Deregulation of the Airline Industry

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Deregulation of the Airline Industry

The airline industry has been subject of intense price competition since it was deregulated, and the result has been a number of new carriers which specialize in regional service and no-frills operations. These carriers typically purchase older aircraft and often operate outside the industry-wide computerized reservations system. In exchange for these inconveniences, passengers receive low fares relative to the industry as a whole. This research examines two low fare air carriers, ValuJet and Southwest Airlines. By investigating these air carriers, we can better understand the economic impacts of price versus service in the airline industry as a whole, as well as, the impacts on passenger and investor confidence.

Until 1978, air transport rates were approved by the government, which meant that price was not a primary competitive factor. Instead, airlines would compete on service and image. The airline industry was dominated by giants (American, United, TWA) which offered nationwide and some international service, and by regional carriers, such as Southwest, which offered short trips between airports not served by the nationals.

Deregulation of the airline industry brought about in 1978 introduced a situation in which the national and regional carriers were suddenly able to compete in an environment that resembled a free market. Rate schedules were lifted, price fixing was eliminated and route management was removed. The main factors that affected whether an airline could serve a particular city was whether or not that city had enough gates for the new carrier, and whether the carrier was able to afford to purchase them. Companies such as Southwest recognized potential for low fares, and began building a niche for themselves by offering low fares with equivalent low levels of service. Southwest's success gave rise to a new generation of low fare airlines, with ValuJet entering the market in the early 1990's. Unfortunately, ValuJet suffered a string of accidents which brought the future of this air carrier into question. ValuJet is a low-priced airline that offers inexpensive tickets for regional travel. Based in Atlanta, the airline serves the Southeastern United States and competes with Continental Airlines as well as with other small regional carriers. It serves 31 cities primarily in the southeastern United States. The airline began its service with flights to Tampa and Orlando from Atlanta in 1993. The no-frills strategy paid off for the fledgling airline, which posted half again as many revenue passenger miles in April 1996 as it did in April 1995. However, the company announced that it was slowing the expansion of its services, voluntarily, at the same time that it posted this impressive revenue mark (Cole & Pasztor, 1996, p. A6).

Perhaps due to overexpansion or to poor luck, Valujet experienced a series of mishaps in its short history. In January 1994, a DC-9 skidded off a runway in Washington which resulted in the entire airport being shut down. In June 1995, a ValuJet flight went through an emergency evacuation after an engine failed and shrapnel flew into the cabin. Additional incidents, including one where the landing gear collapsed after a particularly forceful landing, led the FAA to begin an intense review of ValuJet in February 1996. This review found that ValuJet was in compliance with FAA regulations, but cited concern about pilot training and aircraft maintenance (Larson, 1996, p.30). In May 1996, Valujet flight 592 crashed in the Everglades, killing all aboard and resulting in a shutdown of the carrier for several months. When ValuJet began flying again, it did so with a reduced schedule, and considerable speculation about whether the company will be able to continue operations long- term. The company is also involved in litigation resulting from the crash, and the long-term prospects for the...
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