Printer Friendly

Birth, marriage, life, and death: a life-cycle approach for examining the deregulated U.S. airline industry.

Before 1978 the airline industry in the United States was stable and relatively healthy. However, in the 1960s and '70s, the deregulation movement became ever more powerful in both the academy and Congress. Economic theorists and their congressional allies made numerous indictments of the airline industry's performance under regulation. Their analyses also contained a multitude of predictions about the potential benefits of deregulation.(1)

After more than a dozen years of deregulation it appears that the deregulators were both right and wrong. The scenario proceeded very much as predicted for about the first six years. The older large carriers saw their market shares fall as innovative entrepreneurs entered the arena and many of the previously constrained smaller companies became increasingly aggressive. New airlines emerged, prices plummeted, and the flying public had a choice of airline service options such as had never been seen before.

Sadly, that choice has not been seen since. The year 1985 marked the high point of airline deregulatory accomplishment. Recently, many reversals of the competitive trend have occurred and the industry is now more highly concentrated than before the Airline Deregulation Act of 1978.

Using life cycle analysis, we examine the dynamics of competition in the airline industry and the resulting structural changes. Life cycle analysis is a valuable approach to help explain success and failure among the airlines. It also leads to insights concerning the complex interrelationships among government policy, economic theory, carrier strategy, and competitive dynamics.


During the past three decades the life cycle concept has seen increasingly useful application. The concept has been used for product management,(2) strategic planning,(3) and cost and financial aspects.(4)

Because of its reliance on a biological analogy (birth, growth, maturity, death), the life cycle concept has gained a tremendous reputation in today's business world. While life cycle analysis is not without its critics,(5) many business firms find the concept useful. Support for the life cycle concept is found in news reports, speeches, annual reports, and brochures.(6)

The life cycle concept is defined as "progression of a specific product (or service) from market development to market decline."(7) In the market development stage, a product or service is introduced to the market. When an apparent opportunity exists, many firms enter the market without any knowledge of unknowns, uncertainties, and risk levels. On the other hand, some firms adopt a "used apple policy."(8) These firms let others bite the opportunity apple first; they believe the second or third bite is as good (avoiding the uncertainties in turbulent markets). In the growth stage, where consumer demands increase, sales take off and firms with the "used apple policy" enter the market.

When there is an increase in consumer demand for a service in a deregulated industry such as the U.S. airline industry, the rapid growth often leads to what Wasson calls "competitive turbulence."(9) In such an environment, firms test different ways of getting customers to try their products, pressuring the originator of the service (or product) to seek better alternatives.

This often means adoption of a new marketing strategy (the introduction of frequent flier programs is a good example) to compete with new entrants. In situations where consumers accept the new strategy and sales increase, more competitors may be attracted. Consequently, some of these firms will be forced to lower their prices in order to survive.

According to Wasson, "competitive turbulence" occurs before the maturity stage of the life cycle. In this stage, firms find themselves in battles for market share. The stronger firms usually survive and enter the market maturity stage. Other firms with less strength often merge. However, the smaller, newer, and less experienced firms fail and reach the market decline stage before they reach market maturity. In maturity stage, price competition becomes intense and emphasis is placed on customer service and promotional strategies.

Firms that are not able to compete with lower prices experience lower demand and sales. Eventually, these firms enter the next stage: market decline. Finally, in market decline, some firms adopt a variety of marketing strategies in order to survive. The attractive ones are usually bought by bigger firms, while the less attractive firms are forced to leave the market.

Proponents of the life cycle concept have noted situations that appear relevant to the U.S. airline industry. Day feels that "the stage of the life cycle also acts as a moderating variable through its influence on the value of market share position and the profitability consequences of strategic decisions."(10)

Thorelli and Burnett contend that the life cycle concept also explains changes in industrial structure, i.e., problems of concentrated industries. They state that "for antitrust enforcement it seems important to know where an industry finds itself on the PLC."(11)

The life cycle concept dictates that change and adaptability are necessary for survival. Fawcett and Farris examined the airline industry and, while not using specific life cycle analysis, found that this necessary adaptability contradicted many of the projections of the deregulators. They conclude that "contestability, the theoretical foundation of deregulation, has been clearly no longer applies, at least in the industry's current phase of evolution and adaptability."(12)

The above comments indicate that much of what has been happening in the airline industry can be explained within the context of the life cycle concept. We next examine the U.S. airline industry in general, and then make an analysis of individual companies and their evolution along the life cycle curve.


Data from 1977, 1985, and 1989 on major U.S. airlines reveal that the changes in the U.S. airline industry bear a close approximation to the life cycle concept. Deregulation of airlines in 1978 gave birth to many new entrants, which was followed by rapid market growth. All of this resulted in the competitive turbulence which peaked in 1985, the year with the lowest industry concentration. In 1986, several airlines merged in order to survive the pressure created by competitive turbulence. Finally those who were the market leaders followed their normal life cycle curve and those who had limited strength or attractiveness were often doomed to failure and death. Figure 1 illustrates the various stages of a life cycle construct for the airline industry. The major firms are placed at important life cycle points for the time period 1978 through 1991. In the following sections each of these stages will be examined using data from 1977, 1985, and 1989.


Many economists and politicians thought the airline system was too protected and not competitive enough. A major academic argument was Jordan's(13) finding that intrastate airlines in California provided both lower fares and better levels of service than their federally regulated counterparts.

Senator Ted Kennedy(14) emphasized the point that since the industry originally came under federal economic regulation in 1938, not even a single new interstate airline has been given entry permission by the Civil Aeronautics Board (CAB). It was predicted that airline deregulation would lower prices for the traveling public through increased competition, improve service levels and flight schedules, enable greater fuel efficiency, and help fight the overall impact of inflation.

President Carter signed Public Law 95-504 on October 24, 1978, and airline deregulation became reality. The mechanical details of the legislation called for a relatively gradual path towards open entry and total rate flexibility. The Civil Aeronautics Board (CAB) itself was to be eliminated in 1985.

However, there was nothing in the legislation that precluded the CAB from moving at a faster pace than the minimums mandated by the law. The nation saw competition escalate at an amazing pace, leading to competitive turbulence. The industry quickly found itself operating in a virtually totally deregulated atmosphere. The new era had arrived sooner than many could ever have imagined.


There had been very little turnover in the old airline industry. Merger was generally allowed only to preserve the service of a failing company. No new carriers had been permitted into the industry, as the politicians often pointed out in their debates on deregulation. The positions of the leading airlines had been quite stable for many years.

Table 1 lists the top fifteen air carriers of 1977 ranked by passenger revenues, along with their percentage share of the market, and revenue passenger miles.

United Airlines had historically led the TABULAR DATA OMITTED industry in passenger revenues. In 1977 United outdistanced runner-up American by a margin of almost 25 percent in relative terms. United's share of industry passenger revenues amounted to almost 15 percent, compared to American's 12 percent. Third and fourth position were held by Trans World and Eastern, with both at just under $2 billion in passenger revenue and about 11 percent market share. Delta was in fifth place with more than 10 percent of industry revenues. The five largest airlines aggregated almost 60 percent of industry passenger revenues.

It is interesting to note that United, American, and TWA have somewhat higher shares of RPM's than revenues. This is the result of relatively longer average hauls. With shorter route structures, the situation is reversed for both Eastern and Delta. The five leading firms aggregate slightly over 61 percent of total revenue passenger miles.

Pan American comes in a relatively distant sixth with slightly over 8 percent of total passenger revenues and almost 9 percent in revenue passenger miles. There is another substantial gap separating Pan Am and number seven Northwest, which gathers about 5 percent of both passenger dollars and RPM's.

Braniff is in eighth place and generates just about 4 percent of revenues and revenue passenger miles. Western, Continental, and National, the ninth, tenth, and eleventh largest carriers, are generally within the 3 percent range for both share of passenger revenues and revenue passenger miles. Number twelve Allegheny is in the mid 2 percent area. The last three airlines among the top fifteen--Hughes Air West, Frontier, and North Central--are in the 1 percent range for share of total industry passenger revenue and revenue passenger miles.

In 1977 the fifteen largest airlines totaled almost 94 percent of passenger revenue and 95 percent of revenue passenger miles. The top ten accumulated almost 85 percent and 87 percent, respectively, of passenger revenues and RPM's. This high degree of concentration had often been discussed in congressional hearings. It was predicted that a liberalization of federal control on entry and a greater ability for existing carriers to expand their routes would lower the level of concentration in the industry.


The Airline Deregulation Act enabled many changes in the shape and structure of the airline industry. Numerous new carriers entered the industry and deregulation appeared to be achieving its predicted goals. Meyer and Oster(15) have analyzed the changing competitive situation in the early years of airline deregulation. It appears that 1985 was the high point of deregulatory accomplishment; industry concentration reached its lowest point. New entrants had invaded the market. Older, smaller firms were expansive and innovative. For the largest airlines, the rankings had undergone some significant alterations.

Table 2 presents this information. The most prominent change by 1985 was the loss of the number-one spot by perennial leader United to American Airlines. In 1985 American beat United by more than a half billion dollars in passenger revenue and led the industry with 12.7 percent of revenues and 13.4 percent of revenue passenger miles, compared to United's 11.15 percent passenger revenue and 12.36 percent of RPM's.

A reinvigorated Delta has almost caught United, coming up from fifth place in 1977. Close behind Delta was a very aggressive Eastern Airlines with 10.9 percent of passenger revenues and 9 percent of RPM's. Trans World (third in 1977) is a distant fifth, with only 8.2 percent of passenger revenue and 9.5 percent of revenue passenger miles.

The five largest carriers total only 54 percent of passenger revenue, compared to almost 60 percent in 1977, and 53.8 percent of revenue passenger miles, compared to 61.4 percent in 1977. That amounts to a relative market share decline for the top five of approximately 10 percent.

However, we should note that the fates of individual airlines show important differences. Of 1977's big five, United, Eastern, and Trans World (TWA massively so) lost market share. On the other hand, Delta and American gained share.

Pan American retains its number six ranking, but its 1985 market share has fallen to 6.8 percent from its 1977 level of almost 8.2 percent. Northwest is still in seventh position with its share increasing slightly from 5.23 percent to 5.49 percent. However, its RPM share increased a full 1 percent in absolute measure, from 5.66 percent to 6.65 percent.

USAir, the eighth largest carrier, illustrates a rather innovative path to success. Previously called Allegheny Airlines, the firm changed its name to USAir in an attempt to gain the aura of an airline of national scope. Expanding aggressively from its traditional Pittsburgh hub, the company increased its share of revenue from 2.66 percent in 1977 to 4.14 percent in 1985. This is a relative increase of over 55 percent. In addition, its RPM's increased from 1.86 percent in 1977 to 2.94 percent in 1985.

A new firm formed by merger held ninth place in 1985. Republic Airlines resulted from the 1978 combination of two regional carriers, North Central and Southern. Its 1985 share of passenger revenue amounted to 4.07 percent. The two predecessor firms combined in 1977 controlled a total of only 1.92 percent. Like USAir, Republic exhibited the ability to transform a regional operation into an air carrier of essentially national scope.

The tenth largest carrier of 1985, which also held tenth place in 1977, is Continental. While its absolute revenue dollars had grown by well over twofold, market share increased only from TABULAR DATA OMITTED 3.46 percent to 3.93 percent in 1985. Continental's revenue passenger mile share increased from 3.67 percent in 1977 to 4.88 percent in 1985. The lower increase in dollar share compared to RPM's gives statistical evidence of Continental's low fare competitive strategy.

The ten largest carriers accounted for 78.5 percent of industry passenger revenues in 1985, compared to a larger 84.5 percent in 1977. Similarly, the revenue passenger miles for those firms dropped from 87.48 percent in 1973 to 79.55 percent in 1985.

For the second five group of carriers, their share of passenger revenues in 1977 was 24.7 percent, compared to 24.5 percent in 1985. While the five largest carriers out of the top ten in 1977 had experienced major market erosion, the second five group was holding its own. However, individual firms showed great differences.

The number eleven airline in 1985 was Piedmont. It was only the eighteenth largest airline in 1977, with a market share of just under 1 percent. Piedmont had increased its market share to 3.3 percent, a gain of more than 350 percent. Twelfth place in 1985 was held by Western Airlines, tumbling from ninth in 1977. Revenue share had decreased from 3.46 percent to 2.98 percent, a loss of almost 14 percent in relative terms.

Number thirteen, People Express, had been one of the success stories of deregulation. People Express was a totally new concept. It was the initiator of complete "no-frills" service at bargain fares. Additionally, all employees, who worked a number of different jobs, were also stockholders. It was decidedly a new type of competition within the airline industry, run by a new type of employee.

At first the firm could do no wrong, but later it failed after overexpansion and direct competition with the largest carriers. People Express had tried to transcend its earlier innovative market niches. The company soon directly faced the marketing strength and sophisticated yield management of the giant airlines. The competition met People's low fares with no need for the traveler to endure the inconveniences of no-frills service. People Express turned into a financial disaster and was taken over by Frank Lorenzo's Texas Air Corp. The remnants of People Express were merged into its Continental Airlines subsidiary.

Southwest Airlines was the fourteenth largest carrier of 1985. The firm had ranked only twenty-fourth in 1977, with market share of a mere 0.34 percent. By 1985 Southwest's share of passenger revenues had grown to 1.67 percent, an increase of nearly 500 percent. While it had expanded aggressively, Southwest kept its focus on downtown limited service airports such as Houston Hobby and Dallas Love Field. Southwest continued a regional orientation rather than challenging the largest carriers on a national basis. It thus avoided the major strategic mistakes of People Express. Rounding out the list of the largest carriers was Pacific Southwest Airlines (PSA). It had expanded its market share from 1.19 percent in 1977 to 1.40 percent in 1985.

As a whole, the fifteen largest airlines saw their share of passenger revenues decrease from 93.9 percent in 1977 to 90.1 percent in 1985. Also, their revenue passenger miles dropped from 95.2 percent in 1977 to 91.17 percent in 1985. Interestingly, the final five of the top fifteen actually increased their market share by almost 23 percent on a relative basis. The smaller airlines at the end of the size distribution in 1977 were moving up the life cycle curve and seemingly becoming successful competitors in the turbulent environment of 1985.

Deregulation appeared to be progressing as predicted. Industry concentration was down and smaller firms were finding viable markets. However, this situation was to change quickly. In 1986 a merger wave engulfed the industry.


This merger epidemic was to eliminate many of the smaller and medium-sized carriers that had been so successful in the earlier years of deregulation.

United bought the Pacific Division of ailing Pan American in late 1985. Then, a series of acquisitions of entire airlines began early in 1986 and continued into 1987. Piedmont bought Empire. Northwest purchased Republic. Alaska took over Jet America. Trans World acquired Ozark. Delta bought Western. Alaska purchased Horizon. USAir acquired PSA (Pacific Southwest) and then purchased its major rival, Piedmont. American acquired Air Cal. The former symbol of deregulatory excitement, People Express (which itself was in trouble after having bought Frontier and Britt in an attempt to become a nationwide carrier), was purchased by Frank Lorenzo's Texas Air Corp, which had previously acquired both Eastern and Continental.

This merger activity has been investigated from various perspectives in the academic journals. Jordan(16) examined the overall competitive impact. Curtis(17) investigated the implications of financing strategy, that is, the negative impact of leveraged buyouts. Rakowski(18) viewed the merger phenomenon as being the result of consumer and market imperatives. Using the term "marketing economies," he explores the hypothesis that customers prefer, and carriers therefore attempt to offer, as large a route network as possible.


The wave of acquisitions had increased the market share of many of the larger carriers. The big were generally prospering and getting still bigger. Many of the medium-sized carriers had disappeared in the merger wave. The smaller side of the size distribution continued to experience eroding market share and entered the market decline stage.

The largest carrier in 1989 was American, with 16.5 percent of total passenger revenue and 16.98 percent of revenue passenger miles, an almost 30 percent relative increase over the carrier's 1985 revenue figure of 12.7 percent. United, at 15.7 percent, was closing the gap. This is a 40 percent increase over its 1985 share. Delta weighed in at 15 percent, an almost 35 percent improvement on the 1985 figure. The three largest airlines aggregated 47.16 percent of the industry passenger revenue, compared to only 34.97 percent in 1985, a relative gain of approximately 35 percent. Table 3 presents industry statistics for 1989.

As a result of its purchases of Piedmont and Pacific Southwest (PSA), number four USAir gathered 10.81 percent of passenger revenue and 7.79 percent of RPM's. This was a 161 percent revenue increase over 1985. Texas Air Corp's Continental subsidiary (which had been given the remnants of People Express after the 1986 purchase) and Eastern turned in a combined performance of 10.6 percent of industry passenger revenue. We should note that Continental, Eastern, and People aggregated over 17 percent of passenger revenue in 1985.

The Texas Air group of carriers actually TABULAR DATA OMITTED made the holding company the largest airline company in the country in 1986. That situation, however, was not to endure. Continental was the better of the pair, while the Eastern Airlines unit had been continually and rapidly deteriorating. Eastern was even forced to sell its major gem, the shuttle, which was purchased by Donald Trump.

The five largest carriers of 1989 gathered 68.57 percent of industry passenger revenue, compared to 54.09 percent in 1985, and 66.2 percent of RPM's, compared to 53.8 percent in 1985. That is about a 27 percent increase in revenue market share. In 1989 Northwest ranked number six, with 10.5 percent of passenger revenue. Before its acquisition of Republic Airlines the carrier had only 5.5 percent of the market.

Trans World held seventh place in 1989. Even with the purchase of Ozark, TWA's market share fell from its 1985 level of 8.2 percent to 7.1 percent, a relative drop of 13 percent. Number eight Pan American watched its share fall from 6.8 percent in 1985 to 5.6 percent in 1989, a relative drop of almost 18 percent.

Southwest was the number nine carrier of the year, with a market share of 1.81 percent in 1989, compared to 1.67 percent in 1985, for a relative increase of 8 percent. Southwest blatantly headlined the front cover of its 1986 report to stockholders, "IN 1986 WE DIDN'T MERGE." It gained its increase in market share primarily by being a tough competitor.

The rapid success of tenth-ranked America West indicates that deregulation was at least partially functioning as its architects intended. It was still possible for a new entrant to become a viable and dynamic factor in the industry. America West began flying only in 1983. In 1985 the company was the twenty-first largest carrier, with 0.61 percent of passenger revenue. By 1989 this had increased to 1.74 percent, almost tripling its 1985 share.

Examining cumulative shares, the top ten carriers of 1989 aggregate 95.4 percent of passenger revenues. This compares with 78.5 percent in 1985, and 95.62 percent in revenue passenger miles compared to 79.55 percent in 1985. This amounts to a relative increase of more than 21 percent.

Alaska Airlines is the eleventh-ranked carrier of 1989. Following the merger with Horizon Air it held 1.53 percent of passenger revenues, up from 0.95 percent in 1985. Midway Airlines, the twelfth-ranked carrier, is another upstart of deregulation. Midway shows that an innovator was still able to find a niche in a major metropolitan area somewhat protected from the ravages of the large nationwide airlines. Midway used its namesake, old Midway Field, which is conveniently located much closer to downtown Chicago than is congested O'Hare.

The remaining carriers of the top fifteen firms were Braniff, Hawaiian, and Air Wisconsin. Braniff is now defunct, becoming the victim of aggressive expansion at a very bad time in airline history. Hawaiian is largely an island-hopping operation. Air Wisconsin is primarily a feeder operation.

The third five of the top fifteen aggregated a mere 3.9 percent of passenger revenue in 1989, compared to 11.6 percent in 1985. The third five of 1989 had seen two-thirds of the market share they held in 1985 simply vanish.

This consolidation of the airline industry is continuing. Eastern is now defunct and the vultures have picked over the remains. Continental and Pan American are in Chapter 11 status. Midway filed for Chapter 11 in March of 1991, and its purchase by Northwest was approved in October of 1991. America West declared bankruptcy in June of 1991. The four largest carriers--American, United, Delta, and Northwest--have all investigated the possibility of acquiring various pieces of Pan American. TWA has arranged a "prepackaged" bankruptcy planned to materialize in 1992.(19) Thus, the life cycle of survival and death, prey and predator, growth and decline continues for the airline industry.


Up to now, we have examined the changing market shares within the industry only on a national basis using share of industrywide passenger revenue as the variable under investigation. On a local basis, some carriers have extremely strong impacts on individual airports.

Airline hub-and-spoke systems can possibly give a company a number of operational and marketing advantages. Bauer(20) and McShan and Windle(21) have investigated these factors. The term "fortress hubs"(22) has developed. Essentially a fortress hub is a situation where one airline controls such a large percentage of the flights and passengers at a particular airport that no other airlines try seriously to alter the competitive balance. In sharp contrast to the theory of "contestable markets,"(23) fortress hubs have rarely been challenged. Concentration and the hub phenomenon have led some to investigate the fare level implications.(24)

Table 4 presents data on the thirty-one large hub airports of 1988 ranked by the degree of control by the leading carrier.

A definitional note may be in order here. The United States government defines a "large hub" as an airport that generates at least 1 percent of total enplaned passengers in the nation. There were thirty-one such locations in 1988.

A "hub" in airline terminology is any airport where that firm schedules a number of flights in at approximately the same time. The goal is to maximize a passenger's origin-destination possibilities by changing planes at the hub and continuing the journey on an outbound spoke from the hub.

Thus, "hub" is an operational term for the airlines, while it refers to airport size in regard to government terminology. Many large hub airports are also operating hubs for a particular airline. However, many smaller airports beyond these thirty-one large hubs serve as important operating hubs in the industry. Conversely, the reader should note that many of the "large hub airports" are quite competitive, with no control or domination by any individual airline.

Charlotte is the most concentrated large hub airport in the country. Piedmont (which had been purchased by USAir in 1986 and is now assimilated into the operation) controlled 91.9 percent of enplaned passengers. Four cities show the leading carrier carrying in excess of 80 percent of passengers. They are Pittsburgh (USAir, 85.4 percent), Memphis (Northwest, 83.5 percent), St. Louis (TWA, 82.4 percent), and Salt Lake City (Delta, 80.2 percent).

The reader should note that the most highly concentrated airports are far from the largest in terms of total passengers. In fact, of the five most highly concentrated airports, none are in the top ten in terms of passengers. Closest are St. Louis, at number eleven, and Pittsburgh, in the sixteenth spot. The three remaining cities with very high concentration (Charlotte, Memphis, and Salt Lake City) rank well towards the bottom of the size distribution.


Looking at the five busiest airports in the nation, there is a rather wide range when examining concentration. The premiere airport, Chicago's O'Hare, finds United Airlines in control of almost exactly half (50.2 percent) of total passengers. At second-ranked Atlanta, Delta controls 58.4 percent of the traffic. Dallas-Fort Worth is the third most active facility, where American handles an impressive 63.7 percent of the flyers.

At fourth-ranked Los Angeles International, Eastern is the leading carrier. However, its share of passengers is only 17.7 percent. Number five Denver finds United handling 44.4 percent of total enplaned passengers.

In general, the largest cities on both the east and west coasts do not experience a great deal of concentration, in terms of one carrier controlling a very large share of passengers. The primary exception is Delta's domination of Atlanta. Major interior cities, on the other hand, often exhibit moderate to high degrees of control by the leading carrier.

There are some definite life cycle implications in the development of the hub-and-spoke system of operation by the nation's airlines since deregulation. The trend for the stronger airlines has been to develop a system of hubs, either through merger activity or internal expansion.

The nation's leading carrier, American Airlines, is dominant at only one large hub, Dallas-Fort Worth. While it is the leading carrier at Los Angeles International, the firm has only 17.7 percent of passengers. Much of American's strength has been based on the growth of hubs at smaller cities such as Nashville, Raleigh-Durham, San Jose, and San Juan. United has much strength at Chicago and Denver and controls over half the traffic at D.C.-Dulles. It also is the leading carrier at San Francisco, even if only at the 35.4 percent level.

Delta has historically been the dominant force at Atlanta. After its acquisition of Western, it now commands 80 percent of passengers at Salt Lake City. Delta also is the dominant carrier at Cincinnati. The company is the leading carrier at Orlando and Boston, though market share is relatively low at both these locations.

Northwest is the overwhelmingly dominant carrier at three places: Minneapolis-St. Paul, Detroit, and Memphis. TWA is a one-hub operation, and this may well be part of its financial difficulties. However, it does control 82 percent of St. Louis passengers.

USAir, after acquiring Piedmont and Pacific Southwest, is dominant at Charlotte, Pittsburgh, and Baltimore-Washington. It is also the leading carrier at Philadelphia (36.6 percent) and San Diego (16.6 percent).

Continental controls over three-quarters of traffic at Houston. It also handles almost 44 percent of passengers at Newark, a legacy of the merger with People Express.

The financially weakest large carriers, Pan Am and Eastern, appear to have been essentially hub poor. Pan Am was the leading carrier at New York's JFK airport, but it amounted to only 29 percent of passengers. Historically, Pan Am's problem was a lack of domestic feed for its international operations out of JFK. An interior hub might have helped. However, it could not afford internal expansion (quite to the contrary, it is now actually downsizing in order to survive) and it is certainly not a very attractive merger candidate.

Before its recent demise, Eastern was the leading carrier at four large hub airports: Miami (45.1 percent), D.C.-Nation (22.5 percent), NYC-Laguardia (22 percent), and Tampa (20.3 percent). However, it was obviously not dominant at any of these important cities. Braniff, which ceased operations in 1990, was the leading carrier at Kansas City, but it handled only 27 percent of passengers.

The young upstart, American West, in just a few years has become the leading carrier at two important locations. In 1988 it handled 44 percent of passengers at Phoenix and almost 34 percent at Las Vegas.

There is perhaps a lesson to be learned here. While success, or lack of it, in the deregulated airline industry depends on many factors, hubs may well be an important ingredient in the recipe. The most successful carriers have developed relatively strong and often extremely dominant positions at multiple hubs as they moved up the life cycle growth curve.

It would seem that as airlines move through the growth and into the maturity stage in the new environment, a well planned system of hub operations is important. Otherwise, the firm may rapidly and, perhaps irreversibly, find itself in the decline stage of the life cycle process.


Many of the surprises of airline deregulation resulted from a very simplified model of the industry, along with an almost paranoid emphasis on the issue of government control of entry and routes. This was complicated by an overly optimistic reliance on the theory of contestable markets, which appears inapplicable to the current airline situation. Even such a distinguished economist as Alfred Kahn(25) (the generally acknowledged "father" of airline deregulation) has admitted that the theoretical economics fraternity overlooked or minimized the importance of numerous other factors.

Among elements missing from the deregulatory equation were Computer Reservation Systems (CRS), the development of frequent flier programs, the increasing importance of travel agents, limitations on slots and gates at major airports, fare matching by the larger carriers, and the "deep pockets" or staying power of the larger airlines compared to the limited resources of the smaller firms, as well as the success of cost reduction initiatives by many competitors.

The interrelationship between computer reservation systems and price competition is critical. Layer notes that "development of CRS has resulted in one of the most significant changes in the structure of the airline industry since it was deregulated in 1978. Those who supported deregulation had no idea of the power of CRS's."(26) Brenner states that "no other industry has ever confronted its consuming public with the turbulence of pricing paradoxes we see in today's airline fare structure."(27)

Deregulators had assumed that the new law would eventually simplify rather than complicate the fare structure. Such was not to be the case. Successful yield management required a plethora of fares to meet different customer needs and diverse competitive situations. Stern concludes that "unfortunately, too many pricing strategies are not successful because they do not adequately differentiate between price-sensitive and price-insensitive market segments."(28) Too simple a pricing formula was to be the downfall of many airlines.

The resulting complexity and rapid changes in fares drive more customers to use travel agents who may have a vested interest in placing customers with a larger carrier. After all, if the schedule and price are competitive, why not use the larger company? Service may be better, amenities nicer, and the airline is not on the verge of bankruptcy (or already in it). With the price incentive neutralized, the customer has a natural tendency to avoid smaller competitors. Looking at some commission arrangements, so may the travel agents.

Another hurdle for the small firm is frequent flier programs. Layer states that "frequent flier programs represent one of the most anti-competitive schemes ever developed. It has been used as an effective competitive tool against smaller airlines, and the majority of them are no longer in business...."(29) Even without governmental control of routes, the lack of reasonable availability of slots (ability to land or take off at a given airport) and gates (ability to load and unload passengers) have hampered the capability of some carriers to offer a better product (more flights and destinations). Comm,(30) Bard and Cunningham,(31) Fotos,(32) and The Economist(33) have investigated the impact of facility congestion constraints on industry competitiveness and efficiency.

When gates do become available, it may not ultimately help the smaller competitor. Midway was able to buy some of Eastern's gates at Philadelphia in that firm's liquidation. However, shortly thereafter, with Midway itself being in extreme financial difficulties, it was forced to retrench and sell those Philadelphia gates to much larger USAir.

This leads to a series of questions surrounding the financial viability of the airline industry, fare levels, and service quality. The U.S. industry had operating losses of almost $2 billion(34) in 1990. After interest expense, the net loss was approximately $4 billion, the worst financial performance ever. Recession and the Gulf War precipitated a drop in traffic, numerous carriers were in bankruptcy, and fare wars ensued. Expansion plans and aircraft purchases have been modified or put on hold.

Large airlines claim fares are too low. Consumers complain fares are too high. The entire pricing picture is extremely diverse geographically and is further complicated by the hub phenomenon. Researchers such as Morrison and Winston(35) and Oum, Gillen, and Noble,(36) as well as various government studies,(37) have investigated airline fares. Conclusions have been mixed and ambiguous.

Has airline service deteriorated since deregulation? Service can be defined in many ways: flight frequencies, type of aircraft, non-stop service or lack of it, scheduled flight times, on-time arrivals, comfort, and various amenities. Among academic researchers, Vellenga and Vellenga,(38) Gourdin,(39) and Morrison, Winston, Bailey, and Kahn(40) have recently addressed many of these issues. Like beauty, the definition of good or bad airline service may well be in the eye of the beholder. Because of the complexity of the issue, many varied subjective value judgments are operative. What is not in dispute is that we have a very different system of airline service than what existed prior to deregulation.

In an interview in Time magazine,(41) American Airlines chairman Robert Crandall had some fascinating (if cynical) answers to questions about the airline industry. He blamed the consumers' demand for lower fares as necessitating hubs, plane changes, longer transit times, less comfortable seating layouts, and most other common complaints about the industry. Crandall also noted that fares would eventually have to rise to ensure the long-term viability of the industry and allow for new investments in facilities and equipment.

Looking at the entire industry, Business Week, in an article entitled "Fly the Lucrative Skies of United, American, Delta," concluded that "no post-deregulatory startup of significant size has avoided merger, bankruptcy, or outright failure. The record mocks one of the main tenets of airline deregulation: that low cost startups would preserve competition by adding plentiful low fare service."(42) From the popular and business press coverage of the airline industry, it is obvious that deregulation and its aftermath is still very much a current and emotional issue.

The antitrust laws and merger denials might have prevented the industry structure that we now face. However, deregulation meant a free market and one can reasonably argue that merger restrictions may inhibit a market as much as they might help it.


The years of airline deregulation have resulted in dramatic changes in the structure and nature of the industry. However, the industry has not evolved in the manner that had been predicted by the congressional and academic proponents of deregulation. Much of this unexpected transformation after the initial few years of deregulatory success can be explained in terms of life cycle analysis.

Deregulation ushered in the growth stage for some airlines that had been hampered by prior government restrictions concerning routes and pricing. At the same time, with easy entry for new carriers who had never before been in the business, the airline industry offered an introductory opportunity at the beginning of the life cycle curve.

Some of the older larger carriers who may have grown complacent under the regulatory regime could perhaps be said to have been in the maturity stage of the cycle. Still others, who had been suffering financial and competitive troubles even prior to deregulation, may well have already been in the decline stage.

Therefore, at the onset of airline deregulation in 1978 (or shortly thereafter), we find various airline firms at all four possible stages of the life cycle curve. These individual airlines must then be superimposed on an aggregate life cycle curve for the entire industry. If nothing else, the new competition engendered by deregulation led to a marked growth in air travel throughout most of the last twelve years (recession periods excepted).

We experienced a situation where new, growing, mature, and declining air carriers were competing in what started out as a generalized growth industry moving up the life cycle after deregulation. Competitive turbulence was caused by the new and expanded competition itself, but also by the 1982-83 recession. The formerly growing airline industry found itself carrying fewer passenger two years in a row.

In short, an increased number of airlines found themselves chasing fewer available passengers. This competitive turbulence led to major structural changes as the largest carriers generally saw their market shares fall. The situation peaked in the 1984-to-1985 period, as has been documented by the data discussed in this paper.

While many smaller new entrants had failed and ceased operations during the early '80s (never really getting past the introduction stage of the life cycle), the real "shakeout" or "consolidation" of the airline industry began with the merger wave of 1986. This process has not yet ended; the industry is still entrenched in a situation of competitive turbulence.

At this moment a small number of large airlines appear to be poised for continued movement up the growth curve, as they continue to adapt and change. These carriers are American, United, and Delta. Northwest may well also be included in this group, but because of its highly leveraged situation after going private and its aborted acquisition of Midway, is perhaps a question mark. USAir may still join the industry leaders on the growth curve if it can more fully assimilate and effectively manage its acquisitions. The common theme of the relatively solvent giants appears to be expansion on a global basis.

Eastern and Braniff have ceased operations, followed most recently by Midway. The nation is witnessing the partial (perhaps eventually total) dismemberment of the greatest old name in American aviation, Pan American. However, the recent agreement with Delta concerning the European routes and Frankfurt hub may buy time for a downsized Pan Am.

America West is operating in Chapter 11 status, is restructuring, and has signed marketing and financial agreements with Northwest. Continental continues to survive in Chapter 11 status, but for how long and with what kind of route structure? Even with many bankrupt carriers in the arena, hope seems to spring eternal for additional entrants. We are witnessing yet another reincarnation of Braniff.(43) There is also talk of the possible resurrection of a "New Eastern."(44) Thus we have two recognized "brand names" of the airline industry reverting to what is essentially the introduction stage on a new life cycle curve.

Of the remaining carriers, Alaska and Southwest are holding their own with moderate growth in recent years. With an improvement in the economy and a hopefully stable oil environment in the future, these firms may well experience further growth and a healthy maturity on the life cycle curve.

When the industry life cycle curve reaches full maturity, what will be the airline structure that the traveling public faces? While the future can never be accurately forecast, our preceding life cycle analysis gives some indications.

There will likely be a handful of very large nationwide, indeed, international carriers--perhaps as few as three; maybe, but not likely, as many as six. Complementing the limited number of megacarriers will be approximately a half dozen significant but relatively smaller companies. While they will compete with the giants to a certain extent, they will be more regionally oriented or occupy specialized niches. Generally, modestly sized feeder carriers will funnel passengers from smaller cities onto the flights of these longer haul operators.

This is not the shape of the industry that had been predicted by the theorists of deregulation. It is, however, the industry that free competition, liberal merger policies, consumer choice, and the dynamics of life cycle analysis appear to be giving us.

The larger airlines have brought all elements of the marketing mix--product, price, promotion, and place decisions to bear on the marketplace. They have also deftly exploited any possible size-related advantages to alter the competitive balance in hopes of assuring their survival on the growth sector of the life cycle curve.

This highly concentrated industry may well be the most potentially efficient from an overall economic welfare point of view. However, there are many important public policy issues that must be addressed to insure a truly competitive airline industry to best serve the needs of the traveling public.


1 U.S. Senate, Committee on the Judiciary, Subcommittee on Administrative Practice and Procedure; Civil Aeronautics Board Practices and Procedure, (Washington, D.C.; U.S. Government Printing Office, 1975), George W. Douglas and James C. Miller, III, Economic Regulation of Domestic Air Transport: Theory and Practice; (Washington, D.C., the Brookings Institution, 1974).

2 Robert D. Buzzell, "Competitive Behavior and Product Life Cycle," in New Ideas for Successful Marketing, John Wright and Jac Goldstucker, eds., (American Marketing Association, 1966). Philip Kotler, Marketing Management: Analysis, Planning and Control, 4th edition (Englewood Cliffs, NJ: Prentice-Hall 1980). Chester R. Wasson, Dynamic Competitive Strategy and Product Life Cycles, (St. Charles, IL: Challenge Books, 1978).

3 David J. Luck, Product Policy and Strategy, (Englewood Cliffs, NJ: Prentice-Hall Inc. 1972).

4 Herman Simon, "Dynamics of Price Elasticity and Brand Life Cycles: An Empirical Study," Journal of Marketing Research, (November 1979) pp. 439-52. G.W. White and P.F. Ostwald, "Life Cycle Costing," Management Accounting, (January 1976), pp. 39-40.

5 Nariman K. Dhalla and Sonia Yuspett, "Forget the Product Life Cycle Concept," Harvard Business Review, (January-February 1976).

6 Gerald J. Tellis and Merle C. Crawford, "An Evolutionary Approach to Product Growth Theory," Journal of Marketing, (Fall 1981) pp. 45-52.

7 Theodore Levitt, "Exploit the Product Life Cycle," Harvard Business Review (November-December 1965), pp. 81-94.

8 Theodore Levitt (1965), pp. 81-94.

9 Chester R. Wasson (1978).

10 George Day, "The Product Life Cycle: Analysis and Applications Issues," Journal of Marketing (Fall 1981) p. 65.

11 Hans B. Thorelli and Stephen C. Burnett, "The Nature of Product Life Cycles for Industrial Goods Businesses," Journal of Marketing (Fall 1981) p. 107.

12 Stanley E. Fawcett and Martin T. Farris, "Contestable Markets and Airline Adaptability Under Deregulation," Transportation Journal (Fall 1988) pp. 21-22.

13 William A. Jordan, Airline Regulation in America (Baltimore: Johns Hopkins University Press, 1970).

14 Senator Edward M. Kennedy, statement in Regulatory Reform in Air Transportation, hearings before the Subcommittee on Aviation, United States Senate (Washington, D.C.: U.S. Government Printing Office, 1976) p. 103.

15 John R. Meyer and Clinton V. Oster, Jr., Deregulation and the New Airline Entrepreneurs, (Cambridge, MA: The MIT Press, 1984).

16 William A. Jordan, "Problems Stemming from Airline Mergers and Acquisitions," Transportation Journal, (Summer 1988) pp. 9-30.

17 Ellen F. Curtis, "Negative Impacts of Leveraged Buyouts on the Domestic Airline Industry," Transportation Quarterly, (October 1990) pp. 517-532.

18 James P. Rakowski, "Marketing Myopia Meets Marketing Economies: Unexpected Results of U.S. Airline and Trucking Deregulation," Transportation Quarterly, (October 1990) pp. 499-516.

19 "Carl Icahn Is Planning for TWA to Seek Chapter 11 Bankruptcy Law Protection," Wall Street Journal, (July 31, 1991) p. A3.

20 Paul W. Bauer, "Airline Hubs: A Study of Determining Factors and Effects," Economic Review (Federal Reserve Bank of Cleveland) (4th Quarter 1987) pp. 13-19.

21 Scott McShan and Robert Windle, "The Implications of Hub-and-Spoke Routing for Airline Costs and Competitiveness," Logistics and Transportation Review (1989) pp. 209-230.

22 John H. Huston and Richard V. Butler, "The Effects of Fortress Hubs on Airlines Fares and Service: The Early Returns," Logistics and Transportation Review, (1988) pp. 203-215.

23 Elizabeth E. Bailey and John C. Panzar, "The Contestability of Airline Markets During the Transition to Deregulation," Law and Contemporary Problems, (1981) pp. 125-145. Samuel H. Baker and James B. Pratt, "Experience as a Barrier To Contestability in Airline Markets," Review of Economics and Statistics, (1989) p. 352-356. Stanley E. Fawcett and Martin T. Farris, "Contestable Markets and Airline Adaptability Under Deregulation," Transportation Journal, (Fall 1989) pp. 12-24.

24 Serverin Borenstein, "Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry," Rand Journal of Economics, (1989) pp. 344-365. Rex S. Toh and Richard G. Higgins, "The Impact of Hub and Spoke Network Centralization and Route Monopoly on Domestic Airline Profitability," Transportation Journal, (Summer 1985) pp. 16-27. U.S. Department of Transportation, Secretary's Task Force on Competition in the U.S. Domestic Airline Industry, (Washington, D.C.: U.S. Government Printing Office, 1990).

25 Alfred E. Kahn, "Surprises of Airline Deregulation," American Economic Review (May 1988) pp. 316-322.

26 Charles R. Layer, "The Next Decade Belongs to the Airlines Unless...," Transportation Quarterly (July 1989) p. 325.

27 Melvin A. Brenner, "Action Needed to Correct Pricing and Service Distortions of Airline Deregulation," Transportation Quarterly (July 1989) p. 336.

28 Andrew A. Stern, "Pricing and Differentiation Strategies," Planning Review (Sep./Oct. 1989) pp. 30-34.

29 Charles R. Layer, Supra, p. 324.

30 Clare L. Comm, "Efficient Scheduling Can Create Marketing Opportunities for Service Industries as Illustrated by the Airline Industry," Journal of Professional Services Marketing (1988) pp. 49-55.

31 Jonathan F. Bard and Ian G. Cunningham, "Improving Through-Flight Schedules," IEE Transactions (Sept. 1987) pp. 241-251.

32 Christopher Fotos, "Senate Panel Proposes Removing Slot Limits," Aviation Week and Space Technology (July 23, 1990) p. 82.

33 "Airport Congestion, Oh, for a Slot," The Economist (November 25, 1989) pp. 74, 77-78.

34 "Air Transport 1991, the Annual Report of the U.S. Scheduled Airline Industry," Air Transport Association of America (June 1991) p. 2.

35 Steven A. Morrison and Clifford Winston, "The Dynamics of Airline Pricing and Competition," American Economic Review (May 1990) pp. 389-393.

36 Tae H. Oum, David W. Gillen and S.E. Noble, "Demands for Fare Classes and Pricing in Airline Markets," Logistics and Transportation Review (Sept. 1986) pp. 195-222.

37 Congressional Research Service, "Airlines Under Deregulation at Mid-Decade: Trends and Policy Implications," Report No. 67-87E (April 1986); Congress of the United States, Congressional Budget Office, "Policies for the Deregulated Airline Industry," (July 1988) and U.S. Department of Transportation, Office of the Secretary of Transportation, "Secretary's Task Force on Competition in the U.S. Domestic Airline Industry," (February 1990).

38 David B. Vellenga and Daniel R. Vellenga, "Essential Airline Service Since Deregulation: Selected States in the Northwestern and Southwestern U.S.," Logistics and Transportation Review (December 1986) pp. 339-370.

39 Kent M. Gourdin, "Bringing Quality Back to Commercial Air Travel," Transportation Journal (Spring 1988) pp. 23-29.

40 Steven A. Morrison, Clifford Winston, Elizabeth E. Bailey and Alfred E. Kahn, "Enhancing the Performance of the Deregulated Air Transport System: Comments and Discussion," Brookings Papers on Economic Activity (1988) pp. 61-123.

41 Janice Castro and Richard Woodbury, "The Man Who Fired a Dog to Save a Buck," Time (Oct. 28, 1991) pp. 18, 21.

42 "Fly the Lucrative Skies of United, American, Delta," Business Week (Oct. 14, 1991) p. 90.

43 "Why Startups Can't Wait To Fly the Risky Skies," Business Week (July 8, 1991) p. 35.

44 "Investors May Try To Get Eastern Flying Once Again," Wall Street Journal (July 7, 1991) p. A20.

Mr. Rakowski, EM-AST&L, is professor of transportation and business logistics, and Mr. Bejou is instructor of marketing and transportation, Memphis State University, Memphis, Tennessee 38152.
COPYRIGHT 1992 American Society of Transportation and Logistics, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Rakowski, James P.; Bejou, David
Publication:Transportation Journal
Date:Sep 22, 1992
Previous Article:Road pricing in practice.
Next Article:Winning transportation partnerships: learning from the Desert Storm experience.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters