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03 Jul 2008 AC confident – but will only the strong survive?
03 JUL 2008: When airline deregulation began in the US and Canada in the late seventies, it was hailed by many as the beginning of sweeping changes in the airline sector. Deregulation would transform and revolutionize the skies, usher in major economic savings for consumers and heighten productivity within the industry. And, to some extent, all of this did in fact come to pass.
Airlines were heavily regulated at that time at least in part because of the concern that monopolies would develop partly due to the fact that, at that time, only a small number of carriers provided direct flights between any given "city pair".
In Canada, Air Canada aggressively fought deregulation, but by 1987 it was seemingly here to stay.
Deregulation has had its successes. Economists have estimated US airline growth in excess of US$15 billion per year after about ten years after the Act was passed.
Many other countries have since deregulated their domestic markets, and a similar process has applied to airline markets within the European Union. However, many international airline markets remain subject to tight regulation.
Proposed passenger rights legislation
Now however, the US airline sector is in a crisis, facing a wide variety of developments that range from federal legislation for passenger rights, to rising concerns that small businesses and air-dependent tourist destinations need help. And that hasn’t even mentioned the ever looming, ever rising, price of oil.
The Air Service Improvement Act of 2008 has been introduced in the House of Representatives.
Under its provisions, airlines would have to submit plans detailing how they would provide food, water, restroom facilities, ventilation and medical treatment for passengers onboard an aircraft that is on the ground for an extended time period without terminal access.
Small travel businesses suffer most
In his testimony before congress, the US system was recently described by Roger Dow, president and CEO of the Travel Industry Association (TIA), as being in “steep decline”. He pointed out that economic losses are most harshly felt by small businesses.
"Businesses within the travel sector are particularly dependent on reliable and efficient air travel,” said Dow,
“Over 95% of travel and tourism businesses are small businesses: 98% have 100 or fewer employees and 99.5% have 500 or fewer employees. Anything that affects air travel in the United States hits these small businesses harder".
Dependency on air travel
Popular tourist areas dependent on air arrivals are going to be impacted the most by cutbacks, say tourism officials. About 33% of the 100 busiest airports in the US are expected to experience a reduction in domestic flights as Americans cut back on air travel.
The Caribbean will certainly suffer as routes are slashed, and US air-dependent markets, such as Las Vegas, Arizona and Hawaii, are also expected to suffer.
By the fall even large gateways could be affected as American Airlines, United and Delta, roll out 3rd quarter reductions of 10% to 14% in their domestic capacities.
To re-regulate …or not…
So where does it all lead?
Somewhat surprisingly, there have been some calls for a return to the old days. Yes, regulation.
One of the most prominent advocates in recent weeks is former American Airlines CEO, Robert Crandal.
Deregulation has "worked poorly" says Crandal, and market forces alone cannot sustain the industry. He proposes regulating various areas including scheduling (to prevent congestion), financial standards, labour issues and the management of bankruptcies.
Crandall also recommended revising anti-trust laws and establishing a minimum-fare threshold. to solve pricing, cost and operating problems.
Delta president and chief financial officer Edward Bastian doesn’t see it that way at all, saying he believes deregulation "has been a great success."
"Air travel today has never been more affordable and significantly lower in real dollar costs," Bastian said. "It's almost half what it was prior to deregulation."
Meanwhile here at home…
Robert Milton, president and CEO of ACE Aviation, Air Canada’s parent company, says the Canadian carrier is better positioned than its peers to withstand high fuel prices.
``It's definitely tough for everybody,'' Milton said earlier in the week, ``I think that Air Canada's got a lot of things going for it.''
Unlike most airlines in the world, Air Canada has weathered not only the crisis sparked by the Sept. 11, 2001, terrorist attacks but another linked to ``severe acute respiratory syndrome'' (SARS) that hit Canadian air travel in 2003, Milton said Monday after a shareholder event.
He said Air Canada can also count on a fleet of newer, more energy efficient planes than most of its US competitors.
``It just really sets it apart from the rest of the North American industry and many of the airlines around the world,'' Milton said.
``I think Air Canada is really well-positioned and will come out better than most, but there is no discounting how difficult US$140 a barrel of oil is.''
The former Air Canada president says he believes the current crisis will eliminate many airlines, particularly low-cost carriers, and the survivors will be stronger.
``I think you're going to see a lot of airlines disappear and I think good, strong, well-managed airlines like Air Canada will actually come out of this even better off,'' Milton said. ``The ones that really are going to have a problem are the airlines that have been trying to sell a low-fare proposition.''
Earlier this month, Air Canada announced a reduction of seven per cent of its capacity, a measure that will cut 2,000 jobs.
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