By Dr. Nina Natoli
Fulltime Faculty, Transportation & Logistics at American Public University
Should the government keep inefficient airlines afloat? Warren Buffet once alluded that if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. From its inception the airline industry grew through government support and regulation. At the time when the Civil Aeronautics Board (CAB) was established in 1940, the airline passenger industry ranked second in profitability to the federal airmail business. Larger airlines at the time wanted assurances that their passenger business would not be taken away from them by indiscriminate competition. CAB’s mission was to provide permanent operating franchises to the airlines and to establish regulatory pricing. Even after CAB introduced airfare regulations designed to keep the airline industry healthy, the greatest revenue continued to come from airmail contracts.
Opponents to airline regulation believed that the industry was so heavily regulated that they could not earn a normal rate of return on their investment. For example, allowing airlines to choose routes their leadership feels would be profitable. Also, not allowing domestic airlines to fly international routes; restricting interstate travel to only the four big carriers. Unregulated airlines operating in intrastate markets had markedly lower fares and high passenger load factors. CAB was accused of maintaining profitability for its few certified airlines. Conversely, international airlines and unions opposed deregulation in fear of international competition, which consisted of heavily subsidized airlines. CAB authority was transitioned to the newly formed Federal Aviation Authority in 1958 and the debate about airline subsidization remains strong today.
Strict federal controls over airline pricing, routes and entries to market were relaxed with Jimmy Carter’s signing of the Airline Deregulation Act of 1978. Senator Ted Kennedy argued favorably that the bill was not designed for smaller or bigger government, but for better government, and deregulation of the airlines was better government. With the disbanding of CAB, airlines inaugurated new routes. Competition among the airlines escalated, resulting in lower fares. Deregulation brought on so many airline start-ups that it became difficult to remain competitive by creating a new generation of low-cost carriers. Airlines operating under the CAB were not able to adjust to free competition markets before they had to compete with the low-cost carriers. Often low-cost carriers were not unionized and paid lower wages. Low-cost carriers often focused on airports charging lower fees. Overexpansion along with lower fares, rising fuel costs, and an economic recession negatively impacted the airlines. Passengers did benefit financially from lower prices—while many travelers still pine for the romanticized notion of the better service associated with the Golden Age of Flight.
By nature of the complex airline industry some regulations are needed to enhance safety standards and to maintain optimal traffic control systems (e.g., NextGen). But, is it possible that re-regulation can guarantee that an airline will be successful? My answer is that we’re not asking the right question in the first place. It is not a simple matter of regulating or not regulating the industry, but rather it’s about creating better direction. With over 7,000 aircrafts crowding U.S. skies on any given day and an economy dependent on an expanding air transportation system, we need experienced and visionary leadership in order for airlines to be profitable. Senator Kennedy was on the right track in 1978, but along with better government, we should also expect better leadership.
About the Author:
Due to her passion for the aviation industry Dr. Natoli pursued a doctoral degree in Organizational Leadership focusing on the airline industry. Her dissertation entitled, ‘A Study of the Relationship between Executive Leadership Behaviors and Airline Profitability,’ revealed insightful strategies for improving airline senior leadership. Dr. Natoli brings 16 years’ expertise in the airline industry and in organizational management to APUS. She understands corporate mergers and coordinating regulations between unions and the transportation industry. Dr. Natoli is a versatile strategist whose business solutions streamline operations, improve productivity and increase profitability.
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