The US Airline Industry: an Atypical Oligopoly

The US Airline Industry: an Atypical Oligopoly

DALLAS — Before we claim that the US airline industry resembles an oligopoly, we must first understand what the term means.

An oligopoly is a market structure in which a small number of large companies work to dominate a specific market segment, either explicitly or implicitly. This is normally done through collusion, and due to the limited competition between these firms, each firm can influence the others through their actions.

Firms in oligopolistic markets set prices but do not compete on price; however, they use advertising to ensure that their products are uniquely identifiable (oligopolies are known for having undifferentiated products).

Products in an oligopoly typically provide the same benefit to consumers. Other characteristics of oligopolies include increased barriers to entry and maximized revenue. Economic and legal factors can create or destroy oligopolies.

In terms of the aviation sector, deregulation policies can be seen as the turning point for the industry and the precise point where the industry became an atypical oligopoly.

The American Airlines Boeing 737-800 in TWA heritage livery (registered N915NN) is shown here taxiing to the American Airlines terminal at Miami International Airport in February 2017, more than 16 years after TWA proper ceased to exist. Photo: Venkat Mangudi – N915NN_KMIA, CC BY-SA 2.0

Consequences of the Airline Deregulation Act of 1978

The federal government took control of the economic underpinnings of the US airline industry in 1938, and thus the industry was considered a public utility, much like electric power companies.

The Civil Aeronautics Board (CAB) was established at the time as a governing agency responsible for regulating the economic aspects of airline operations. The CAB had five members with six-year terms, appointed by the president (with the consent of the Senate). With its 750 employees (on average), the CAB conducted its duties until its dissolution in 1984, after the deregulation act was passed.

On October 24, 1978, the Airline Deregulation Act of 1978 (ADA) was passed, and air travel in the United States was thus revolutionized.

The law did not completely erase regulatory measures in the industry. It reduced the regulatory blanket gradually over the years until 1984. By then, CAB’s standing functions had been transferred to the Department of Transportation (DOT).

In its reign, the CAB decided how many airlines and which airlines would conduct operations on a particular route. To enter the market, airlines had to gain certification from CAB outlining the routes that must be followed. The exit was also controlled, and it required the carrier to receive CAB approval before cutting services to a city.  

This massive shift in the industry was mostly contained in the US, but by the mid-1980s, Canada and Western Europe began adapting these deregulation policies; the rest of the world joined this movement in the mid-1990s, but not without resistance by various governments and foreign airlines.

Despite the fact that the airlines were not subject to stringent government regulations, they faced the same financial and economic challenges as any other business. They include, among other things, managing staffing issues, cost analyses, leveraging financing instruments, and maintaining brand loyalty, which must still be considered.

As one example, apart from suffering from repeated instances of financial mismanagement, TWA failed because the airline couldn’t effectively compete with new competitors after the airline deregulation act of 1978. These new airlines would reside in a special economic environment, and these characteristics would end up labeling the industry as an atypical oligopoly.

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Featured image: A United Airlines Boeing 737-9 MAX, American Airlines and Southwest Airlines Boeing 737-8 MAX sit in Renton. Photo: Brandon Farris/Airways

From residing in the Caribbean, Tarik has developed an interest in studying how developing nations benefit from the presence of the aviation industry through tourism, trade, and other linkages. Based in Jamaica.

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