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Air Transport Industry

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Background Information
 There is a difference between those who travel for leisure and
those who travel for business
-Price Sensitivity: The degree to which the price of a
product affects consumer’s purchasing behavior.
 The market for air transport is point-to-point.
-A flight from Detroit to Dallas is not a substitute for a
flight from Detroit to Orlando, for example.
-There are exceptions: A flight from DTW to LGA
might be a substitute for a flight from DTW to JFK.

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History: Regulation
 This mostly occurs after WW1 and before WW2
 Civil Aeronautics Board is created to regulate the air transport
industry
-Airlines first must be certified as “safe”.
-Then entry is regulated into the market on the basis on
individual routes.
-Additionally, CAB also regulates prices in the industry
by providing the maximum price that the airline can
charge for a route.

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History: Deregulation
 Why Deregulate?
1. Market Contestability
-Contestable: No barriers to entry or exit.
2. Empirical Evidence
-Rates were lower on unregulated intrastate
routes than on regulated interstate routes.

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History: Deregulated Market
 Civil Aeronautics Board dissolved.
 Regulation occurs only in terms of safety
 Airlines can enter any route they want and charge any price
they want

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History: Deregulated Market
 What Happened?
1. Hub and Spoke System
2. Emergence of two business models