Essay by JasUniversity, Bachelor'sD+, February 2006

download word file, 6 pages 5.0

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...