Business, Legal & Accounting Glossary
In 1978, the airline industry, which had been heavily regulated and controlled, was liberated from government oversight and released to the vagaries of the marketplace. As a result, the industry underwent significant change during the 1980s and 1990s. At the same time, several major air disasters took place, including the 1996 Valujet and TWA 800 aircraft crashes. In response to the post-accident events, Congress passed the Aviation Disaster Family Assistance Act (ADFAA) the same year. The terrorist attacks of September 11, 2001, wrought further change in the airline industry. Just weeks after the attacks, President George W. Bush signed the Air Transportation Safety and System Stabilization Act (ATSSSA). According to a statement released by President Bush on September 22, 2001, the act was intended to ensure passenger safety and to “assure the safety and immediate stability of the nation’s commercial airline system.” It also created financial turmoil for nearly all the major carriers. What followed was a period of evolution and metamorphosis that changed the nature of flying forever.
When the first commercial airlines appeared after World War I, fewer than six thousand passengers a year traveled by air. By the 1930s, the Big Four—Eastern Air Lines, United Air Lines, American Airlines, and Trans World Airlines (TWA)—dominated commercial air transport. These companies had garnered exclusive rights from the federal government to fly domestic airmail routes, and Pan American (Pan Am) held the rights to international routes. The hold of these four airlines on their lucrative contracts went virtually unchallenged until deregulation in 1978. Even after the formation of the Civil Aeronautics Board (CAB) in 1938, formed to license new airlines, grant new routes, approve mergers, and investigate accidents, the Big Four and Pan Am continued to be guaranteed permanent rights to these routes. In fact, no new major scheduled airline was licensed for the next four decades.
In October 1978, Congress passed the Airline Deregulation Act (49 U.S.C.A. § 334 et seq.), ending the virtual monopoly held by the Big Four and Pan Am. The government’s goal was to promote competition within the industry. The act gave airlines essentially unrestricted rights to enter new routes without CAB approval. The companies could also exit any market and raise and lower fares at will.
The immediate effect of deregulation was a drop in fares and an increase in passengers. New cut-rate, no-frills airlines, such as People Express Airlines and New York Air, offered travelers the lowest fares ever seen in the industry. Forced to compete to fill their planes, the larger companies lowered their prices as well. Then the oil-producing countries in the Middle East formed a cartel and raised the price of jet fuel 88 percent in 1979 and an additional 23 percent in 1980. Combined with tumbling fares and increased passenger loads, the higher cost of jet fuel caused airline profits to drop.
Labor strife also affected the industry in the early days following deregulation. In 1981, after years of working under stressful conditions made worse by deregulation, the Professional Air Traffic Controllers Organization (PATCO) called a strike, demanding shorter working hours and higher pay. The union expected support and cooperation from the Reagan administration because of a sympathetic letter President Ronald Reagan had sent to PATCO when he was campaigning for the presidency. In the letter, he pledged to do whatever was necessary to meet PATCO’s needs and to ensure the public’s safety. But Reagan ordered the strikers to return to work within three days or be fired. Most did not return. The Federal Aviation Administration (FAA) ordered all carriers to temporarily reduce their number of flights by one-third. Newer and smaller carriers found themselves increasingly unable to gain access to lucrative routes. Rebuilding the air traffic controller force took years, during which landing slots at the largest airports remained restricted, and small carriers, unable to compete, simply abandoned their attempts to break into the larger markets.
To some extent, competitive pricing actually had the opposite effect of what the deregulators intended. When the small “upstart” companies offered extremely low fares, the larger companies responded aggressively. For example, in 1983, People Express announced a $99 round-trip fare between Newark, New Jersey, and Minneapolis–St. Paul. Northwest Airlines, which had always dominated the Twin Cities market, undercut People by instituting a $95 fare for the same destination and scheduling extra departures. As a result, People decided it could not compete and withdrew from the market. Passengers enjoyed the benefit of lower fares, but only for a short time before the competitive effect faded and high fares returned.
When deregulation brought competitive pricing, the large carriers began to realize that it was not profitable for them to do business the way they had in the past. The first major change they made was to abandon the practice of crisscrossing the continent with nonstop flights to many different cities. Instead, the major airlines scheduled most of their flights into and out of a central point, or hub, where passengers might need to change to a different flight to complete their journey. One airline controlled most of the reservation desks and gates at a particular hub—for instance, United in Chicago, Northwest in Minneapolis–St. Paul, American in Dallas–Fort Worth, and Delta in Atlanta. For this reason, and because passengers tend to dislike changing carriers in the middle of a trip, the dominant company in a hub had a tremendous advantage over the competition in influencing what carrier a passenger would choose. By 1990, two-thirds of all domestic passengers traveled through a hub city before arriving at their final destination. Of those passengers, eight out of ten remained on the same airline throughout their journey. By 1992, there were at least twelve “fortress hubs,” or airports where one airline controlled more than 60 percent of the traffic. Passengers who flew out of these hubs paid over 20 percent more than they would have for a comparable trip out of an airport that was not a hub.
After deregulation, the airlines also came to realize that they needed a more efficient way to book reservations and issue tickets. It is difficult to imagine, in these days of highly sophisticated computers and split-second communications, that until the late 1970s and early 1980s, airline schedules were contained in large printed volumes, reservations were taken over the telephone and tallied manually at the end of each day, and tickets were written by hand. To streamline this process the large companies initially proposed a joint computer system, listing schedules and fares.
The Justice Department objected on the grounds that such a system would be anti-competitive and would violate the Sherman anti-trust act (15 U.S.C.A. § 1 et seq. ). Instead, each airline developed its own computer system and entered data in a manner that unfairly biased travel agents’ choices in favor of the carrier that owned the system. Through skillful manipulation of the data, the airlines were able to put competitors at a disadvantage. For example, the airline that owned the system might enter the data so that all its flights to a particular destination appear on the screen before any flights of a competitor.
In a further attempt to win loyalty from passengers, the large airlines instituted frequent-flyer programs, which awarded free tickets to travelers after they logged a certain number of miles flown with the company. The combination of hubs, central computer reservation systems, and frequent-flier programs made the major airlines almost invulnerable in large markets.
Deregulation also brought a period of financial upheaval and an epidemic of “merger fever.” A number of companies ceased doing business between 1989 and 1992, and still others merged with stronger, more aggressive companies. Among the companies that disappeared from the skies were Eastern, Pan Am, Piedmont, and Midway Airlines. Continental and TWA sought the shelter of Chapter Eleven bankruptcy reorganization. USAir and Northwest required cash infusions through cooperative arrangements with foreign airlines. Even financially strong carriers such as United and American laid off employees and abandoned plans to purchase new aircraft, which added to the woes of the depressed aerospace industry.
The mergers and buyouts of the 1980s were often accomplished in an atmosphere of hostility and distrust. Charges of predatory pricing and other unfair business practices were leveled by one carrier against another. During the 1980s, the Justice Department’s Antitrust Division made a number of grand jury investigations into alleged anticompetitive activity by the major airlines, but no indictments were handed down. However, the companies that survived did not emerge unscathed. Many of the acquisitions were highly leveraged buyouts that left the reconstituted companies heavily in debt. With profits insufficient to cover their enormous debt loads, the companies frantically competed for business, engaging in fare wars that produced a dizzying array of pricing plans with equally numerous and confusing restrictions. Some of the tactics were questionable, but, again, not clearly illegal. In 1993, American Airlines was sued by Continental and Northwest for alleged predatory pricing during a 1992 fare war. The jury took just over two hours to return a verdict in favor of American.
By 1993, the industry began to rebound. Continental Airlines and TWA emerged from bankruptcy, and a few small carriers, such as Kiwi International, formed by former Eastern pilots, responded to the public’s demand for low
fares and began to make incursions into the established markets, although they generally shied away from directly challenging the giants. Older carriers for the most part chose to stay with their hub-and-spoke systems, while several, including Northwest and United, came up with a creative new solution to their financial woes.
Northwest avoided bankruptcy when its unions agreed to wage concessions in return for part ownership of the airline. Then, in 1994, after seven years of negotiating, employees of United gained majority control of their company in return for deep pay and benefits cuts. Secretary of Labor Robert B. Reich commented that other financially troubled companies would undoubtedly follow suit: “From here on in, it will be impossible for a board of directors to not consider employee ownership as one potential business strategy.” However, some industry analysts doubted that employee ownership would be effective in the long run because of inherent conflicts between labor and management, or between different labor groups. “It can’t work,” declared former Chrysler chairman Lee A. Iacocca. “What do you think will happen when it’s a choice between employee benefits and capital investment?”
One troubling criticism of deregulation is that aggressive competition has forced airlines to cut corners, resulting in safety lapses. In 1990, Eastern Airlines was handed a 60-count federal indictment charging it with shoddy and dishonest maintenance practices. The indictments came after years of complaints by the financially troubled airlines’ mechanics, who claimed that pressures to cut costs led to maintenance shortcuts and falsification of maintenance records. In January 1991, Eastern ceased operation.
Critics contend that Eastern was hardly alone in its cavalier approach to safety. They charge that the FAA is understaffed and poorly managed and that money shortages have caused all the airlines to relax safety standards. They point not only to increased pressures on the labor force but also to companies’ reluctance to replace their aging fleets, the congestion of airspace caused by increased air travel, crowded hub airports that create security risks, and over-worked and sometimes poorly trained air traffic controllers. Yet, statistically, passengers are no more likely to die in a plane crash since deregulation than they were before it. Still, critics maintain that, despite the airlines’ and the government’s efforts to assure the traveling public to the contrary, air safety is in need of substantial improvements.
Many critics feel that at least part of the problem lies in the dual role of the FAA. Charged simultaneously with promoting the economic health of the aviation industry and fostering safety, the agency is often at odds with itself. In addition, the FAA’s budget was cut and the number of inspectors reduced in the 1980s, the same period during which the number of passengers multiplied and the number of air traffic controllers was reduced. Furthermore, unions, which stand to benefit from the increased scrutiny and higher standards imposed by the FAA, continue to be major instigators for change. However, even neutral commentators have suggested that it is time to impose some degree of regulation, in the form of stronger FAA oversight, on the industry. In fact, the FAA has been accused of suffering from a “tombstone mentality” that causes the agency to delay acting on safety concerns until negative publicity generated by a crash forces the issue. Even after safety measures are recommended by the National Transportation Safety Board (NTSB), the agency charged with investigating accidents, the FAA has been criticized for not always following through.
Aging aircraft became a major concern during the late 1980s and early 1990s. In 1988, an Aloha Airgroup Boeing 737-200, purchased in 1969, lost the top of its fuselage while flying at 24,000 feet. A flight attendant was immediately sucked out of the plane. The plane made a harrowing emergency landing, but not before 65 passengers suffered injuries, some serious. Congress responded in 1991 by passing the Aging Aircraft Safety Act (49 App. U.S.C.A. 1421 note), which requires airlines to demonstrate that their older planes are airworthy. Critics claim that enforcement of the law has been lax and that it ignores other compelling reasons to replace aging aircraft, such as the availability of newer fire-retardant seat materials and of updated seats designed to be more resistant to the impact of a crash.
Concerns over airline safety became even more acute in the early 1990s with a series of fatal crashes. The Boeing Company, a major producer of aircraft, predicts that the number of jet crashes worldwide could double by 2010 if accident rates of the early 1990s continue. Such a projection strikes fear into the hearts of the flying public. However, according to David R. Hinson, former FAA administrator, flight safety “is not a simplistic science that lends itself to easy solutions.” Flight safety experts point out that all the most obvious causes of crashes have been addressed with technological advances that include such safeguards as early warning systems for wind shear.
Many experts feel that not enough research has been devoted to the study of the human elements that contribute to crashes. Boeing reports that flight crews have been the primary cause in more than 73 percent of jet crashes since 1959. In 1990, a federal jury in Minneapolis convicted three Northwest Airlines crewmen—a flight captain, a copilot, and a flight engineer—of flying a jet aircraft while under the influence of alcohol. Although this was the first flying-while-intoxicated conviction involving professional pilots, many claim that the problem of alcohol and drug abuse among flight crews is widespread and well hidden. Yet it is difficult to convince companies to focus on the issue of human elements that contribute to accidents. According to airline industry expert Clay Foushee, “It’s a lot easier to convince someone to fund a fancy new piece of technology than research into social sciences.”
In 1994, five fatal crashes, three involving commuter airlines, brought safety concerns to light once again. After the fifth crash, Secretary of Transportation Federico Peña ordered a safety audit of the entire airline industry. As a result, commuter airlines, which had previously been held to a lower standard of safety than major carriers, were placed under new operating rules that required them to bring their safety standards up to those of the other companies by the end of 1996. Industry experts said the elimination of the two-tier safety standards was “the most important decision affecting the industry since it was deregulated in 1978.”
Several other safety and health issues have been publicized. The quality of air aboard an airplane has been questioned by some. As a result of intense lobbying by passenger groups and flight attendants, federal law now prohibits smoking on all domestic flights and on many international flights as well. Air quality was again questioned in 1993 when it was revealed that, as a cost-saving measure, many airlines were circulating fresh air into their aircraft less frequently than they had in the past. This led to complaints by passengers and crew of headaches, nausea, and the transmission of respiratory illnesses. Although the FAA conceded that circulating more fresh air would be beneficial, it backed off from requiring airlines to do so, because of the cost involved.
The safety of babies and toddlers on airplanes was investigated after it was shown that a number of them suffered injuries, some serious or fatal, during incidents that did not injure their parents. Unlike adults and their luggage, children under age two are not required to be secured on an airplane but rather may be held on an adult’s lap. These “lap babies” are often ripped from the adult’s grasp during turbulence or crashes. In 1994, Representatives Jolene Unsoeld (D-Wash.) and Jim Ross Lightfoot (R-Iowa) introduced a bill that would have required the use of child safety restraints on commercial flights. However, the measure, which was supported by the Association of Flight Attendants, NTSB, Air Transport Association, Aviation Consumer Action Project, and Air Line Pilots Association, was opposed by the FAA and eventually defeated. An FAA spokesperson, testifying in opposition to the bill, said the FAA’s research indicated that if all children who needed them were placed in child safety seats, the airlines would save approximately one life over a ten-year period, and families would save $2.5 billion in added fares and costs over the same timespan. In contrast to the FAA’s findings, a study conducted at Harvard Medical School estimated that one infant a year could be saved through the use of safety seats. The sponsors of the bill vowed to continue to press for more stringent safety standards for babies.
Safety concerns will continue to plague the airline industry, even though the FAA assures the flying public that, statistically, at least, flying a major airline in the United States is far safer than driving on an interstate highway. Questions persist about the FAA’s effectiveness in overseeing air safety. And financially strapped airlines, which posted $12.8 billion in losses from 1990 to 1994, must make difficult risk-benefit analyses when contemplating new safety measures.
Some critics such as Ralph Nader, who initially supported deregulation, are now calling for limited government intervention to ensure safety. However, experts warn that the U.S. airline system, which is already extremely safe, probably can never be completely without risk. According to Stuart Matthews, president of the Flight Safety Foundation, “If the public absolutely demands that flying be totally safe, you are going to have to ban flying.” Given the choice between taking a calculated risk and not flying at all, Americans, who take their lives into their hands each time they drive, will probably continue to trust the statistics and take their chances.
In 1996, to address concerns that the families of airline crash victims were not receiving timely information, Congress passed the Aviation Disaster Family Assistance Act (ADFAA) (49 USCA § 1136; 49 USCA § 41113). The act requires airlines to submit a plan to the National Transportation Safety Board that would address the needs of the families of passengers who are involved in any aircraft accident that results in a major loss of life. Once approved, the carrier must make a good faith effort to carry out the plan.
Plans approved under the ADFAA have some minimum requirements for notification and care of families affected by an airline crash. Among them are that the airline carrier must set up, publicize, and staff a toll-free telephone line that passengers’ families can call for information. The carrier must also cooperate with the independent, NTSB-appointed nonprofit (i.e, the Red Cross) to provide an appropriate level of aid and support. In addition, the carrier must assist a passenger’s family in traveling to the crash site, as well as provide for their physical needs while at the accident location. Finally, the carrier must respect a family’s wishes for burial, a memorial, or a religious ceremony, and get the input of all families before any memorial is erected in memory of the passengers.
The ADFAA provides limitations on the liability of airline carriers for passenger lists. The act states that a carrier may not be liable for damages in preparing or providing a passenger list, unless the conduct of the air carrier was grossly negligent or constituted intentional misconduct. Further limiting airline liability, the ADFAA provides that no unsolicited communication concerning a potential action for personal injury or wrongful death may be made by an attorney or any potential party to the litigation to an individual injured in an airplane accident, or to a relative of an individual involved in the accident, before the 45th day following the date of the accident.
The provisions of the ADFAA became crucial on September 11, 2001—the day that four domestic airplanes were hijacked by terrorists and crashed into the World Trade Center in New York City, the Pentagon in Washington, D.C., and a field in Pennsylvania. In the aftermath of that tragedy, the government built on the ADFAA by passing the Air Transportation Safety and System Stabilization Act (ATSSSA) (Pub.L. 107-42, Sept. 22, 2001, 115 Stat. 230). This act took into consideration the devastation wrought on U.S. airlines on September 11 and enacted measures to try to ensure their survival.
In addition to compensating airlines for direct losses incurred as a result of September 11, the ATSSSA established a framework for computing the maximum grant that an airline could claim as compensation. To streamline efforts, it set up the Air Transportation Stabilization Board to review the prospective loan applications. The act attempted to protect the insurance industry, as well as the aviation industry, by limiting the claims that could be made upon them.
The act also established the September 11th Victim Compensation Fund of 2001 to deal directly with the needs of families who were victims of the September 11th attacks. The fund provided direct financial assistance to families so they would not have to endure lengthy court battles. Liability for all third-party losses was transferred from the airlines to the U.S. government and a waiver system was established so that families could not sue the airlines for damages as a result of the terrorist attack at any future date.
Security measures for airlines have also been upgraded since September 11. The government took over security at airports from private companies through the creation of the Transportation Security Administration. In addition, cockpit doors were reinforced, passengers were limited in what they could bring on to flights, luggage screening was upgraded, and pilots were allowed to carry guns to protect themselves on flights.
Despite the ATSSSA and the increased security measures, however, the September 11 attacks had a disastrous effect on U.S. airlines. A little over a year later, two major airlines, U.S. Airways, and United Airlines were in bankruptcy, with a good chance that others would follow. And the threat of low-cost airlines, such as Southwest, combined with a widespread decline in flying, made the business plans of most major airlines insupportable. All major airlines except Southwest saw huge losses in 2001 and 2002. As of 2003, it was not clear who would survive this latest shakeout or what the future of the airline industry would be.
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This glossary post was last updated: 8th October, 2021 | 0 Views.