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Essays on Economic Environment Pre And Post Deregulation Of The US Airline Industry And Suggestions For Future Thesis

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Introduction The airline industry remains a large and growing industry to date. This industry has enabled and can be identified with economic growth, trade, investment and tourism on a global level. The airline industry is therefore key to the globalization process. Between 1990 and 1999, air travel was speculated to have grown at the rate of 7% per annum (Morrison & Clifford, 1995). The rate of travel worldwide both for the purposes of business and leisure steadily increased. In the leisure industry, the existence of huge aircraft such as the Boeing 747 has facilitated convenience at cheaper and affordable costs thereby enabling individuals to travel to exotic new destinations.

Economic growth in developing countries is influencing citizens to tour the globe. Currently these citizens are deemed as the new future global tourists. The rate of business travel has also increased as more and more firms are taking a global approach both in terms of their operations and investments. The rapid increase in international trade of goods and services and direct investment on a global scale has played a significant role in increasing the rate of business travel.

The International Air Transport Association (IATA), projects that air travel will increase at the rate of 6.6% per annum on average between 2000 and 2010. Slower growth is projected in regions where the airline industry is highly developed such as Europe and North America, the growth is anticipated at between 4-6 percent per annum. The most vibrant growth is centred in the Asia and Pacific region where investment and trade co by coupled by domestic prosperity are rapidly increasing. The rate of growth in the Asia region is projected to be at 9 percent per annum and is anticipated to continually increase (Boyd, 2008).

BackgroundIn the1920s airlines were focused on carrying mail. In 1925, Ford Motor Company started the first American airliner. Its capacity was 12 passengers. Juan Trippe linked America to rest of the world with Pan Am. World War I and II brought about significant advancements in aviation technology and planes were made to carry more load and go faster. This brought about increased efficiency from both superior speed and greater payload.

The Boeing 747 made its appearance in the 1970s and this further enhanced capacity of the airlines and popularity of air travel. The deregulation done in 1978 was aimed at reducing the bureaucratic grip on factors such as pricing and scheduling and onto a more market-based solution. There have been wide debates as to whether deregulation was good or not (Morrison & Clifford, 1995). It depends on which perspective one sees it from. One thing is for sure is that air travel customers have been the biggest winners over the last few decades because of fierce competition in price and service among the many airlines that came about.

A weak economy, high fuel prices, a recent mergers and safety issues, brought about new debate with respect to airlines. The profitability of the airline industry is closely connected to trade and economic growth. The industry experienced setbacks in the mid 90s due to economic recession and the Gulf War, and for the first time in 1991, the total number of air passengers worldwide, plunged. The financial problems were intensified by excessive purchases of aircraft by airlines in the boom years.

Airlines affiliated to the International Air Transport Association incurred cumulative net losses of 20.4 billion dollars between the years of 1990 to 1994 (Jonas, 2010). From this period onwards, airlines realised the need for drastic changes as a measure to ensure their survival and success in the industry. Some of the drastic changes that these airlines considered took the form of aggressive cost-cutting, increasing load factors, and reducing growth capacity. Implementation of these measures saw the return of profitability in the airline industry.

However, in 1996, airlines affiliated to the International Air Transport Association had cumulative net profits of 5 billion dollars 2 percent less of the total revenues. This level of profit was beneath what the IATA considered necessary for airlines to build reserves, trim down debts and maintain investment levels. Incidentally, many airlines did not make profits. It is on these grounds that airlines have been forced to change their approach through heavy investment in terms of the quality of services that they offer to their customers both in the air and on ground.

These investments took the form of product enhancements as a measure of attracting and retaining clients, these measures include: ticket free air travels, new entertainment systems that are interactive, comfort and so on. (McCabe, 2006)

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