TJC H2 ECONS P1 CSQ

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© TJC 2014 2 Answer all questions. Question 1 The Evolution of the US Domestic Airline Industry Figure 1: Annual US Domestic Average Itinerary Fare in 2014 Constant Dollars Source: Bureau of Transportation Statistics, US Table 1: Net Income of US Carriers (in millions of dollars) Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total -9,104 -27,220 18,186 7,691 - 23,750 -2,526 3,666 1,392 364 12,771 Source: Bureau of Transportation Statistics, US Extract 1: Airlines: Who Can Tolerate Them The “big bang” in the airline world was October 24, 1978. On that momentous day, the Airline Deregulation Act was signed into law. Prior to the new law, airlines were governed by the Civil Aeronautics Board (CAB). It sets fares and granted (or not) licenses to airlines for new routes. The system had functioned for over four decades w hen in the early 1970’s, the Arab oil embargo drastically increased fuel prices and the economy su ffered from stagflation. The rate system often subsidised inefficient routes. As airfares were escalating rapidly, congressional pressure mounted to scrap this antiquated bureaucracy. The theory was that an industry once untethered from government shackles would surely thrive under unfettered capitalism. Post 1978, the stampede to compete was fast and furious. The “Act” basically allowed, perhaps encouraged, any sentient being who, satisfied adequate pecuniary requirements and experience, to join the fray. And in the intervening twenty-fi ve year period, 129 enterprising souls did exactly that. By the end of 2003, only 15 of these start-ups remained, with that number much less today. Some of the great entrepreneurial success stories were Southwest, JetBlue, and America West (now merged into US Airways.) Of the twenty-three major and regional carriers licensed before the mass “airline rush”, only seven survive today and three of those are small regional airlines in Alaska and Hawaii. Bankrupted are old great names of Eastern Airlines, Braniff and Pan American. Most of the others have been merged out of existence so that only United, Delta, US Airways and, with fate hanging, American remain extant. Of these remaining majors, it should be noted that all have been through at least one bankruptcy. Source: Adapted from Forbes, 20 Aug 2012 320 340 360 380 400 420 440 460 480 1997 1999 2001 2003 2005 2007 2009 2011 2013 Average Fare ($) Year

© TJC 2014 3 Extract 2: How Airline Mergers Saved an Industry—and May Even Benefit Fliers In the airline industry, the "turbulence" puns never seem to end, because there's always something that rattles the big carriers and shakes up the business. All the recent bankruptcies allowed the airlines to trim an excess supply of jets and cut labour costs that got inflated during the late 1990s, when the carriers were flush and the unions for pilots, flight attendants and machinists had the leverage to demand generous contracts. They also set the stage for a spate of mergers, including American and TWA in 2001; US Airways and America West in 2005; Delta and Northwest in 2008; and United and Continental in 2010. Once American and US Airways have merged, the industry will have shrunk from eight or nine big carriers in 2000 (depending on how you count) to just four. Delta, United, Southwest and the new American will control about 85 per cent of all domestic air travel. Consolidation is finally helping a money-losing i ndustry become profitable. Fliers may associate bankrupt carriers with fire-sale airfares, but on the whole, a dysfunctional airline industry is a net drag on the US economy. "What we should all root for is an equilibrium in which the airlines are stable enough to make some money for shareholders and provide steady employment, while not charging consumers too much," says Seth Kaplan, managing partner of the trade publication Airline Weekly. Too much consolidation, of course, can generate monopolies that gouge consumers. But so far that hasn't happened. Since 2000, the average airfare, adjusted for inflation, has fallen by 18 per cent, according to the Department of Transportation. Airfares have risen more sharply since 2009, but that follows a plunge in fares during the recession, with ticket prices settling more or less where they were before the downturn. "Mega-mergers over the last seven years have not caused US domestic passengers to experience dramatically higher airfares or drastically reduced competition on most routes," a recent study by consulting firm PricewaterhouseCoopers concluded. Profit-hungry carriers undoubtedly will push fares as high as possible if a shortage of competition on some routes lets them get away with it. But there are still discounters like Spirit and Frontier eager to find markets where they can undercut established carriers by offering lower fares. Airlines do charge more for extra baggage and other extras these days, but travellers have some control over whether to pay those fees or not. As much as travellers like to gripe about flying, the experience is actually getting better. Mild weather, better technology and other factors have contributed to the better performance, but larger route networks with more integration help, too. Source: Adapted from US News, 14 Feb 2013 Extract 3: American and US Airways Officially Merge to Create World's Biggest Airline The world’s biggest airline was officially created on Monday with the merger of American Airways and US Airways, capping a round of consolidation that has worried the US government, rivals and consumer groups. The merged airline will take the American Airlines name and will have a global network of nearly 6,700 daily flights to more than 330 destinations in more than 50 countries, and more than 100,000 employees worldwide. The company has a firm order for 600 new aircraft. Last month, the Justice Department gave the $11bn merger the go-ahead after initially raising anti- trust concerns. Under the terms of the settl ement, American and US Airways must divest themselves of prime take-off and landing slots at six key airports in Washington, New York, Chicago, and other cities. The two carriers will be forced to sell those slots to low-cost carriers such as Southwest and JetBlue. "This agreement has the potential to shift the landscape of the airline industry. By guaranteeing a bigger foothold for low-cost carriers at key US airports, this settlement ensures airline passengers will see more competition on non-stop and connecting routes throughout the country," said attorney general Eric Holder. Source: Adapted from The Guardian, 9 Dec 2013 [Turn Over

© TJC 2014 4 Extract 4: What’s Next for the Industry? With airline consolidation re shaping the indust