March 26, 2010 ECO2
A Comparative Report
Jan Abigail Maravilla
Harold De Guzman
Mario Giordano Sarmiento
Mr. Paul Caampued III
This study provides a comparative analysis of the state of the airline industry before and after deregulation. The paper considers most if not all possible areas of growth and development that will affect the airline transportation industry. It generates hypotheses about passenger growth, quality of service, and markets served. The paper concludes with a discussion of the pros and cons of deregulation.
Deregulation, in simple terms, is a liberalization of an industry from government policies that control its production, and other key factors including market entry or exit. Deregulation is aimed to break down cartels and monopolies by encouraging new players in an industry. Based loosely on a laissez-faire type of leadership and control, it assumes that the lesser control and restrictions an industry has, the more efficient it can be. President Ronald Reagan and Prime Minister Margaret Thatcher are the forerunners of the deregulation race. During Reagan’s presidency, “the reduction in economic regulation that started in the Carter administration continued […] eased or eliminated price controls on oil, natural gas, cable TV, long-distance telephone service, interstate bus service, and ocean shipping.”
The foremost incident of deregulation happened during President Richard Nixon’s administration in late 1971 . This focused on transportation, mainly on rail and truck transportation. The first airline deregulation in America happened in 1978 due to the Airline Deregulation Act under President Jimmy Carter’s administration.
Deregulation aims to boost the economy by encouraging competition and competence. As Adam Thierer wrote, “"The first step toward creating a free market in electricity is to repeal the federal statutes and regulations that hinder […] competition and consumer choice.
This study is limited to the Philippines’ passenger airline industry. The boundary point of the comparison is the year 1995 which is the year that the airline industry was liberated under Executive Order 219.
In 1952, the Philippine Government passed the Civil Aeronautics Act which gave birth to the Civil Aeronautics Board (CAB) and the Air Transportation Office (ATO). These departments were given the authority to “promote adequate, economical, and efficient passenger airline service […] at reasonable charges and promote competition”
Until deregulation, Philippine Airlines had a virtual monopoly of the passenger airline industry due to the passage of two Letters of Instructions (151 and 151A) in 1973. Although Presidential Decree 1590 was the nearest thing to encouraging competition although it only gave PAL a new franchise.
This monopoly which was maintained between 1973 and 1994 led to a domino effect of macroeconomic proportions. This position of control gave PAL an opportunity to dictate the price of airfare. This limited supply increased the price and the government had to intervene because of the obvious advantage of the firm over the households. PAL’s Return of Investment was capped at 12% by the government. This gave PAL a cushion of assurance and did not foster growth or improvement of quality of service. The government, over the course of time had to subsidize PAL’s losses and this cross-subsidization hurt the government’s funds and the consumers’ comfort.
This monopoly’s guarantee of short supply meant that they can choose to service only the profitable markets and once again, the government had to intervene. The government brandished its subsidy to compel PAL to provide for missionary routes but to this, PAL responded by...
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