Question

Some airline executives have called for reregulation. Why might an executive of an airline prefer to operate in a regulated environment?

Short answer

Answer: An airline executive might prefer to operate in a regulated environment due to increased market predictability, less competition, guaranteed profitability, easier cost management, and reduced complexity in managing the airline.

Step-by-step solution

1. Introduction to Regulation

A regulated environment refers to a situation where the government has control over aspects of the airline industry, such as pricing, market entry and exit, and route allocation. The deregulation of the airline industry in the late 1970s removed these controls, allowing airlines to compete more freely, set their own prices, and operate on any route they choose. This led to lower fares and more choices for customers, but also increased competition, operational challenges, and financial risks for airlines.

2. More Predictable Market

One reason why an airline executive might prefer a regulated environment is the predictability of the market. In a regulated market, the government controls many aspects of the industry, which may result in a more stable business environment. Reduced competition and controlled pricing can lead to steadier revenues and more predictable costs, allowing executives to plan for long-term growth.

3. Less Competition

In a regulated environment, there are fewer competitors, because the government determines which airlines can operate and on which routes. This can be advantageous to established airlines, since the lack of competition means less pressure to innovate and continuously improve. An airline executive may prefer a regulated environment, as it allows their airline to maintain their market share without having to compete with new entrants or adjust to changing market conditions that may arise in a deregulated environment.

4. Guaranteed Profitability

In some cases, a regulated environment may include a guaranteed rate of return for airlines, ensuring a certain level of profitability. This can be attractive to an airline executive, as it reduces the financial risks associated with running an airline. As a result, they may prefer a regulated environment that protects their profits and provides a safety net for their business.

5. Easier Cost Management

With government control over pricing, airlines may find it easier to manage their costs. In a regulated environment, airlines are not subject to the extreme price competition found in a deregulated environment. This ability to better control expenses could be another factor in an airline executive's preference for a regulated environment.

6. Reduced Complexity

Lastly, operating in a regulated environment could mean reduced complexity for an airline executive, as there are fewer variables to consider when making strategic decisions. With government oversight, airlines may find it easier to deal with issues related to route allocation and pricing, which in turn simplifies the management of the airline. An airline executive may prefer a regulated environment for its simplicity and potential to reduce their responsibilities in managing the business. To summarize, there are several reasons why an airline executive might prefer to operate in a regulated environment, including increased predictability in the market, less competition, guaranteed profitability, easier cost management, and reduced complexity in managing the airline.