The Airline Deregulation Act

Political factors directly impact the operations of a company, having a huge influence on the regulations of companies and the spending power of their customers. All airlines must adhere to regulations set by the Civil Aviation Authority (CAA) in accordance with the Air Navigation Order 2005 Statutory Instrument. The CAA was established to act as an independent aviation regulator and provider of air traffic services. (CAA, 2008)

The Airline Deregulation Act 1978 was introduced in a bid to remove the controls which were faced by all airlines. Before this Act took effect, entries and exits in the skies were highly controlled, alongside the pricing of airline services by the Civil Aeronautics Board. Regulated skies saw a downturn in the aviation industry, with high prices and limited access; this gave way to a need for deregulation.

The impact of deregulation was that airlines could compete with airfare prices, largely increasing the industry capacity and passenger traffic. Since its enforcement, deregulation has given the aviation industry the ability to expand. However traditional airlines emerged from a regulated background, hence structural costs remained high. This is when the low-cost airlines found an opening, and due to this the traditional airlines have had to face immense pricing pressures. (Library of Economics and Liberty, 2008)

The Deregulation Act led to an 'open skies' agreement between the European Union (EU) and the USA in 2007, where the aviation market was open to foreign access, eliminating barriers to competition, making the industry more global. (Centennial of Flight, 2008) Numerous international airlines have joined alliances, whereby member airlines and affiliates co-operate to provide a service. Common use of passenger terminals and routes are used so that customers are provided with a wider choice of travel. There are three main alliances; Star Alliance, Sky Team and Oneworld, by forming these alliances it means airlines are able to provide a more extensive service. (Qantas, 2009)

There are many constraints which airlines are faced with taking into consideration the affects their actions have on the environment. Climate change and the emission of greenhouse gases is one major factor. Although there have been significant improvements to aircraft technology and operational efficiency, an increase in aviation traffic means that improvements have not been enough to neutralise the effects. Legislation has been proposed to the EU in an attempt to monitor the emissions from EU airports. (Great Green List, 2009)

After deregulation, all airlines were virtually free to determine their prices and route structures. Through alliances and mergers, airlines have increased their portfolio of destinations, and with costs spread across a wider base, airlines can achieve decreasing average costs. This characteristic usually shows a 'natural monopoly'. (weber.ucsd.edu, 2009) However to assume that the larger airlines such as BA are monopolising the industry is incorrect. Cost and price cuts by airlines such as BA suggest that they have competition, and therefore are not monopolising the industry. (www.mises.org, 2009)

4.2 Economic Factors: The state of the economy affects all businesses, whether the economy is in a boom or recession affects the confidence and behaviour of consumers. These factors affect the purchasing power of customers and also the state of the economy in the short and long-term. As recession overshadows many companies in all industries, as a global organisation, the aviation industry will encounter many problems. Recession is causing consumers to make sacrifices, to search for cheaper alternatives; this means air travel will be one of the first services to be sacrificed. (Gross, 2008)

In order to understand the current state of the aviation industry, the activity levels at the UK's airports must be looked into. Recently in the third quarter of 2008, between July and September, the aviation industry faced its most turbulent times. The inflation for consumer price reached its highest since 1992 to 5.1%, detrimentally affecting the aviation industry. There have been large falls in charter passenger numbers during the third quarter of 2008, with the mergers of Thomas Cook and MyTravel in June 2007 and Thomsonfly and First Choice in March 2008, both mergers made reductions to their charter holiday capacities. UK airports saw the fastest fall in passengers since 2001 from a 0.4% decrease in the second quarter of 2008 to a 2% decrease in quarter three. This was also seen in the number of commercial flights to and from the UK being down by 1.5% from 2007 to 2008. (CAA, 2009)

Before the prospect of the economic state hitting recession, the aviation industry was facing issues of rising fuel prices. The soaring fuel prices, which reached a record high of US$186 billion in 2008, proved very detrimental to the industry, with many airlines going bankrupt, being unable to maintain their services and keep up with pricing pressures with additional overheads. (Karp, 2008)

Because the aviation industry is a global affair, the impact of exchange rates is one which affects all airlines. Recently as the value of the pound has fallen, the exchange rate has been a major issue which has affected airlines. Fuel prices are dominated by the dollar; a rise in fuel prices therefore has affected all airlines, because although the exchange rate may show a lower bill in terms of dollars, an increase in fuel prices has dented the cash outflows of all airlines. (Anon, 2003)

Recently airlines and airports have had to contend with the issue of increased air traffic at Heathrow Airport, and to rectify this issue, expansion of the current runways is required. As the 'go-ahead' was given to build the third runway, it was announced that measures were put in to limit noise and emissions, with the new runway using only the newest, least polluting aircraft. Economically the expansion is a requirement to connect the UK internationally; creating up to 60,000 new jobs. However there are many against the third runway, with protestors buying a part of the land on which the runway is proposed to be built. The land has been divided in an attempt to complicate the repurchase of the land by the government. (BBC, 2009)

4.3 Social Factors:

Changes in the demographic, trends in the way people live, think and work and the cultural aspects of the macro-environment are all social or socio-cultural factors which need to be considered. These factors affect the needs of the customer and the potential size of markets. As the trend for holiday homes abroad increases, with people on average taking more holidys per year than before, the low-cost airlines continue to grow at a phenomenal rate.

More consumers who are moving towards retirement age are buying homes abroad. And with the financial ability to set up a second home abroad, they are able to take more trips via airlines. With statistics showing annual holidays are becoming more frequent for British consumers; airlines are building up a new passenger market. With the economic state in the current recessive condition, those who continue to take holidays will look for value, and airlines who offer package deals at a budget are benefiting. (Anon, 2005)

With the introduction of low-fare airlines, consumer behaviour is changing. The airline industry found consumers who previously travelled by trains, were choosing to fly, due to the low prices on offer from airlines. This change in consumer behaviour patterns is due to price drops and increases in competition and choice. (Swarbrooke & Homer, 2007)

The distribution of income and the changes in the disposable income has a counteracting effect on the aviation industry. With recession, the income distribution will surely have a negative effect on the aviation industry. With consumers with higher income brackets continuing with the privilege of flying, leaving those with lower income brackets opting for cheaper alternatives. With the responsibility of flying millions of passengers worldwide every year, airlines also have a duty to take precautions in the interests of passenger safety.

There are many areas in which the aviation industry has to tackle safety issues. Bad weather conditions such as lightning, ice and snow are all major threats to flights and aircrafts have been designed with non-conducting materials to withstand such conditions. Heavy snow or ice on runways can make braking and steering extremely difficult or impossible, to prevent any danger from occurring; the only route is to monitor weather conditions.

Engine failure, stalling of aircrafts and fire are all issues which are difficult to predetermine, however tests and regulations have been implemented in order to be as prepared as possible. (IATA, 2009) Human error is one issue which cannot be foreseen, and in order to minimise risk checklists have been introduced to ensure all aspects of a flight are considered. Terrorism can also be categorised as human error and since the 9/11 attacks, stricter airport security measures have been introduced to prevent this. (Metric Stream, 2009)

4.4 Technological Factors:

Technological factors are vital in order for companies to have a competitive advantage, be efficient and have a major drive for change. These factors can lower barriers for entry into an industry and influence production and outsourcing decisions. The revolution of technology has had a profound effect on the global community. The internet has allowed the aviation industry to excel and grow continuously. Alongside online ticket booking, airlines have introduced paperless tickets. By eliminating paper administration, flying has become a more simple and easier to use process. The use of the internet has also influenced consumer behaviour. With the simplicity of online ticket booking, airlines are increasing revenue and custom, using modest incentives to promote online booking. (Ottawa Group, 2009)

As part of the IATA's Simplifying the Business Programme, e-tickets, self-service check-ins, bar-coded board passes and e-freight were amongst the key projects to technologically enhance the aviation industry. (Financial Express, 2009) With this new project, airlines are able to have huge cost savings, which in turn will benefit the consumer, by way of cheaper ticket prices. Electronic administration means airlines save on ticket distribution, as well as paper savings. This also eliminates risks of counterfeit, loss and damage. Online self-service check-ins has also simplified the flying process for airlines and passengers, removing the queuing process and any additional problems. (Telegraph, 2009)

The use of mobiles on aircrafts has been banned for many years, due to the risks involved and effects on the navigation equipment being highly unstable. However recently there have been plans to allow the use of mobiles on aircrafts, with an on-board base station using the passengers' own networks.

However there are currently many restrictions, with handsets only allowed on after the aircrafts reach a certain height. (3g, 2009) In order to coincide with a greener global community, airlines are adopting newer aircraft which are more improved for efficiency, with less noise pollution and fuel usage. In order to improve fuel conservation, the IATA issued a checklist on fuel and emissions to member airlines in 2005. These guidelines were introduced to assist airlines to be more eco-friendly. (New Airplane, 2009)