UNITED AIRLINES AND REGULATIONS

I have attached the Case study for the McDonalds and the Analyse guidance All I waUnited Airlines was founded 1926 when Walter T. Varney carried airmail using a Swallow biplane from Pasco, Washington to Nevada. This event is considered United Airlines’ birth. Subsequently, United has faced many issues over the course of its existence, to which it had to adapt in order to maintain financial stability, as competition kept increasing. A major factor that have brought those changes –and still continues to do so- has been the implementation of new regulations, whether external or internal to the aforementioned airline. Currently, United serves 60 countries and 350 destinations across the world, making it a major modern airline.
Within the aviation industry, there are numerous aspect that have the ability to dramatically effect aviation finance as a whole. United Airlines says, “As an industry, we face volatile fuel prices, intense competition, excessive tax burdens, regulatory and structural to growth (…).” (Government / Policy) In order to illustrate how United Airlines was impacted by new regulations, and chose to adapt to them, I will be discussing the Deregulation Act, the U.S. Antitrust Policy, the Open Skies Agreement, Airlines for America, Star Alliance, and Vision 2050.
Prior to the Deregulation Act, the Civilian Aeronautics Board (CAB) had tremendous control over the whole of the airline industry. They were the ones to set the airline tickets’ prices, allocation of routes as well as schedules. Airlines were obligated to ask the CAB for their authorization prior to opening a given route, and were not allowed to freely choose their pricing nor their schedule. Furthermore, the CAB also controlled agreements between carriers, mergers and customer issues. If United Airlines wanted to make an amendment to one of their operated routes, like the ticket prices, they would have been mandated to go through a very long and slow governing process prior to doing so; if their request got accepted. This left United only being able to compete using onboard services such as quality of food served, quality of customer service delivered by both cabin crew and ground personnel, and punctuality. The CAB was creating a dauntingly challenging environment for United Airlines to evolve in, because the prices were high and the average number of seats filled was low. “In the early 1970s load factors were only about 50 percent.” (Smith Jr. & Cox, 2008) At a later stage, the Deregulation came along, and, with it, a huge overhaul on the aviation industry.
In 1978, the Airline Deregulation was ultimately approved. This process took many years, as the treaty sparked a lot of debate and controversy. However, President Jimmy Carter finally signed “the most sweeping act of deregulation the United Stated had ever seen in the fall of 1979.” (Peck, 2009) United Airlines was now able to take a lot more control. They were able to make a lot of improvements to their routes and equipment, making air travel more economical using a balanced approach to operating costs for instance, and the general public. This allowed pricing to be based on highly intricate pricing models, instead of a one size fits all pricing. Since the Deregulation, the airline industry has grown tremendously in the Unites States. From the years 1979 to 2001, there has been an amazing growth of 225% in passengers.
Even though deregulation can create tremendous growth, it also can be responsible for financial issues. “United reported a net loss of $540 million in the third quarter of 2001 (…). They reported earnings of $425 million and $359 million in the corresponding quarters of 1998 and 1999 respectively.” (Gowriankaran, 2002) Most of the issues relate to the cost of labor and fuel, which are constantly fluctuating, thus hardly precisely forecastable. Fuel prices can drastically change from a year to another, and therefore greatly impact an airline’s capacity to generate stable profit margins.
Another aspect of airline deregulation also brought additional difficulties to existing airlines: an ever increasing competition. Before, due to the strict regulations from the CAB, the creation of a new airline was extremely complicated, as market penetration was almost impossible. With increased flexibility, came a new generation of airlines (low cost carriers such as Spirit, JetBlue, Frontier, ExpressJet, amongst others), which interfered with already existing airlines’ plans. Therefore, United was to act in order to keep attracting customers, and reduce costs to keep financially afloat. In order to respond to the new marketing environment by encouraging valuable repeat business through rewarding loyal customers, United launched its loyalty program “Mileage Plus”, less than a week after American Airlines launched their “AAdvantage” program –in May 1981-. “In many respects, Mileage Plus was a mirror image of AAdvantage. The “Plus” referred to the few (but significant) elements in UA’s program which distinguished it from AAdvantage–a 5,000-mile Enrollment Bonus and no mileage expiration. […] The large U.S. FFPs (American’s AAdvantage, United’s Mileage Plus, Delta’s SkyMiles) have more than 20 million members each.” (FrequentFlier.com, 2014) Southwest was first reluctant to create a FFP. However, due a significant loss in market share, it had to adapt as to keep attracting customers. FFP’s are extremely powerful marketing tools that emerged as a result of the competition brought by the deregulation. “So both entered the FFP game late, and had to work extra hard to make up the competitive disadvantage they had allowed to accrue. “We didn’t want an FFP. But it came to my attention that FFP’s were siphoning business travel away from us. We did it defensively, and I think if we had not done that we would have been terribly disadvantaged.” (FrequentFlier.com, 2014)
On another note, although GDS’s were originally under development before the deregulation (TCA in 1953, or American Airlines’ collaboration with IBM resulting in the emergence of SABRE in 1964, for instances), the aforementioned induced competition made airlines use theirs in a way more intensive manner, as to reach out to as many potential customers as possible, create extensive databases to be used for further forecasting (analysis of trends, likes, most popular schedules and routes, targeting specific passengers’ segmentations) and reducing booking expenses. The most prominent GDS programs in use nowadays are SABRE, Amadeus (mostly European businesses), KIU (Latin America), Mercator, Navitaire (LLC’s), and PARS. GDS now includes travel agents, in order to provide customers with the best values possible, making offers more attractive. PARS (Programmed Airline Reservation System), which was developed by IBM as an improved version of System 360, is the GDS United Airlines opted to use, along with carriers such as Brussels Airlines, US Airways, Swiss, or Coppa, amongst others. GDS are also crucial because they allow for airlines to come together and share data. (Wardell, 1991)
Deregulation also encouraged changes in the configuration of airlines. After deregulation, most of the biggest airlines started to operate on a “hub-and-spoke” system. This means an airline would choose an airport (the hub) as the destination point for the many flights from other cities (spokes). This system gives commuters from small and mid-sized cities better and easier connections; how this would work is the commuters would take a flight to the airline’s hub, and then take a connecting flight to their final destination. This not only benefits commuters, but also allows airlines, such as United, to maximize profits on given routes; for instance, keeping all ground material necessary to take care of medium to long haul flights (towing big heavy planes, boarding gates, luggage handling equipment,…) in a precise hub allows airlines, such as United, to decrease expenses related to ground operations. In addition, this also made it possible for United to better fill flights, instead of having to fly routes –imposed by the CAB- with a low percentage of passengers per flight, leading to eventual losses. Nowadays, United Airlines has eleven hubs. (United Airlines, 2015) For a long time, Chicago O’Hare airport was the airline’s largest hub. However, subsequently to merging with Continental in 2010, United Continental’s busiest airport hub has shifted to Houston, Texas –George Bush Intercontinental Airport-. (Spiegel, 2011). Other domestic hubs include Washington DC, Newark, Cleveland, Denver, Los Angeles, and San Francisco. United’s international hubs include Frankfurt, Tokyo, Guam, and London (United Airlines, 2015). International routes have also been deregulated through the Open Skies Agreement, which provided an increased scope of varied options and flexibility. This agreement brings us into our next topic.
The Open Skies Agreement was first initiated in 1992 when the Unites States concluded the first agreement with the Netherlands. Open Skies Agreements allow air transport between countries all over the world without governments interfering with commercial airlines’ decisions regarding routes, capacity, and the prices charged. (U.S. Department of State, 2015) There are eleven elements to the Department of Transportation Order 92-8-13 pertaining to Open Skies Agreements, and they are as follows:
1. Open entry on all routes.
2. Unrestricted capacity and frequency on all routes.
3. Unrestricted route and traffic rights, no restrictions on intermediate or beyond points, change-of gauge, routing flexibility, co-terminalization of 5th Freedom traffic.
4. Double disapproval in 3rd and 4th Freedom markets, price matching rights in 3rd country markets and price leadership to the extent that carriers in 3rd country markets have it.
5. Liberal charter arrangements (least restrictive of two regimes applies).
6. Liberal cargo regimes.
7. Un-restricted Conversion and remittance arrangements
8. Open Code-sharing arrangements.
9. Liberal self-handling arrangements.
10. Level playing field with respect to user charges, fees, inter-modal rights, access to infrastructure.
11. Explicit commitment for non-discriminatory operation of an access for Computer Reservation Systems. (Fitzgerald, 2010)
Today, there are over a hundred Open Skies partners. Carriers in the United States even decided to resume direct service to Liberia, a current Open Skies partner, after a twenty year disruption. (U.S. Department of State, 2015) However, an Open Skies Agreement does not allow United to transport foreign passengers within their country, or vice versa. Over seventy percent of international departures from the United States are now flying to Open Skies partners.
There are many differences in opinion regarding the Open Skies Agreements. However, a majority of people believe it is beneficial to the economy as it expands cooperative marketing arrangements, relaxes charter rules, increases flexibility for airline procedures, and contains obligations requiring both governments to respect the important principles of safety and security. These agreements also create numerous new cultural links worldwide.
As a result of Open Skies Agreements, United Airlines was able to implement new routes to numerous countries; today, United operates flights to about 60 different countries. Open Skies Agreements comprise of over a hundred partners, including all 27 EU members states.
A private study found that new direct service between a U.S. city and a point in the European Union generates up to $720 million annually in new economic activity for the U.S. city and its local region, depending on the size of the markets. (Bureau of Public Affairs, 2011)
Others believe the Middle Eastern airlines “have downplayed the role of the government subsidies in their growth in recent years.” (Laing, 2015) Now let us see why Middle Eastern airlines are being accused and what the plans are to remedy this situation.
The Open Skies policy is based on the principle of fair competition in a place where there is no government distortion. The Middle Eastern airlines consist of Qatar Airways, Etihad Airways and Emirates Airlines. These groups do not face the same tax and infrastructure burdens as the United States does. Their regulation burdens are not like the United States’ either. This gives them the opportunity to grow with a continuous increase in rate, enabling them to reinvest into their products and expand globally. Some groups claim that they have received more than $42 billion dollars in funds, with a no payback, from their government. This would make it hard for United Airlines to compete in the airline industry, because American carriers do not receive these kinds of funds. These Middle Eastern airlines appear to be violating the Open Skies policy.
For that reason, United Airlines, along with American Airlines and Delta Airlines are calling for a reassessment of the agreements. The Air Line Pilots Association, International, the Allied Pilots Association, the Association of Professional Flight Attendants, and the Airline Division of the International Brotherhood of Teamsters are also requiring the reassessment to be taken into consideration. They believe that the Middle Eastern airlines are playing from an uneven playing field, with these airlines having the upper hand. (Martin, 2015) They claim that this can put American jobs and the long-term sustainability of American carriers, including United Airlines, in grave danger. “We welcome an open global marketplace that drives innovation and service.” (Laing, 2015) However, they want to do this on a fair basis. Although there may be some debate about Open Skies Agreements, “By allowing air carriers unlimited market access to our partners’ markets and the right to fly to all intermediate and beyond points, Open Skies Agreements provide maximum operational flexibility for airline alliances.” (U.S. Department of State, 2015)
In 1997 a world-class group of five airlines came together to form Star Alliance. These airlines included Air Canada, Lufthansa, SAS, Thai Airways, International and United Airlines. “United is a founding member of the Star Alliance network.” (Staralliance.com, 2015) Star Alliance is “the first truly global airline alliance to offer worldwide reach, recognition and seamless service to the international traveler.” (Star Alliance Chronological History, 2013) This alliance brings together a variety of services together to improve the traveler’s experience. Some of these services include lounge access, shared features of loyalty programs, ticketing and check in services. Today, Star Alliance has a total of 28 members within its network. These airlines include Adria Airways, Air New Zealand, Brussels Airlines, EVA Air, Aegean Airlines, ANA, Copa Airlines, LOT Polish Airlines, Air Canada, Asiana Airlines, Croatia Airlines, Lufthansa, Air China, Austrian, EGYPTAIR, Scandinavian Airlines, Ethiopian Airlines, Shenzhen Airlines, Singapore Airlines, South African Airways, Swiss, Avianca, Tap Portugal, Thai, Turkish Airlines, TAM Airlines, United and US Airways. (Staralliance.com, 2015)
A significant amount of Star Alliance’s members are involved with code sharing as well. Code sharing is a commercial agreement allowing an airline to have their designator code on a flight operated by a different airline company. United has a code share agreement with seventeen other airlines. “These agreements allow carriers to expand their service offerings without additional resources, equipment and costs.” (Code Share Fact Sheet, 2015) The particulars to each agreement determine how revenues are shared. If there is no agreement, then there is no share of revenue that there would otherwise be.
United Airlines benefits from such alliance and associated agreements because it increases its visibility in foreign countries where other airlines may be better known; therefore, this creates an indirect form of publicity. In addition, code shares allow for United to better fill their planes, and maximize profits compared to operating costs.
The U.S. Antitrust Policy originally started in 1890 and was also known as the Sherman Antitrust Act. The main goal of the policy is to keep firms from unduly limiting the competition in markets, so there can be more economic efficiency. “Many developing countries have derived their antitrust legal framework from Western models, often as a condition of trade agreements.” (Markovich, 2014) The effectiveness of this policy depends on many factors. Some include the willingness to trade, the degree of corruption and the level of economic growth.
In 2000-2001, the Department of Justice (DOJ) investigated United’s suggested procurement of US Airways. As of that time, it was the last major merger the DOJ investigated. They looked at various aspects like both airlines’ economic stand point and how the merger would affect competition. The two airlines were the only two major airlines who offered nonstop service from the Washington D.C. area to many other cities. They both have strong east coast hubs. They were the only 2 out of the three airlines connecting some northeast cities to some in the southeast cities in the United States. Lastly, this merger would reduce the competition in a lot of transatlantic industries. In the end, DOJ determined that the merger would create a lot of competitive problems and would greatly lower the competition in a variety of markets. Therefore, “DOJ announced it would sue to block this transaction and United and US Air abandoned the deal.” (McDonald, 2005)
IATA’s Vision 2050 Conference brought together a group of 37 strategic thinkers, representing a wide variety of industry stakeholders. Members included government ministers, regulators, airlines, manufacturers, technologists, financiers, airports, air navigation service providers, labor and consumers. It has been predicted that, in 2050, there will be an estimated 16 billion passengers, and 400 million tons of cargo flown. There needs to be a common effort towards being able to manage this drastic growth using sustainable technologies as well as an efficient infrastructure while still satisfying the travelers and compensating the shareholders. Vision 2050 highlights the need for continuous change to procure a successful future for the aviation industry. Even though revenues have increased to double than what was expected, the actual profits are another story. In 2010, even though the industry’s profit was $18 billion, it was only equal to a poor margin of 3.2%. That does not even cover the 7% to 8% cost of capital. The times are changing, so the aviation needs to change with it.
Five main topics were discussed during the aforementioned key meeting organized by IATA. These are namely profitability and value creation, customers’ environments, infrastructure, technological improvements, and finally, aircraft’s efficiency. This vision does not provide a straightforward answer that would procure a successful future. It instead highlights the need for change in order to do so.
Unfortunately, there are many things that can hinder United’s profitability. “Lack of profitability is driven by poor industry structure, misguided government intervention and inconsistent strategy choices.” (Giovani, 2011). Other powerful threats include high speed trains (Eurostar, Thalys, ICE, and maglev trains being developed in Asia), private jets, and the improvements that have been made in video conferencing, distance learning, and even Skype. Increased amount of taxes also represent a threat to United Airlines. The United States government has tremendously increased the amount of taxes over the years. As of 2014, there are 17 taxes within the aviation sector, in comparison to 6 distinct taxes in 1990. The taxes are higher for air travel and are taxed far more than any other means of transportation. Over 20 billion in taxes were paid in 2014. This is even higher than the tax on tobacco and alcohol, which are taxed to discourage their use.
United Airlines has been in business for almost 9 decades and has had many ups and downs, mostly driven by changes in regulation. For a while government regulations basically controlled everything. It was practically impossible to request a change. Then, came the controversial Deregulation Act in 1978, and United Airlines was finally able to set their own routes, prices, and schedules. This made them more efficient. However, due to the cost of labor and fuel constantly changing as well as the increasing taxes, achieving high profit margins is a daunting challenge that demands a lot of innovation and creativity in order to adapt effectively to the ever changing marketing landscape. Fortunately, United has proven to be resourceful in that extend, with the prompt creation of “Mileage Plus”, and PARS in an attempt to cope with the competition induced by the Deregulation Act. The U.S. Antitrust Policy gave United Airlines freedom to fly overseas, and since, they are a member of Star Alliance, which makes it easier to branch out into new countries and attract more travelers. Recently, the new Open Skies Agreements are generating fierce controversy and debate, since Middle Eastern airlines are thought to be violating the Antitrust Policy by obtaining funds from the government which they do not have to pay back. Now, with the growing number of airline travelers, Vision 2050 will be helpful in understanding the need for continuous change to procure a successful future in aviation. However, for Vision 2020 to be successful, everyone needs to be on the same page, including the government. Time will tell if Vision 2050 will be used and if it was successful.
Works Cited
Bureau of Public Affairs. (2011, March 29). Open skies partnerships: Expanding the benefits of freer comercial aviation. US Dept. of State. Retrieved from http://www.state.gov/r/pa/pl/159347.htm
Code Share Fact Sheet. (2015, March 02). U.S. General Services Administration. Retrieved from http://www.gsa.gov/portal/content/103887
Fitzgerald, P. P. (2010). Darkening skies? International conference on air transport, air law & regulation (p. 3). Singapore: Centre for International Law – National University of Singapore. Retrieved from http://cil.nus.edu.sg/wp/wp-content/uploads/2010/05/Liberalisation-of-Air-Transport_Paul-Fitzgerald.pdf
Giovani. (2011, February 12). Vision 2050. International Air Transport Assiciation. Retrieved from http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Government / Policy. (n.d.). United Airlines. Retrieved from http://crreport.united.com/our-business/government-policy
Gowriankaran, G. (2002, January 18). Competition and regulation in the airline industry. (J. Goff, Ed.) FRBSF Economic Letter, pp. 1 – 3. Retrieved http://www.frbsf.org/economic-research/publications/economic-letter/2002/january/competition-and-regulation-in-the-airline-industry/
Laing, K. (2015, March 12). Airlines: Foreign subsidies are destroying flight competition. The Hill. Retrieved from http://www.thehill.com/policy/transportation/235543-airlines-foreign-subsidies-destroying-flight-competition
Markovich, S. J. (2014, February 6). U.S.A. Antitrust Policy. Council on Foreign Relations. Retrieved from http://www.cfr.org/corporate-regulation/us-antitrust-policy/p29984
McDonald, J. B. (2005, November 3). Antitrust for airlines. U.S. Department of Justice. Retrieved from http://www.justice.gov/atr/public/speeches/217987.pdf
Peck, B. (2009, January 30). 30 years after airline deregulation: Who is the big winner?. All Rise (Winter), 16-18. Columbus, OH: OSU Moritz College of Law. Retrieved from http://moritzlaw.osu.edu/news/allrise/2009/01/30-years-after-airline-deregulation-who-is-the-big-winner/
Smith, F. L. Jr., & Cox, B. (2008). Airline deregulation. Library of Economics and Liberty. Retrieved from http://www.econlib.org/library/Enc/AirlineDeregulation.html
Star Alliance Chronolgical History. (2013, October 09). Star Alliance. Retrieved from http://www.staralliance.com/en/about/organization