NigerianFLIGHTDECK

WHEN GOVERNMENT POLICY CREATES WINNERS AND LOSERS: THE STORY OF PAN AM, DELTA, AMERICAN AND UNITED AIRLINES One of the most fascinating things about government policy is how a single legislative reform can fundamentally alter the fortunes of businesses operating within the same industry. Some businesses flourish. Others struggle. Some disappear entirely. The United States’ Airline Deregulation Act of 1978 offers a compelling case study. Before 1978, the American airline industry operated under an extensive system of economic regulation administered by the Civil Aeronautics Board (CAB). The government exercised substantial control over which airlines could operate particular domestic routes, the fares they could charge and entry into the market. In effect, competition was heavily regulated. This regulatory arrangement provided established airlines with a measure of protection from competitors. But it also restricted innovation, network expansion and price competition. Then came October 24, 1978. President Jimmy Carter signed the Airline Deregulation Act into law, beginning the dismantling of federal economic controls over domestic airline fares, routes and market entry. The government had fundamentally changed the rules of the game. PAN AM: FROM GLOBAL AVIATION GIANT TO BANKRUPTCY For decades, Pan American World Airways was one of the most recognisable names in international aviation. It pioneered international routes, helped usher in the jet age and became synonymous with global air travel. But there was a structural weakness in Pan Am’s business model. Under the earlier regulatory system, Pan Am had developed a powerful international network without a comparable domestic feeder network. Once deregulation allowed other American airlines to expand their networks more freely, that weakness became increasingly consequential. Airlines such as Delta, American and United could use their extensive domestic operations to connect passengers to international services. Pan Am struggled to replicate that advantage. In 1980, it acquired National Airlines in an expensive attempt to establish a substantial domestic network. The acquisition did not deliver the competitive transformation Pan Am needed. As financial difficulties intensified, the airline began disposing of valuable assets to raise funds. Other factors, including economic pressures, management decisions, international competition and the devastating Lockerbie bombing of 1988, compounded its difficulties. In December 1991, Pan Am ceased operations. Deregulation did not single-handedly destroy Pan Am. But it fundamentally altered the competitive environment in which Pan Am’s established business model had to survive. DELTA, AMERICAN AND UNITED: ADAPTING TO THE NEW ENVIRONMENT While Pan Am struggled, other airlines exploited opportunities created by the new regulatory framework. Delta expanded its network, merged with Western Airlines in 1987 and acquired substantial Pan Am transatlantic routes and shuttle operations in 1991. American and United developed extensive connecting networks, strengthened their hub operations and expanded their presence in domestic and international markets. The hub-and-spoke model became increasingly important. By concentrating flights at major airports, airlines could connect passengers from several smaller markets, improve load factors and operate more extensive networks. Meanwhile, Southwest demonstrated how a different low-cost operating model could prosper in the increasingly competitive industry. The same legislative reform had created opportunities that different businesses were able to exploit to varying degrees. THE ECONOMIC LESSON Government policy does not operate in a vacuum. It shapes the commercial environment in which businesses make investment decisions, acquire assets, establish operations and compete. A policy can protect an established business from competition for decades.

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