2.1 Onward and Upward
2.1.2 Regulation and Deregulation
commercial plane—capable of holding up to 800 passengers, flying faster than 600 miles per hour (960 kph), and going 8,500 nautical miles without refueling.
Yet it also ought not to be forgotten that aviation was tragically brought to a practical standstill by terrorist attacks (on September 11, 2001) using hijacked civilian commercial aircraft against the World Trade Center in New York and the Pentagon in Washington, DC: 3,000 innocent people were murdered. Global airline passenger traffic and tourism then subsequently declined so steeply that many airline companies required extensive government guarantees and subsidies of various types so that services could be resumed.3
comprising 20 % of the total—suppressed nascent industry profitability and gave airline investors an especially bumpy ride.4
As Fig.2.2aillustrates, it was not until after the economic recessions of the early 1980s that profitability was briefly restored. Then, another recession beginning in mid-1990, the Gulf War of early 1991, and a highly competitive pricing environ- ment once again restrained profitability to the point that cumulative industry profits were wiped out (Fig.2.2b). Finally, however, the record-long economic expansion
-28 -21 -14 -7 0 7 14 21
38 50 62 74 86 98 10
Net profit/loss
$ billions
-42 -30 -18 -6 6 18 30
38 50 62 74 86 98 10
$ billions
5 10 15 20 25
80 90 00 10
¢
Current $ Constant $
a
b
c
Fig. 2.2 (a) Airline industry operating profit/
loss ($ billions) and net profit/loss ($ billions); (b) cumulative net profit/loss ($
billions), 1938–2014; and (c) average consumer cost to fly a mile in US cents (constant 2010 dollars), 1980–2014. Light line above constant includes baggage and other fees.
Source:ATA
4OPEC, the Organization of Petroleum Exporting Countries, was established in 1960 for the purpose of stabilizing oil prices. In the 1970s, however, in response to political pressures and the need of the member countries for more income, OPEC was able to significantly raise the price of oil in two large steps.
2.1 Onward and Upward 53
of the 1990s took hold, with the airline industry becoming a major beneficiary of the rising demand thereby created. Such demand was further sustained by the continu- ing long-term decline of the average real price (now around 15 cents) that passen- gers paid to fly a mile (Fig.2.2c).
Although the public-utility style regulation that characterized the airline busi- ness until the late 1970s no longer exists, there remain numerous restrictions and regulations concerning the award of landing rights, customer service reporting requirements (e.g., on-time arrivals, frequency of overbooking, etc.), and the power to grant privileges to carriers of foreign countries. The comment that “It’s the most regulated deregulated industry in the world” thus rings true.5
However, international landing agreements and privileges are still negotiated bilaterally between nations and specify which cities can be serviced, how many flights each airline may operate, and the prices that each carrier may charge.
Bilateral negotiations involving the United States are led by the State Department, with active participation from the Department of Transportation (formed in 1967).6
5Quote from former Continental CEO Gordon Bethune cited in McGee (2012, p. 50).
6Many bilateral agreements follow along the lines of the US and British agreement that was a compromise signed in Bermuda in 1946. Both countries then undertook to model other future agreements on the Bermuda pattern. As Doganis (1991, p. 29) notes, a significant clause of the Bermuda agreement was that “while both governments maintained their ultimate right to approve or disapprove the tariffs proposed by the airlines, they agreed that where possible such tariffs should be arrived at using the procedures of the International Air Transport Association.” The other significant clause involved so-called fifth freedom rights. In bilateral negotiations, the freedoms are as follows:
First Freedom: The right to fly over another country without landing.
Second Freedom: The right to make a landing for technical reasons (e.g., refueling) in another country without picking up or setting down revenue traffic.
Third Freedom: The right to carry revenue traffic from your own country (A) to the country (B) of your treaty partner.
Fourth Freedom: The right to carry traffic from country B back to your own country A.
Fifth Freedom: The right of an airline from country A to carry revenue traffic between country B and other countries such as C or D.
Sixth Freedom: The right of an airline, registered in country A, to carry traffic to a gateway—a point in A—and then abroad to a third country C. The traffic has neither its origin nor ultimate destination in country A.
Seventh Freedom: The right of an airline, registered in country A, to operate entirely outside of country A, in carrying traffic between two other countries.
Eighth Freedom: The right of an international airline, registered in country A, to carry traffic between any two points of country B (often referred to ascabotage).
In the Bermuda-style agreement, fifth freedom rights are relatively unrestricted in terms of allowing airlines to set the frequency and capacity on routes between two countries without regulatory interference as long as the other airline doesn’t complain. Freedoms of the sixth to eighth degrees are rarely accepted. See also Meller (2003) about proposed changes in European bilateral agreements and theWall Street Journal editorial, “The Free Blue Yonder,” October 18, 2005.
In 2007, the United States and the European Union (EU) signed a comprehensive Open Skies agreement which authorizes every US and EU airline to fly directly between every city in the EU and the US; to operate without restriction on the number of flights, aircraft, and routes; to set fares according to market demand; and to enter into codesharing, franchising, and leasing arrangements.
This means that a US passenger could fly to Paris on British Airways without changing planes in
The International Air Transport Association (IATA) was, founded in 1945, repre- sents the interests of the airlines and operates a clearing house for inter-airline debts arising from inter-airline traffic.7 Figure 2.3 displays the key trends of airline passenger growth of recent decades.