Enlightened Engagement

Deregulation changed the operating system of airlines from ‘point to point’ to ‘Hub and spoke system’. After deregulation, the airline industry in the USA and Europe is consolidating rapidly through mergers, alliances and joint ventures. Cost efficiency is the key to survival in the deregulatory environment. Many of the new entrants left the market having failed to develop the necessary economies of scope and scale. Other airlines were taken over, either because they fell into financial difficulties. On the negative side, there is firm evidence of predatory pricing, creating barriers of competition through CRS, hub and spoke domination, FFP and slot allocation by mainly the large airlines.

Deregulation made airlines more productive than ever before. Decontrol of price means airlines can offer heavily discounted fare to fill up the unused seat. Deregulation also helped to gain efficiency through outsourcing, optimum use of equipment and personnel.

The airline industry is far more competitive than it was & the benefits of that competition have been widely distributed. Though the impacts of competition are not evenly distributed amongst markets, routes and carriers; and that competition on equal terms amongst carriers plays an important role in maintaining the effectiveness of deregulation. Although liberalization has merits, it also has defects- notably a tendency to generate cut-throat competition, the pressure it places on safety related expenditures, the creation of monopolies or oligopolies, and the exclusion of some countries from effective participation in international markets. Airfares which are generally trending downwards irrespective of whether or not markets are liberalized tend to rise in markets that become concentrated after liberalization . Without acceptable safeguards, liberalization is anyway in principle unacceptable to the majority of the countries. The deregulation of the USA market and more recently the creation of single aviation market in Europe mark a dramatic shift toward more market-based outcomes. During this time, the structure of the industry has evolved from point-to-point service to hub-and-spoke and finally now moving to global-alliance based networks built on the linking of hub-and-spoke structures across the globe .

Market deregulation happened in these two regions in a different macro-economic situation . In US, deregulation happened in a period of escalating oil prices and world recession. In the EU, on the other hand, deregulation happened during a period of escalating economic growth and rapid expansion of air travel. Airlines ownership is still very much restricted all over the world. For example, in the USA, foreign investors are not authorized to acquire more than 25 per cent of the voting capital of airlines and carrier boards must be controlled by US citizens. European Union Member countries, and Australia-New Zealand, as well as all other OECD countries have similar foreign investment restrictions, generally at higher thresholds such as 49 per cent .

Non-US airlines are somewhat behind the deregulation “learning Curve”, because they did not have to face the consequences and open competition situation until recently. For example, the proliferation of low-fare carriers in Europe and their rapidly extending market share raised serious concern about some of the major European airlines on their ability to achieve financial stability or sustain in absence of state support or regulation.

Deregulation, liberalization and competition have fundamentally changed the management strategies and practices of airlines. Cost management and productivity improvements have been the major focus of airlines everywhere after the deregulation. It is widely believed that- global liberalisation of airline markets, will increase disparities between airlines with respect to their ability to compete effectively, and may ultimately lead to the demise of weaker carriers.

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