The global aviation industry was, up to the 1970th, generally characterized by a widely regulated market. This included, for example, the regulation of airline routes and their frequencies, ticket prices, etc., by governmental institutions. Due to the intervention of the government many stakeholders in the industry – airlines as well as airports – operated inefficiently and travelers faced high prices for air travel (Ehmer and Berster, 2000 1).
1. Airline market deregulation and its consequences
The first country to address theses market inefficiencies was the US, where the government decided to open up the airline market with the so called Airline Deregulation Act in 1978. From that date, the structure of the industry changed: seat capacities and routes could be set by the airlines according to market demand, new airlines were allowed to enter the market and prices could be reduced. All these tendencies implied competition between the airlines, resulting in higher benefits for their customers, not only in lower ticket prices but also in better services. Following this first movement in the US, other countries and the EU also set up mechanisms to reduce market barriers. Due to market deregulation, traffic growth accelerated in the following years and many new airlines, mainly Low Cost Carriers, entered the market. Due to their different business model which is based on reduced services and operational efficiency (e.g. fast turnaround times) they managed to achieve slim cost structures allowing them to stay profitable at significantly lower fares compared to the established carriers. (refer to Low-Cost Carriers for more details)
Legacy Carriers however, being in the market for many years and having huge overhead costs, faced a lot of pressure and were forced to change their internal business structure to remain competitive in the market. Another development due to the opening of flight routes was the development of the so called hub-and-spokes-system. The hub-and-spokes-system (refer to Hub-and-Spokes Operations for more details) requires high complexity costs due to the synchronization of the flights as well as the maintenance of different aircraft types on different routes. As a result, it is more costly than the easily structured point-to-point traffic Low Cost Carriers perform.
As a consequence, airlines are now trying to find market structures to keep the costs within a limit and therefore create alliances. Within these alliances airlines try to link their route networks to offer an even better connectivity all over the world. A very important fact can also be seen in the negotiating power airlines achieved against other stakeholders, like airports, in the industry by working closely together (Kenan-Flagler, 2004 2).
2. Liberalization of airports
Even though it might seem as if the deregulation of the aviation market only had positive impacts on the airlines, many of them however had difficulties to remain successful in the market, especially legacy carriers. Some of them, not being able to adapt to the necessary structural changes – most importantly cost reductions - even had to file for bankruptcy. To achieve an equal state within the sector only a short while after the deregulation of the airlines, the rest of the industry also became deregulated subsequently. Through the liberalization and privatization airlines particularly hoped for more competition between airports as well as between ground handling providers, resulting in decreasing aeronautical charges and a better service quality. This hope can be backed by the logic of market freedom, which implies that the market would “respond naturally and to the best advantage of all concerned if it is subject to minimal control” (Williams, 2006 4).
Until the late 1980s, most of the airports were under the management and/or ownership of the government, either local or national. The first airport privatization in the EU took place in the UK with the British Airport Authority being sold in an initial public offering of stock. Shortly after this first movement and driven by the objective of large incomes, many other countries followed this example and privatized their airport companies - in most cases very successfully (Sander, 2004 3).
Generally this aviation market liberalization had a huge impact on the business structures of all stakeholders involved in air transportation. Through the evolving competition they were and are under pressure to cut costs and find ways to increase revenues.
Want to know more?
- Airline Deregulation
- Wikipedia Page about Airline Deregulation in the US and Europe as well as its impact and problems
- Competition and Regulation in the Airline Industry
- FRBSF ECONOMIC LETTER, published by the Federal Reserve Bank of San Fancisco in 2002