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Aneeq Ahmed Siddiqui

Student ID: 58183138
Course: English 112
Instructor: Joanna Cockerline
21
st
March 2014
The Evolution of the North American Airline Industry: Impact of Airline Deregulation
and Foreign Competition

Although North American Airlines may be going out of business due to host of factors
including but not limited to the perpetually rising oil prices, precarious domestic economy as
well as changing consumer behavior; tough competition from fast emerging Persian Gulf airlines
on account of their state subsidization and access to resources is an integral factor contributing to
the demise of the North American aviation industry. The United States, for instance, has been a
pioneer in the field of aviation for over a century with the Wright Brothers first flight in 1903 to
the launch of St Petersburg-Tampa Airboat Line, the worlds first scheduled airline service, as
early as 1914 (Tucker 2)(Kane 1). While the world was still in awe of the possibility of human
flight, the U.S companies were already designing and testing fixed-wing aircrafts, as they knew
the revolution it was about to bring. In essence, the 1930s were the aviation revolution of North
America with many companies specializing in designing aircrafts opening operations and
amongst them was the Boeing Company. However, not all those companies survived due to the
competitive nature of the industry and amongst those, which did, was Boeing. The company at
present is the largest global aircraft manufacturer with over 12000 commercial aircrafts in
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service and is the largest exporter by dollar value in the United States (Senguttuvan 1) (Defense
News 1). The United States unlike Canada is a large economy with a high population density as
such there are far greater airlines in operation in the United States but for the purpose of this
paper, the focus will be on the international majors such as American Airlines, United Airlines
and Air Canada as these airlines operate on the domestic as well as international front and as a
result are affected by the macroeconomics of other countries.
Managing an airline is not everyones cup of tea and in the words of C.E. Woolman,
founder of Delta Air Lines, Running an airline is like having a baby: fun to conceive, but hell to
deliver (Ridgers 1). Airline travel was considered a luxury few years ago but now its merely a
mode of transport for the common man and this has been made possible by the competitive
nature of the industry. The United States had strict rules concerning airlines in its formative years
as it was an untried format and therefore there were strict government controls over fares, routes
and market entry of new airlines which not only prevented competition but made airline travel
unaffordable for the common man. However, in 1978, after constant lobbying the Airline
Deregulation Act was passed by Congress, which led to a removal of these authoritarian
regulatory powers, eventually allowing consumers to be exposed to the competitive forces in the
airline industry. The airline industry has witnessed spectacular growth ever since with passenger
numbers increasing from 207.5 million in 1974 to over 800 million last year, but at the cost of
flight-choked northeast corridor, massive flight delays and overcrowded airports and terrorism
associated risk making air travel cumbersome. The perfect competition mechanism has pinched
heavily into the profitability of the airlines with airline revenue per passenger mile substantially
decreasing from 33.3 cents in 1974 to a meager 13 cents in 2010. As per a recent business week
report, the cheapest inflation-adjusted fare between New York-Los Angeles in the regulated
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market in 1974 would have been around $1442.However, today one can fly the same route for as
low as $268 which is why the industry has experienced a substantial increases in passenger
numbers ("Airline Deregulation, Revisited" 1). The bill intended to make the industry more
competitive has made air travel cut-rate from the societys point of view, but as a consequence
pinched heavily in to the profitability of the airlines. American Airlines, once a powerhouse in
the aviation industry, and the only international major in the United States to never have filed for
bankruptcy recently filed for bankruptcy in 2011. Another critical problem for the airline
industry is the perpetually rising oil prices, which in recent years have increased significantly
putting downward pressure on the profits. The United States, for instance, refines over 60
percent of jet-fuel at home with the remainder being imported from the oil rich Middle Eastern
countries, price of which is determined by the international macroeconomic environment and is
usually very volatile. The issue is further complicated by the export of home-refined jet-fuel to
other countries by domestic refineries for higher profits exposing the domestic airline industry to
supply chain problems (Young 6). The airline business model is based on capturing minuscule
profit margins and with jet-fuel prices being the major cost center; a slight change can
substantially turn the tide for any airline. To reduce risk, some airlines have hedging programs in
place, which like insurance protects against an unprecedented increase in oil prices but even then
the risk is not eliminated and makes planning extremely difficult. An increase in the marginal
costs due to increase in oil prices without an increase in fares due to competition makes it an
extremely difficult industry to operate in and hence the evolution of the airline business model
from full service to no-frills (Heimlich 5). Although airline fares have substantially decreased
over the years, globalization and the advent of information technology have made the average
person more aware and more cost-conscious. This change in consumer behavior is also due to the
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precarious, debt ridden, economy of the United States whereby the expectation of another global
meltdown induces the consumer to save as much as possible due to fear of uncertainty. The no-
frills airline system more commonly known as Low-cost carriers (LCCs) has been adopted by
airlines like JetBlue and Southwest in the United States. These carriers have been able to do so
by leveraging their costs efficient and innovation to remain in a leading position, even in a
disconcerting market (The Evolution of the Airline Business Model 1). Over the past 20 years,
competition from LCCs has increased dramatically. More than 60 percent of US passengers in
2010 traveled on routes with LCC presence, and the aggregate LCC share of passenger miles has
tripled since 1990, to roughly 30 percent(Rose 376). The success of the LCCs in the US has
been at the cost of the profitability of the international majors such as United Airlines, which due
to their business model can not compete with these LCCs at the domestic front and yet remain
profitable. The LCCs focus on short-haul flights and greater frequencies within North America
thereby allowing them to earn a positive rate to return at the end of the day. Whereas the
international majors usually, focus on long-haul flights, across countries with connections to
destinations within the United States. In essence, they compete with other foreign carriers on the
international sector as well as with the domestic LCCs on the connections within the country
thereby being pressured from both sides. The U.S airline industry, as a result, has lost over $40
billion dollars in the last decade alone with over 100,000 job losses with many air carriers filing
for bankruptcy and seizing operations, the ramifications of which can be seen by worsening
economic conditions of the United States (Bamber 24).
Most of the world relies on Oil exports from the Middle Eastern countries such as the
United Arab Emirates (UAE). The UAE has been endowed with over six percent of world oil
reserves which given its small land size and population is a substantial amount. The
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transformation of the country from barren land to an epitome of modern day success has
coincided with the massive growth of its aviation industry, which has led to a transformation of
its cities into major trading hubs. A contributing factor is the fact that 4.5 billion people live
within an 8-h flying radius to the Middle East, thus allowing carriers based in the Gulf to not
only generate revenues by connecting passengers to other flights through their hub but to also
contribute to their countries tourism (OConnell 339). Airlines in the UAE, particularly
Emirates airline, have been able to achieve growth unmatched by any other air carrier in the
world. Emirates Airline, owned by the Dubai government, was founded by the Al Maktoum
family in 1985.It started operations with an initial start-up capital of $10 million and two wet
leased aircrafts from Pakistan International Airlines and is now amongst the leading international
airlines in the world. The airline flies to over 120 destinations daily and boasts a fleet of over 200
latest commercial airliners in service such as the Boeing 777 and the Airbus A380. The airlines
expansion plans are evident from its most recent $100 billion order at the Dubai Airshow for
over 200 aircrafts which when delivered would make it the biggest airline in the world (Jain 1).
The airlines access to capital, cheap labor from South Asia and state support in the form of
infrastructure give it an edge over other air carriers without even operating a single flight for its
fixed costs are substantially lower. The variable aspect of its costs associated with its flight
operations are also substantially lower then other airlines due to its high fleet utilization and use
of latest fuel-efficient aircraft. This not only allows it to maintain a lower carbon footprint per
seat but also offer fares unmatched by any airline in the world due to which its passenger
numbers keep increasing. As a result, the expansion of Emirates airline poses a serious threat to
well established international airlines all over the world (Squalli 38).
The cost-cutting measures being taken by the legacy carriers in the US have led to job
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losses in the recent past which has led to a flight of skilled labor to airlines such as Emirates for
not only does it offer competitive tax-free wages but also the chance to live in a world class city.
A major difference between the aviation jobs in the US and UAE is that the latter is a contract
job while the former is a career with pay scales based on seniority and the incentive of pension
upon retirement. A major concern for the US airline industry has been the flight of skilled pilots
to the rival airlines in the Middle East and it makes sense for them to do so as by getting
retirement from their US employers, the pilots get their pension while earning a competitive tax-
free salary. Although, the US legacy carriers and Emirates airline operate under the same market
structure of perfect competition, however, the difference in economic conditions and supporting
local laws in the UAE give Emirates a slight edge over its US rivals but that should not be
considered as unfair competition. The US airlines benefit from bankruptcy protection and
government bailouts continue to exist in the US, which is not the case in the UAE. As per a
recent corporate report issued by Emirates Airline and International Air Transport Association
(IATA), Emirates airline in fact does not get any subsidized fuel from Dubai government despite
it sitting over a massive reserve. In addition, Emirates airline does not benefit from cheaper
landing and service fees at airports in Dubai and the only financial subsidy it ever received was
the initial start-up capital of $10 million (Airlines and Subsidy: Our Position 4). Furthermore,
most US airlines are listed on the stock exchange that gives them an ability to raise equity capital
with rather ease, which yet again is not the case with Emirates, as it is not listed on any stock
exchange.
In conclusion, to say that unfair completion is leading to demise of the US airlines would
be incorrect for its in fact the market forces of perfect competition which are responsible for the
diminishing profit margins. Competition on the macroeconomic level can be difficult for any
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industry and not just airlines. The expansion of international airlines such as Emirates does
impact legacy carriers such as American Airlines but it isnt due to unfair subsidy but rather due
to the different economic environment, these airlines are based in. The airline business is of high
fixed costs and volatile variable costs, which need to be managed efficiently in order to remain
competitive. Emirates due to its access to cheap labor, tax-free working environment and high
fleet utilization of modern fuel efficient aircrafts is able to undercut other airlines thereby posing
a serious threat to their survival whilst continuing to make profits.











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Works Cited
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