Regulation of Air Transport Economic Rationale and Impact

Regulation of Air Transport Economic Rationale and ImpactDavid GrantTo under(a)stand what was in the minds of those who conceived and developed frugal regulations for advertize transport, a good place to start is the Second World War. scratchThe aviation industry was experiencing its second period of very rapid technological development, the depression such(prenominal) period having occurred during World War I. In 1944, it was clear that aviation would play a much bigger role during peacetime after the war, than it had done in the beginning the war. The tide of the war had turned and there was a sense that it would soon be over (The History Place, 2014).The minds of innovation leaders began to focus on post-war matters. The world had been through two wars in close succession and there was a determination that this cycle should not be repeated. In his State of the Union mental object to congress, on 11 January 1944, chair Roosevelt said We atomic number 18 united in determina tion that this war shall not be followed by an opposite interim which leads to juvenile disaster- that we shall not repeat the tragic errors of ostrich isolationism ( light beams G and Woolley J, 2014).In November of that year, the unify States took a very practical step to address isolationism. It convened a meeting at Chicago to discuss post-war aviation. Delegates from 52 nations att residueed and discussed the challenges facing international civil aviation. The convention lasted longer than expected but, in the end, it achieved two things an international agreement, referred to as the Chicago Convention and, a new organisation, the supranational Civil Aviation Organisation (ICAO) to oversee international civil aviation (ICAO, 2014).The sentiment expressed earlier in the year by President Roosevelt was encapsulated in the preamble to the Chicago Convention. . . whereas it is desirable to avoid friction and to promote that cooperation between nations and peoples upon which the peace of the world depends therefore, the undersigned governments having concur on certain principles and arrangements in order that international civil aviation may be developed in a safe and orderly bearing . . . and operated soundly and sparingally have accordingly concluded this convention . . . (ICAO, 2014).In respect of an economic rationale for the ca-ca that had been done, Adolf Berle, a close advisor to President Roosevelt wrote after the conferencea substantial beginning has been made towards opening the air to commerce. It is not too much to say that we entered the Conference in the fairness and atmosphere of the 17th century and we came out with a fair prospect of obtaining 20th century conditions. Faithfully yours, ADoux A. BERLE, JR. ( fall in States Department of State, 2014)Scope of RegulationThe area of what was agreed at the meeting was broad. It included, for example, the concept of the nationality of an aircraft. It agreed a global system of aircraft regi stration (that has obtained ever since) under which each nation was assigned a prefix (for example, the letters EI and EJ were assigned to Ireland) and that aircraft would be assigned a unique registration (for example, EI-AAA, EI-AAB, etc.) by their home nation and that the registration would be displayed prominently on every aircraft.The Chicago Convention was an agreement between nations. Outside of its scope was the question of which respiratory tracts flew where and what furtheres they charged. Domestically, in the US, that function was performed by the Civil Aeronautics Board (CAB) under 1938 legislation. Internationally, it was to be managed by means of bilateral agreements. A standard form of bilateral agreement was prepared by the Chicago meeting (ICAO, 2014).In 1945 the International Air Transport Association (IATA) was founded and took on the role setting fares. The first IATA fare-setting conference was held in 1947. Aviation grew rapidly over the following decades and IATAs work expanded. By the 1970s, the IATA conference had become a mammoth undertaking and was approving and publishing 200,000 passenger fares and 100,000 cargo fares (Tiernan, 2013).Small GovernmentA majority of Americans (54%) conceptualise that government interferes too much in society and in business (Gallup, 2013). Small government is a philosophy the main tenet of which is that government should draw off involved in as little as feasible and should stay out of the way of business. In the United States, President Ronald Reagan was one if its main advocates (Boaz, 2004).The economic regulations contained in the Civil Aeronautics Act (1938) and the Chicago Convention (1944) lasted until 1978 when some of them were repealed by the Air withdraw Deregulation Act. Although air hose deregulation is clearly an initiative that was item to the air duct industry, it is useful to see it in the context of small government. The 1978 changes were consistent with a move towards small government. It was President Jimmy Carter who signed the act into law, towards the end of his presidency in October 1978, but it was Ronald Reagan who oversaw most of the resulting changes and is associated with deregulation in the public mind (Goetz and Dempsey, 1989).Scope of DeregulationThe impression is abroad that airline deregulation, which commenced in 1978 and was make headway developed in 1992 and 2001, has eliminated economic regulation from the airline industry. This is untrue. Significant economic regulation remains, includingrestrictions on extraneous ownership of airlines, or cross-border consolidation of airlinesrestrictions on foreign airlines providing domestic services and,the tax-free status of aviation raise.Airline OwnershipOwnership of an airline in the US is regulated. No to a greater extent than 25% of an airline may be owned by non-US citizen(s). In Europe, a similar provision exists but the upper limit on foreign ownership is 49%The economic rationale beh ind these rules has been presented variously as a wish to defend a fledgling industry or (in the US) military reliance on civilian airliners to provide supplemental capacity in time of war (GAO, 2013). However, one cannot but suspect that it is in fact protectionism of an industry that has in the retiring(a) been regarded as a sort of national asset, a flag-carrier.The practical effect of these restrictions is to prevent cross-border airline mergers, acquisitions and investments.CabotageThe Chicago Convention specifically outlawed cabotage, i.e., the carriage of passengers (or freight) inside the territory of an opposite state. Since then, other developments have reduced the impact of this restriction, most notably European Union treaties which have created a single-market in EU instalment states so that cabotage restrictions no longer apply there and any EU-based carrier may operate services within the borders of any ether EU-state. This is not the parapraxis outside of the EU. Aer Lingus may not carry passenger between New York and San Francisco. Similarly, American Airlines may not carry passengers between points within the European Union. raise TaxArticle 24 of the Chicago Convention stated that aviation fuel would be exempt from taxes. That article remains in force today. in that location is general agreement that the worlds climate is changing and, that the cause is manmade. The proposed solution is sustainable development. The concept of sustainability is central to the subject of climate change. sustainable development is defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs (World Com missyion on surround and Development 1987).Emissions from aircraft engines are one of the causes of climate change. The most significant emission (from the perspective of climate change) is CO2 and it is estimated that the CO2 emissions from aviation represent about 2 percent of total CO2 emissions. This seems small, relative to the overall problem. However, two points are noteworthyaviation is growing at a faster rate than other sectors and so it is estimated that this number could increase to as much as 10% and,aviation deposits its CO2 directly into the upper atmosphere and so the impact on climate change may be greater than the numbers suggest.Understandably, pressure is building on the industry to reduce CO2 emissions. In particular, there are calls for the removal of Article 24 of the Chicago Convention in order to end the use of tax-free fuel which the industry has enjoyed for almost seventy years.A Note About SafetyBetween 1944 and today, the aviation industry has achieved significant improvement in its safety record. Passenger fatalities have dropped while the industry has been growing. picture 1 graphs an index of fatalities relative to passenger number during sixty years between the year 1950 and 2010.Figure 1 index (passengers v fatalities) for 1950 to 1978 and for 1978 to 2010The blue line indicates progress between 1950 and 1978, which was spectacular. Before deregulation, engineers and pilots had much more influence at airlines than they have today (McManners, 2012). The regulated environment that existed for 35 years (1944 and 1978) was one in which costs and profits were less important than they are today. In that environment, technical departments encountered less resistance when proposing safety-related initiatives than they might today.The red line indicates progress between 1978 and 2010 which has been less marked. This is not to suggest any causal relationship between deregulation and safety. It seems much more likely that the cause of the decline is the law of change magnitude returns. One can solely speculate about what the rate of progress might have been, had intense competition been introduced sooner. tellmary of ImpactsThe significant impacts of economic regulation have beenThe Chicago Convention, bilateral ag reements and pre-agreed fares provided a framework for the safe development and growth of an international airline industry which might not have been possible in a free-for-all situation.Restrictions on airline ownership and on cabotage provided nations and airlines with a sense of control over airlines and domestic networks. This was a reasonable cost to pay as it allowed nations and airlines to take risks and to develop the confidence to expand internatiomnally while secure in the knowledge that their airline(s) and home market were protected.The provision of tax-free fuel provided an environment in which the new international airline industry could grow more rapidly. This allowed aviation to grow market share and to catch up with other modes of transport. Now, given the need to make aviation sustainable, it may be time to change tax-free fuel.ConclusionEconomic regulation has been good for the airline industry. It has served to protect it during a time when it needed to be nurt ured and developed.If we look at airline economic regulation through the lens of small-government, deregulation, and market-is-king thinking of today, we are liable to miss the point. Better to look at it through the lens of a world still at war and the lenses of a group of 185 delegates from 52 nations strangers who came together in a hotel in Chicago for five weeks and who between them had the belief, foresight and imagination to envisage something that didnt yet exist. It does now.ReferencesBoaz D., 2004, Remembering Ronald Reagan, http//www.cato.org/publications/commentary/remembering-ronald-reaganFranklin D. Roosevelt State of the Union center to Congress, January 11, 1944. Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http//www.presidency.ucsb.edu/ws/?pid=16518. accessed, 21 May 2014Gallup, 2013, http//www.gallup.com/poll/157481/majority-say-government-doing.aspxGoetz and Dempsey, 1989, Airline Deregulation Ten Years after Something Foul in th e Air, Journal of Air Law and Commerce, Vol. 54, No. 4, Summer 1989, http//papers.ssrn.com/sol3/papers.cfm?abstract_id=2229476International Civil Aviation Organisation (ICAO), 2014, http//www.icao.int/secretariat/PostalHistory/1944_the_chicago_convention.htm accessed 21 May 2014 and, http//www.icao.int/publications/Documents/7300_orig.pdf 9accessed 22 May 2014McManners, Peter (2012) Fly and be Damned What Now for Aviation and Climate Change? London Zed Books.The History Place, http//www.historyplace.com/worldhistory/genocide/holocaust.htm accessed, 22 May 2014Tiernan S, 2013, University of Limerick, MBA (Aviation Management) class notes.United States Department of State / Foreign relations of the United States diplomatic papers, 1944. General economic and social matters (1944) Preliminary and exploratory discussions regarding international civil aviation conference held at Chicago, November 1-December 7, 1944, pp. 355-613, http//digicoll.library.wisc.edu/cgi-bin/FRUS/FRUS-idx? subje ct=turnid=FRUS.FRUS1944v02entity=FRUS.FRUS1944v02.p0622isize=text accessed, 22 May 2014US Government Accountability Office (GAO), INTERNATIONAL AFFAIRS Issues Relating to Foreign Investment and Control of U.S. Airlines GAO-04-34R promulgated Oct 30, 2003. Publicly Released Dec 1, 2003. http//www.gao.gov/products/GAO-04-34RWorld Commission on Environment and Development (WCED) (1987) Report of the World Commission on Environment and Development Our Common Future, regular army WCED (http//www.un-documents.net/our-common-future.pdf)1. What is the economic rationale for the regulation of air transport markets? What impacts have regulations had?Question Do you mean what was the economic rationale etc. in so far as most economic regulation is now gone, so this would be an essay about pre-deregulation times?Answer The essay is looking for a more general perspective on the arguments put forward for government intervention in transport markets so you can cover past and present experiences and economic rationales many of the historical arguments may no longer be valid, but it is worth rehearsing that they may have been appropriate given the stage of development of say, the airline industry in the 1930s/40s. You have considerable flexibility in what you cover in your essay.2. Outline the role and impact of network structure on airline behaviour and process.Role?Impact?Network Structure?Airline behaviour? P2P = no bag transfer no responsibility for latenessAirline performance? therefore fewer bags lost and therefore better performance therefore no obligation to late passengersThe role of landing fees in influencing network typeParadox re full-service versus point-to-pointEight flights make 45 marketsGlobal hubs the gulf and now Turkey?3. How and why might you undertake a cost epitome of an airline? What difficulties might arise in undertaking such an analysis?Question Is it the case that I am invited in by the airline to do the analysis and therefore will have access to all financial data or, is it that I am doing the analysis from outside the airline with access to only published data?Answer I am not imposing any particular perspective for the 2nd question you might outline why cost analysis is useful for a firm as well as for regulators or industry analysts. You can discuss the data requirements for undertaking such analyses and the likelihood of these data being available. Again, you have considerable scope to shape the essay any way that you wish.How?Why costs analysis is useful for a firmFor a regulatorFor an industry analystThe data requirements and the likelihood of it being availableStandard way of comparing?Legacy costs at the legacy carriersThe difficulties?4. Are airline markets inherently unprofitable? Please explain your answer.No it just seems that wayIs it infrastructure if is it business?Chicago ConferenceSum of profits to date = losses compare that with other industry(s)Yield management systems better sell cheap seats first? S upermarket does the opposite (perishable product?)United Airlines +/-1 pax modelCyclical?Demand is derived Is there another industry that is the same? Car rental? hotels?The next step after flag carriers the airline owner Nike Lauda Richard Branson executive jet (Gates v Trump) Howard HughesIn the context of a sector where the other four elements (manufacturers financiers airports and MRO etc.) do make money? Parallel? NB, take a holistic view it is profitablePage 1 of 11