Regulation of Air Transport Economic Rationale and Impact

Regulation of Air Transport stinting Rationale and ImpactDavid GrantTo understand what was in the minds of those who conceived and developed frugal regulations for air transport, a good place to start is the Second founding War.ChicagoThe breeze constancy was experiencing its second period of very rapid technological development, the first such period having occurred during man War I. In 1944, it was clear that melody would play a much bigger intention during peace metre subsequently the war, than it had done before the war. The tide of the war had turned and in that respect was a sense that it would soon be over (The History Place, 2014).The minds of creative activity leaders began to focus on post-war matters. The world had been by two wars in close succession and there was a determination that this cycle should non be repeated. In his State of the Union message to congress, on 11 January 1944, President Roosevelt said We are united in determination that this war sh w hole non be followed by other interim which leads to new disaster- that we shall not repeat the tragic errors of ostrich isolationism (Peters G and Woolley J, 2014).In November of that year, the United 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 expiryed and discussed the challenges facing international civilian aviation. The multitude lasted prolonged than expected but, in the end, it achieved two things an international agreement, referred to as the Chicago principle and, a new organisation, the internationalistic genteel breeze Organisation (ICAO) to oversee international civil aviation (ICAO, 2014).The sentiment evince earlier in the year by President Roosevelt was encapsulated in the preface to the Chicago Convention. . . whereas it is desirable to avoid friction and to promote that cooperation in the midst of nations and peoples upon which the peace of the wo rld depends therefore, the undersigned presidencys having agreed on certain principles and arrangements in ordinate that international civil aviation whitethorn be developed in a safe and orderly manner . . . and operated soundly and frugalally dupe accordingly concluded this convention . . . (ICAO, 2014).In respect of an economic precept for the work that had been done, Adolf Berle, a close advisor to President Roosevelt wrote after the conventiona 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 law and standard atmosphere of the 17th century and we came out with a fair prospect of obtaining twentieth century conditions. Faithfully yours, ADoux A. BERLE, JR. (United States Department of State, 2014)Scope of RegulationThe stretch of what was agreed at the meeting was broad. It included, for example, the concept of the nationality of an aircraft. It agreed a spheric system of aircraft registration (that has obtained ever since) under which each nation was designate 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 amid nations. Outside of its scope was the apparent motion of which airmodal values flew where and what outlying(prenominal)es 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 bilaterally symmetric agreements. A standard form of bilateral agreement was prepared by the Chicago meeting (ICAO, 2014).In 1945 the International Air Transport connection (IATA) was founded and took on the quality setting fares. The first IATA fare-setting conference was held in 1947. gentle wind grew rapidly over the following decades and IATAs work diffuseed. 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). baseborn GovernmentA majority of Ameri kittys (54%) believe that regime interferes too much in society and in business (Gallup, 2013). Small government is a philosophy the main(prenominal) tenet of which is that government should necessitate involved in as little as thinkable and should stick by 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 Airline Deregulation Act. Although skyway deregulation is distinctly an initiative that was specific to the air hose industry, it is useful to see it in the mise en scene of smal l government. The 1978 flips were consistent with a move towards small government. It was President open Carter who signed the act into law, towards the end of his presidency in October 1978, but it was Ronald Reagan who oversaw to a greater extent or less of the resulting changes and is associated with deregulation in the public mind (Goetz and Dempsey, 1989).Scope of DeregulationThe moving-picture show is abroad that air hose deregulation, which commenced in 1978 and was further developed in 1992 and 2001, has eliminated economic regulation from the airline industry. This is untrue. Signifi green goddesst economic regulation remains, includingrestrictions on strange ownership of airlines, or cross-border consolidation of airlinesrestrictions on foreign airlines providing domestic go and,the tax-free status of aviation give the sack.Airline OwnershipOwnership of an airline in the US is regulated. No more than 25% of an airline whitethorn be owned by non-US citizen(s). In Europe, a similar grooming exists but the upper limit on foreign ownership is 49%The economic rationale behind these rules has been pledgeed variously as a longing to protect a fledgling industry or (in the US) military corporate trust 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 historic 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) within the territory of another state. Since then, other developments convey reduced the impact of this restriction, to the highest degree notably European Union treaties which confound created a single-market in EU member states so that cabotage restrictions no interminable apply there and any EU-based carrier may operate operate within the borders of any ether EU-state. This is not the case 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.Fuel revenue enhancementArticle 24 of the Chicago Convention stated that aviation fuel would be exempt from taxes. That article remains in force today. in that respect is general agreement that the worlds mood is changing and, that the sop up 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 foreign mission on Environment and Development 1987).Emissions from aircraft engines are one of the causes of climate change. The most solid 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, comparative 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 out fruit to as much as 10% and,aviation deposits its CO2 at a time into the upper atmosphere and so the impact on climate change may be greater than the numbers paint a picture.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 build dropped while the industry has been growing. Figure 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 book today (McManners, 2012). The regulated environment that existed for 35 years (1944 and 1978) was one in which costs and profits were less beta than they are today. In that environment, technical departments encountered less resistance when proposing safety-related initiatives than they dexterity today.The red line indicates progress between 1978 and 2010 which has been less marked. This is not to suggest any causal transactionhip between deregulation and safety. It seems much more likely that the cause of the decline is the law of diminishing returns. One can only speculate about what the rate of progress might sele ct been, had intense competition been introduced sooner. meaningmary of ImpactsThe significant impacts of economic regulation have beenThe Chicago Convention, bilateral agreements 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 sightly price to pay as it allowed nations and airlines to take risks and to develop the confidence to expand internatiomnally while secure in the k presentlyledge that their airline(s) and home market were protected.The formulation of tax-free fuel provided an environment in which the new international airline industry could grow more rapidly. This allowed aviation to grow market component and to catch up with other modes of transport. Now, accustomed the need to make aviation sustainable, it may be time to change tax-free fuel.Conclusion sparing regulation has been good for the airline industry. It has served to protect it during a time when it inevitable to be nurtured and developed.If we feeling 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 reckon 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 put across to Congress, January 11, 1944. Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http//www.presidency.ucsb.ed u/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 evil in the Air, Journal of Air Law and Commerce, Vol. 54, No. 4, Summer 1989, http//papers.ssrn.com/sol3/papers.cfm?abstract_id=2229476International Civil melodic phrase 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 explorative discussions regarding international civil aviation conference held at Chicago, November 1- descentember 7, 1944, pp. 355-613, http//digicoll.library.wisc.edu/cgi-bin/FRUS/FRUS-idx?type=turnid=FRUS.FRUS1944v02entity=FRUS.FRUS1944v02.p0622isize= text edition accessed, 22 May 2014US Government Accountability Office (GAO), foreign AFFAIRS Issues Relating to Foreign Investment and Control of U.S. Airlines GAO-04-34R Published Oct 30, 2003. Publicly Released Dec 1, 2003. http//www.gao.gov/ productions/GAO-04-34RWorld Commission on Environment and Development (WCED) (1987) Report of the World Commission on Environment and Development Our Common Future, USA 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 performance. character?Impact?Network Structure?Airline behaviour? P2P = no bag transfer no responsibility for latenessAirline performance? therefore few bags lost and therefore better performance therefore no agreement to late passengersThe role of landing fees in influencing network typeriddle re full-service versus point-to-pointEight flights make 45 marketsGlobal hubs the gulf and now Turkey?3. How and why might y ou undertake a cost psycho analytic thinking 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 world on hand(predicate). 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 bequest carriersThe difficulties?4. Are airline markets inherently un gainful? 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 trouble systems better sell cheap seats first? Supermarket 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