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Deregulation of Airline Industry in America and Its Consequences

Autor:   •  September 2, 2011  •  Research Paper  •  1,476 Words (6 Pages)  •  1,135 Views

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The deregulation of an industry is the removal of governmental forces that coerce the industry to function in a particular manner and the ingress of market forces that dynamically mould the industry into a competitive market place.

In 1974, the US economy was in the greatest down turn since the Great Depression. Prices rose, jobs were lost and there was major discontent among people. During this period, Chicago School Economists were arguing that rigid regulations were inflating prices instead of reducing them. Instead of allowing competitions, governments were with the help of regulations were preventing it. A number of regulations set up after the Great Depression was still in effect in the aviation industry. This was a classic example of regulated capitalism. A consequence of following the regulations was that airlines that had been set up in 1938 were still operating and no other airline had entered the market.

On 24th October 1978, President Carter signed the Airline Deregulation Act, and sealed the fate of the aviation industry in the US forever. The Civil Aeronautics Board's (CAB), which had been formed in 1938, regulated the working of the aviation industry. It purposes was to protect the people's interests and maintain order in the lucrative and rapidly expanding aviation industry. The CAB regulated all aspects of the industry, be it the number of flights that could serve a region, routes or fares. It also helped create, by using its legal powers, four major domestic airlines: United, Eastern, American and Transcontinental and Western Air (TWA). During a hearing once, officials from the CAB were called to answer questions regarding its functioning. What was learnt was that 95% of the CAB's time was devoted to stock prices that were too low and 5% of the time was devoted too prices that were to high. Yet always the effort was to keep the prices high and not low. With such state of affairs change was immanent. (Airline Degregulation, 1998)

In 1975 winds of change were in the air. The airline industry was in far an overhaul. John E Robinson became chairman of the CAB and he initiated the deregulation of the airline industry. He realized that the board that was set up to protect the people's interests and maintain order was doing neither job effectively. By April 1976, the CAB recognized that it needed to step back and let market forces come into play in the airline industry, and announced that it supported deregulation. (Time Inc., 1975)

Due to deregulation, there were innumerable benefits to consumers and the airline industry. The first and most important benefit that consumers received was a reduction in airfares. Before deregulation came into effect, a passenger would


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