Business Regulation in the Airline Industry - Example

Running head: BUSINESS REGULATION Business Regulation [Writer’s name] [Institution’s name Table of contents Introduction ………………………………………………………..3 Discussion …………………………………………………………3 Conclusion …………………………………………………………15 References………………………………………………………….17 Business Regulation Introduction The airline industry is an extremely competitive industry and since deregulation and the open skies agreement have become common in it, competition has increased. Oligopoly that existed due pre de-regulation has increased . The present paper highlights the above mentioned concept and also highlights which kind of liberty allows new entrants into the industry. The paper is based on the below given question: What impact has the dergulation of the airline industry and the open skies agreement has had in terms of both disbanding the oligopoly that existed pre de-regulation allowing low cost airlines to enter the market and take large market shares etc. Discussion Deregulation has become a common practice in the control of routes. America developed the practice of deregulation of the airline industry in 1978, after which Europe did the same in 1989 and then later on further implemented it in 1997. Nearly all of the Asian countries, excluding a few important and developed countries like Singapore, do not value this system and thus prefer not to implement it in their Airline industry (Bailey, 1992). Due to the deregulation by mutual consent a lot of governments have signed open skies agreements in order to attain complete freedom for their airline carriers to select their routes and number of flights to the other countries involved in the agreement. The deregulation caused the expansion of America’s domestic airline markets, several countries, in which UK, New Zealand, Chile, Canada and Australia, have deregulated or significantly given the domestic markets more freedom. Due to this liberalization the concept of deregulation and open skies agreements came into became a necessity for every country. This may be noted by the fact that open skies continental blocs were mostly are signed according to the existing trading blocs in North America and Europe. Even America and Canada signed the before mentioned agreement. While Australia and New Zealand too signed the open skies agreement inorder to further expand their air transport bloc(Belobaba , Odoni, Barnhart 2009). Due to the before mentioned signed agreements and increased of deregulation practices international airlines are continuously under great pressures. As deregulation and open skies agreements have become a common practice in the industry liberalization and continentalization are two important factors which caused well known airlines to follow the open skies agreement . However, it may also be noted that due to competition and recent recession the industry in question has suffered severe d intense widespread losses; this has led to various airlines’ restructuring to develop better productivity and reduce costs. A close analysis may conclude that this ruthless competition and effect of recession on the may have caused the airline to go through with the open skies agreement as it could control and deregulation process in a better manner. Even after the step towards the globalizing airline industry, the capability of a carrier to endure and flourish in extremely competitive markets eventually The open skies regulation also has caused Airline depends on its output and cost competitiveness cost differentials determined by differences in input prices and productive efficiency (Belobaba , Odoni, Barnhart 2009). Hence, awareness regarding the current levels and sources of cost differentials is quite important inorder to assess public policies and strategies which are planned to improve airline competitive positions in a manner which may result in severe implications for the organization of international aviation . The before mentioned symbiotic relationship may be noted more clearly obvious when the effect of open skies regulation is evaluated in a manner which proved the fact that airline alliances have increased due this policy . A unique characteristic of the present regulation and deregulation process is that it has caused top notch airlines to form stable relationships .the partnerships is not just done for growth purposes but it is a strategy to cop with the open skies regulation and increase of deregulation in the industry . In pervious years customers of airlines which were in a partnership was more then those who had no mergers , mostly because transatlantic flights joined the world’s two major domestic air transport industry that may mean approximately more then half of the global air traffic has been effected by the deregulation which has risen in the industry due to before mentioned regulation ((Belobaba , Odoni, Barnhart 2009). It is thus reasonable that the authorities and the airlines both greatly valued the open skies regulation as it has increased their growth. As the deregulation increase in an industry which competition is at it’s height, the airline industry turned into an extremely concentrated market. Similar to the consolidation trend which had an effect on many airlines, new low-cost as well as value-based airlines in the industry due to deregulation has space to enter the market. The growth of hub-and-spoke networks, the developments in technology, the development of common flyer propositions and the part of computer reservation systems played an important part in the increase of alliances in the industry. Even though such practices in the industry have reached it’s peak , the United states and European airlines are searching for methods to obtain government support in either strengthening their position in the domestic markets so that the entry of new competitors become comparatively slow due ‘open skies’ agreements, thus they require new open skies regulation to prevent this (Shaw, 2011). They have used the open skies agreements in the past to create alliances this was clearly done by the support of the government. It may noted that open skies regulation gave way to new and important airlines to introduce themselves in the international expansion, they came up in opposition to the controlled international bilateral system of traffic rights, this has always proved to be a hindrance for new airlines entering the market(Hamilton , 2011) . Only noninterventionist ASAs offering full market entrée without limitations on designation, route rights, aptitude, number of flights , codes haring and duty among the countries involved in is what have given space to new players to become more aggressively competitive in the international market by flying to new markets. Previously this is what made united states request the government for ‘open skies’. This helps in providing access to each and every route among the involved countries, by eliminating all limitations and designation, competence, tariff and frequency, in the meantime sustaining the ownership rule restrictions The above mentioned ‘open skies’ agreements, nevertheless, require the airlines selected by every of the states or country in the joint agreement to be ‘substantially owned’ as well as ‘efficiently controlled’ via nationals of the selected state or country . If the past is considered then it’s importance may noted in the fact that, In 1984 the America started to renegotiate joint agreements . where as in the same time period the Netherlands and the united Kingdom went forth to deregulate the air transportation services among their air routes by implementing bilateral agreement like the open skies , this seemed to be the first step in direction of the international use of deregulation and thus, it opened he door for entry of new competitors (Hamilton, 2011) . This was due to the fact that this giant leap may have caused the open skies agreement to be used commonly. It may also be noted that because of the united sates signing several on skies agreement with various airlines and countries and the industry more open to new competitors. The after effect of those agreements still seem to have an effect on the airline industry, as even today new competitors find routes of entry into the airline industry quite easily however, many views state that open skies agreements is only a more reformed and les strict type of Chicago regime bilateral agreement, highlighting the fact that it even now limits competition on routes among the signatory states to airlines ‘ mostly owned and efficiently controlled’ via nationals the countries involved in the agreement and prohibit services via foreign airlines in domestic markets yet after complete deregulation, EU airlines are functioning under a regulatory system which has 2 parts - the first one is major flights in the European Aviation Area, the second one is the major international aviation out of the EU, where scrupulous tests of nationality may till now be considered as being important (Smith &Cox 2007) . Present negotiations among the European Union and America about the Trans-Atlantic Common Aviation Area (TCAA) may introduce drastic changes in the industry, moreover through deregulation and usage of the open skies agreement the two biggest air transport markets opened the skies for competition of other airlines as well. Their mergers, acquisitions or takeovers became a common and possible consideration on an intra-continental level ( Hamilton, 2011). The present regulatory structure on airline alliances and international management of regulations regarding the before mentioned agreement is mostly b provides countries with an opportunity to liberalize their airline industry. However it also may be noted that such agreements may also restrict competition on factors like the frequency of flights, the number and uniqueness of the airplanes and airports that can be provided. It may also be noted that the “open skies” agreements introduced by united states also consists of provisions which limit the degree of competition. All agreements have to fulfill the required relevant regulations with the partner airlines’ host country. For instance, alliances among airlines which are functioning in the Atlantic must abide by the competition regulation of the European Commission and the United sates(Smith &Cox 2007) .The problem here may be that two or more competition authorities may very well arrive at contradictory or illogical decision. Here one must note that the open competition due to the open skies agreement has caused major confusion for many airlines, this not only effects the industry’s growth but also the development of the airlines itself, open competition due to deregulation could always prove to be negative. An example associated with the one given above may be noted here, that many countries thought that if deregulation and opens skies agreement was successful in America then why couldn’t it be successful all over the world ? . Here it may be noted that competition had become so aggressive it that caused 3 major airlines i.e. Eastern, TWA, and Pan Am to suffer heavy losses , this may be due to the fact that the deregulation and open skies agreement resulted in higher load factors along with more flights between important hub. As per the aviation body, the fact that deregulation and opens skies agreement was introduced it reduced unnecessary regulation which made increased the variety of destinations for tourists (Shaw, 2011). It also concluded that there was ample growth in the industry the airline industry increased 225% growth and this growth was more then the experienced growth in the previous years. It even experienced an increase in fares in 2000 due to the agreement in question (Smith &Cox 2007) . This remarkable change was indubitably caused by deregulation as well. It even permitted air carriers to provide passengers more quality service at reasonable prices . It may also be noted that along with providing ample space for entry for new airlines , the agreement also has helped to introduce new marketing strategies and the low-cost airline model which almost all airlines are currently implementing . many well known countries have used the open skies agreement to become leading competitors in the industry , by liberalizing their domestic airline systems this has helped them to benefit from deregulation. The agreement even helps in increases traffic hike and decreasing costs of the industry, Thus, it may be noted that deregulation and the open skies agreement leads to liberalization of the industry permitting competitors to enter yet it brings about a positive change (Shaw, 2011). However it may be noted that (Dennis 2007) the agreements according to The network strength is largely maintained, however, which appears a better strategy than setting up a low-cost subsidiary. According to Barret (1995) factors which contributed to the greater success of this deregulation than on US internal routes or Anglo-Dutch routes are as follows: market stagnation before deregulation, weak competition from sea carriers, the lack of charter airlines, the large ethnic Irish population in Britain, a change in fashion away from sun tourist destinations, market exit by British Airways the availability of low cost labour to the main new market entrant due to high unemployment in Ireland An open skies agreement permits entry to each and every route between the United States of America and the European Country; this offers the greatest probable level of freedom in pricing; disallows limitations on the capability and regularity of flights on these routes, and permits unlimited route and traffic rights, for example an airline's capacity to provide intermediate destinations and points of the countries which are involved in agreement, to alter the size of airplane used, to provide "co-terminal" airports, and to implement fifth freedom rights." (Doganis , 2010). However it may even be noted that competition in a fully-liberalized air transportation setting may make small carriers face huge losses due to scarcity of resources . it can be predicted that prevailing alliances under the open skies agreement will control the market by either dipping prices or dominating the routes which smaller carriers have a hard time controlling or operating on . However this may also be seen on a positive point of view, as it may be noted that competition stimulates growth. This argument in question highlights the fact that there is no reason to be concerned as passengers, trade and competence will increase with or without the small airlines . By the above discussion it may be noted that there are clear and different advantages of the open skies agreement in the airline industry. These not only highlight economic regulation but also the regulation of flight route expansion. Even though the consequential market planning, regardless of the fact that changes have been the most sophisticated, do not completely support economists’ philosophy of perfect competition, they may be based on the concept of high degree of workable competition. The current industry may possibly have a few imperfections; however the speculative benefits of eliminating those imperfections by means regulation do not validate the improved managerial and other expenses that may be implanted due to new regulations. According Dobruzkes. (2006) to the geography of low-cost networks is to a large extent the geography of EU air transport liberalization. The open skies agreement provided have competition as it offered a number of freedoms to the industry. They are as follows: 1st freedom The first one gives complete right of a carrier to fly over another country without landing there. This means that if an airlines requires a certain air space to cross over to it’s destination it may use the air space of the country with which it has signed the open skies agreement . In this manner new airlines can venture different destinations and even reduce their air fares (Smith &Cox 2007). 2nd freedom Another extremely important freedom provided by the open skies agreement is that an airline of a country has the permission to land on the airport of the country due to non traffic reasons . The airport must be of the country it has signed the agreement with. In this manner fueling and maintenance becomes easy for even new airlines as they can stop over while on enroute to their destination. It makes it easy for new airlines to reach offer new destination packages at low fares to their customers. 3rd freedom Airlines of one country have no restrictions regarding taking traffic from its country to another country . in this manner new airlines can easily increase the frequency of flights as well as the number of customers they cater to . The open skies agreement gives them ample space to capture a strong clientele in the airline industry . 4th freedom The open skies agreement provides airlines with the right to carry traffic from their country of registry to different countries. This kind of freedom helps the airlines to enter in the airline industry of an other country as well (Doganis , 2010). In this manner completion in the airline industry of both countries, the one it is registered in and the one to which it is carrying the traffic become resourceful for the airline. 5th freedom The airline not only has the right to carry traffic to other countries but also has the right to terminate their flights in other countries as well. The open skies agreement assures that airlines have the opportunity to avail this freedom to the fullest and thus airlines become competitors of even the most well known foreign airlines. This is due to the fact that they can increase the frequency of flights in a certain country where their competitors has few flights. 6th freedom The open skies agreement even gives airlines the leverage to carry traffic between two foreign countries through its host country. Here one may note that airlines can easily use their own country to attract foreign clientele as well (Stevenson 1995). Using this leverage the flights from their host country to may carry foreign clientele to their desired destination. 7th freedom The open skies agreement also provides airline with an opportunity to operate stand-alone services, completely outside of the area of its home state, to take customers between two foreign states. Here too one may note that new competitors can easily enter the foreign airline industry due to this leverage given by the open skies agreement. According to Balfour (1994) there is certainly scope for confidence that the gradual approach taken by the Community, accompanied by a degree of regulation, will be successful, and may be exported more internationally. Conclusion It is possible that the ‘open skies’ agreement may even result in positive outcomes for the aviation industry. although this is a prelude agreement and many hidden problems need to be addressed, it provides the possibility to liberalize the transatlantic market. As per the before discussion , deregulation has positive outcomes on a market. It makes the members to work more professionally or face the negative out come of being over come by new entrants. Customers benefit from low price offers, better choice and an overall better service. but with the recession at it’s height all over the world currently , it is hard to completely assume the exact effect this agreement will have. Regardless of these issues it is the likely for competition that is very important for the resourceful operation of any industry . The ‘open skies’ agreement will put down the fundamentals for the future of the whole aviation industry. Main goal of airline deregulation was to enhance competition among airlines, which could result in price decreases. Over all inflation-adjusted airlines fares seemed to have slowly shown a down wards trend since deregulation, open skies agreement and many new airlines decreased the frequency of their flights to different destinations. in addition, the barrier to entry into the airlines industry for a promising new airline lessened to quite significantly, due which a lot of new airlines entering the industry were ready to do so and this increased the competition. on the other hand, a lot of airlines reacted to deregulation with frequent-flier programs along with the utilizing a hub-and-spoke system which led to fortress hubs in which one airline is dominant and may have a tendency to have more control on ticket prices of the hub where it is dominant . this growth might decrease competition among airlines, as it permits a certain airline to have more control on air fares at its hubs and to provide motivation for consumers to remain loyal one airline and not to keep switching airlines due to their airfare . it also may be noted that a number of airlines underwent alliances so that they could expand their routes , this too lessened the competition amongst airlines. One such alliance is the open skies agreement which has been mentioned throughout the paper. References Barret, S. D. (1997) The implications of the Ireland-UK airline deregulation for an EU internal market, Journal of Air Transport Management, Vol.3, Issue. 2, pp.67-73 Balfour. J. (1994) The changing role of regulation in European air transport liberalization, Journal of Air Transport Management, Vol.1, Issue.1, pp. 27-36 Belobaba Peter , Odoni Amedeo, Barnhart Cynthia (2009), The Global Airline Industry (Aerospace Series) Wiley; 1 edition Dennis. N. (2007) End of the free lunch? The responses of traditional  European airlines to low-cost carrier threat, Journal of Air Transport Management, Vol.13, Issue.5, pp.311 -321 Dobruzkes. F. (2006) An analysis of European low-cost airlines and their networks, Journal of Transport Geography, Vol.14, Issue.4, pp.249-264 Doganis Rigas (2010), Flying Off Course IV: Airline economics and marketing Routledge; 4 edition Hamilton Scott (2011), Practical Aviation Law Aviation Supplies & Academics, Inc.; Fifth edition editio Hamilton Scott (2011), Practical Aviation Law Workbook Aviation Supplies & Academics, Inc.; Fifth edition edition Poole, R. W. Jr., Butler V., (1999), Airline Deregulation: The Unfinished Revolution, Regulation, vol. 22, no. 1, Spring 1999, pp. 8., Smith Jr F. L., Cox B (2007)., Airline Deregulation, The Concise Encyclopedia of Economics, Liberty Fund Inc, 2. Edition, Shaw Stephen (2011), Airline Marketing and Management Ashgate; 7 edition Read More