How Far Government Management Travel Has Come

» Posted by on Aug 28, 2013 in Airlines, History and Overview, Travel Management Centers, White Papers | 0 comments

Government travel management stems a long way back with initiatives lunched after the enactment of the “Airline Deregulation Act of 1978”. The main purpose of the act was to remove government control over fares, routes and market entry (of new airlines) from commercial aviation. The Civil Aeronautics Board’s (CAB) powers of regulation were to be phased out, eventually allowing passengers to be exposed to market forces in the airline industry. The act, however, did not remove or diminish the Federal Aviation Authority’s (FAA) regulatory powers over all aspects of airline safety. The stated goals of the act included:

  • the maintenance of safety as the highest priority in air commerce;
  • placing maximum reliance on competition in providing air transportation services;
  • the encouragement of air service at major urban areas through secondary or satellite airports;
  • the avoidance of unreasonable industry concentration which would tend to allow one or more air carriers to unreasonably increase prices, reduce services, or exclude competition; and
  • the encouragement of entry into air transportation markets by new air carriers, the encouragement of entry into additional markets by existing air carriers, and the continued strengthening of small air carriers.

The act intended for various restrictions on airline operations to be removed over four years, with complete elimination of restrictions on domestic routes and new services by December 31, 1981, and the end of all domestic fare regulation by January 1, 1983. Exposure to competition led to heavy losses and conflicts with labor unions for a number of carriers. Between 1978 and mid-2001, nine major carriers (including Eastern, Midway, Braniff, Pan Am, Continental, America West Airlines, and TWA) and more than 100 smaller airlines went bankrupt or were liquidated including most of the dozens of new airlines founded in deregulation’s aftermath.

Another problem stemmed with travel agencies having monopoly on two aspects of air travel: (1) information and (2) ticketing for more than 20 years. These monopolies where lost due to deregulation; information is plentiful and tickets are more and more irrelevant. By cutting agents’ commission, airlines decrease their dependence on travel agencies as a distribution channel. The process started in the United States (U.S.) in 1995 when seven airlines, (American, Delta, US, Trans World, United, Northwest and Continental Airlines) joined forces to put a cap on commissions paid to travel agencies. They set an upper limit for travel agents’ commissions fixed at $50 for domestic flights, and at $100 in 1998 for international flights. In October 1999, airline commissions were reduced to 5% and finally eliminated in the U.S. in March 2002 (on average, one commission cut every 14 months). Three key variables triggered the end of the commission model:

  • The unsustainable financial losses by airlines due to the growth of low-cost carriers leading to an increase in the number of bankruptcies
  • No negative consequences from previous commission cuts: airlines had progressively lowered the commission payments starting in February 1995
  • No effective recourse for travel agencies (group actions prohibited by US law)

So, what’s interesting to me is: where are the fees being applied?

Most travel agents have managed the commission cuts by migrating to a “fees for services” business mode; by applying charges to each transaction. The structural changes that are taking place in the industry are such that travel agents need to be able to provide added value for which they can charge the client and a lot of them are now doing better than they were before commission was cut. However, fees have raised the total cost of travel for the traveler and customers are unwilling to pay for a service they did not have to pay for in the past.

The government has played an important role in shaping air transportation as well as shaping the roles and responsibilities of individuals who use government funds for travel. In the deregulation act, the federal government loosened its control of the airline industry. Without government controls over airlines and their route structures, the airline business became a more competitive industry. Many airlines dropped unprofitable routes which were no longer subsidized in favor of more heavily travelled, profitable routes. New airlines sprung up, some literally overnight, to take advantage of new markets.

To improve efficiency and cut costs, airlines developed a “hub and spoke system” where some airports are used as a connecting point for passengers from different origins and destinations. Large airlines have two to five hubs. Many major cities have hub airports while other municipalities continue to seek airlines willing to develop hubs at their airports. In addition to adding thousands of new jobs to an area and an improved tax base due to related economic growth, “hubs bless a community with a unique synergy created by the comings and goings of thousands of people”.

Another major benefit for hub cities is the huge numbers of flights to choose from to many different destinations. If a passenger needs to travel between two major hubs, such as Detroit and Chicago, there are many flights on airlines (i.e., American, Delta, Southwest, and United) to choose from.

With everything good, I believe there are some disadvantages… One of the biggest problems facing the airline industry today is airport congestion, a condition intensified by the hub-and-spoke method of operations that concentrates all aircraft activity into certain narrow time periods during the day. Much of the scheduling problem at major airport hubs is a direct result of airlines’ attempts to meet the demands of customers; that is, providing service at the times passengers want to fly.

Unfortunately, passengers tend to want to fly at the same times, so all the airlines schedule flights around those times. The inevitable result is delayed flights, which hurt everyone:

  • passengers miss connections,
  • airlines lose money as planes burn fuel on the ground, and
  • the government air traffic control system gets saturated.

However, the carriers do not feel they can curb service since satisfying demands is the rule of the day….

By: Anna Quartey-Smith

Disclaimer: The comments in this paper are mine and do not reflect the opinions of my employer. 


Airline Deregulation Act:

Effects of Airline Deregulation:

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