size. This conclusion is consistent with the evolution of the US airline industry in the last decade.     

Technical efficiency of mainstream airlines and low-cost carriers: New evidence using bootstrap data envelopment analysis truncated regression

Between 2001 and 2005, the US airline industry faced financial turmoil while the European airline industry entered a period of substantive deregulation. Consequently, this opened up opportunities for low-cost carriers to become more competitive in the market. To assess airline performance and identify the sources of efficiency in the immediate aftermath of these events, we employ a bootstrap data envelopment analysis truncated regression approach. The results suggest that at the time the mainstream airlines needed to significantly reorganize and rescale their operations to remain competitive. In the second-stage analysis, the results indicate that private ownership, status as a low-cost carrier, and improvements in weight load contributed to better organizational efficiency.     

Clustered airline flight scheduling: Evidence from airline deregulation in Korea

This paper explores the impacts of competition level on airline scheduling in the Korean domestic short-haul routes where a hub-and-spoke system is not the optimal air transport network strategy. The empirical findings using the Korean airline panel data for the period 2006–2010 suggest that competition leads to less differentiated departure flight times as expected from spatial competition theory. Unlike the previous study on the U.S airline industry, the degree of this tendency for less differentiation differs across the type of routes: the Jeju island routes (leisure type) and the inland routes (business type), in the deregulated period. Following the May 2008 Deregulation Act we find an increasingly clustered pattern of airline scheduling in the Jeju island routes where there have been competitive pressures associated with new low cost entrants. This recent evidence would imply that airline carriers strategically schedule departure flight times and allocate flights between routes as competition increases in the deregulated period.     

The impact of airline financial distress on US air fares: A contingency approach

This article investigates to what extent an airline’s financial distress impacts its pricing behavior. While prior research suggests that, on average, distressed airlines sell at lower fares, it is hypothesized that the magnitude of this effect may depend on certain firm and market specific contingencies. A large-scale empirical analysis using panel data from the US airline industry is conducted. The results indicate that firm financial distress and air fares are generally negatively related. It is further shown that the magnitude of the effect of distress on fares decreases with the magnitude of operating costs and firm’s market shares and increases with firm size and the level of market concentration. Implications for policy makers and managers are discussed.     

The application of a neural network approach to predicting bankruptcy risks facing the major US air carriers: 1979–1996

Airline bankruptcy, an unheard of event prior to the deregulation of the US airline industry, has become rather commonplace. Over 123 air carriers have filed receivership since 1982, and several large carriers have sought court protection more than once in the past decade. In spite of record airline profits over the past two years, the financial condition of many carriers still remains fragile. The huge financing requirements of the industry over the next decade, driven by the carriers’ need to replace aging fleets of aircraft, will create further stress for many. The ability to assess the level of this financial stress is important to many groups, including stockholders, bondholders, other creditors, financial analysts, governmental regulatory bodies, and the general public. For this reason, models that can forecast financial distress are useful. Building on prior research by several of the authors, who utilized multiple discriminant models driven by financial ratios, a neural network approach is employed to increase the reliability of the forecasts. In this paper, a neural net is trained with the result that it successfully classifies 26 out of 26 carriers in the holdout (test) set.     

Reputation,search cost,and airfares

As cost of search for consumers decreases with the spread of the internet; researchers question whether this trend will lead to lower price or higher product differentiation. This paper examines a sample of offered fares to see if an airline choosing not to distribute its tickets via a channel where competitors' offers are directly observable may attempt taking advantage of potential customers. We find this to be the case. Our study suggests that the US airline industry appears to be evolving toward more product differentiation in the internet age.     

Evaluation of US legacy airline distribution strategies

Seventeen years of operational data is used to explore the relationship between efficiency and distribution strategies. Despite perceivable market power possessed by the strongest players in an oligopoly industry, the end results reveal that US legacy airline distribution strategies negatively impacted their performance and did not improve operational efficiency.     

Effect of airline choice and temporality on flight delays

The civil aviation industry is critical to the economic development of any nation. Being a key infrastructure service, the performance of the civil aviation industry spills over to other segments of the economy. We investigate service failure among US airlines, using departure delay, and model its likelihood using mixed-logit regression. We characterize arrival performance for delayed departures using a service recovery/double deviation framework. We model the likelihood of different arrival possibilities using multinomial logistic regression. We use the chosen airline, temporality, and flight duration as predictors. Our key results include: (i) Afternoon/evening flights, and longer duration flights are more likely to depart late; (ii) Delta Airlines is most likely to depart on time; (iii) Southwest Airlines is best in recovering from delayed departures; (iv) United Airlines is most likely to aggravate delays.     

Does the theory of the ‘core’ explain why airlines fail to cover their long-run costs of capital?

The major air transport markets at the early part of the 21st century are failing to generate sufficient revenues to cover their long-run costs. Many airline are being supported by subsidies, going out of business (e.g. Sabena, Ansett, Canadian International, Swissair) or having to resort to various forms of financial restructuring such as afforded by Chapter 11 bankruptcy laws in the US (US Airways, Midway, National). The effects of the terrorist attacks of September 2001 have exacerbated this situation, but the data suggests the problem be more deep routed in the ‘deregulated’ markets that now exist in many parts of the world. This paper concerns itself with the issue of whether there are intrinsic features of the scheduled network airline industry that makes the current structure of liberalized markets unsustainable. It highlights on a number of features of this market but pays particular attention to the question of whether the market is naturally prone to excesses in competition that, because of its nature, forces airline fares down to the level where full costs cannot be recovered. It focuses in this sense on a long established concept in economics, namely does a core exist in this market. The fact that there is prima face evidence to suggest that the core is empty then leads to a discussion of appropriate policy reactions that may allow a more sustainable market structure to survive.     

Disability-accessibility of airlines’ Web sites for US reservations online

With the number of disabled travelers continuously increasing, the airline industry is faced with the challenges associated with making online reservations accessible to the disabled. In this paper, we investigate the disability-accessibility of the online reservations systems of commercial US airline carriers, as well as, those of foreign carriers that fly to/from the US.     

Airline hubs in Southeast Asia: national economic development and nodal accessibility

For developing countries, integration into the international airline industry is an important prerequisite to access global flows of money, goods, people, and information. This research examines how patterns of international air transport accessibility changed in Southeast Asia over the period 1979–1997. Particular attention is given to the competition between the major hubs of the region. The paper argues that national governments have used a variety of tools, including airline industry liberalization and airport development, to shape the development of air transport networks. The results of these strategies are assessed using network analysis.