Lcc Vs Legacy Carriers

Today's aviation environment is much different then the one we had almost 30 years ago. Our old environment was highly regulated in terms of how the airlines operated economically. Before the Airline Deregulation Act of 1978 the CAB (Civil Aeronautics Board), now the FAA (Federal Aviation Administration), regulated all domestic air transport as a public utility, setting fares, routes, and schedules. The CAB was the driving force behind the entire airline industry. If an airline wanted to start service or change fares they would have to petition the CAB for that right. In the 1970's things started to change and the whole system was encountering pressure from all sides. The airlines obviously favored the system since they would almost be guaranteed a profit, while passengers despised it because of the ever increasing fares. The energy crisis of 1973 and an economic downturn had started to change the economy; congress was forced to get involved. Congress was scared the airline industry would follow the rail industry into major financial troubles. They were worried a huge bankruptcy could happen and force a tax payer buyout similar to the one Penn Central experienced. Not looking to make the taxpayers foot the bill for another buyout congress began looking at solutions to the problem. So in 1975 the United States Senate Judiciary Committee started to hold formal hearings into airline deregulation. Many issues arose and much time was taken to carefully examine the consequences of both sides of the argument. In the end it was decided that the Airline Deregulation Act or ADA would be signed into law in 1978. "The ADA stated many goals:

* the maintenance of safety as the highest priority in air commerce;

* placing maximum reliance on competition in providing air transportation services;

* the encouragement of air service at major urban areas through secondary or satellite airports;

* the avoidance of unreasonable industry concentration which would tend to allow one or more air carriers to unreasonably increase prices, reduce services, or exclude competition; and

* the encouragement of entry into air transportation markets by new air carriers, the encouragement of entry into additional markets by existing air carriers, and the continued strengthening of small air carriers.

The Act intended for various restrictions on airline operations to be removed over four years, with complete elimination of restrictions on domestic routes and new services by December 31, 1981, and the end of all domestic fare regulation by January 1, 1983. In practice, changes came rather more rapidly.

Among its many terms, the Act

* gradually eliminated the CAB's authority to set fares;

* required the CAB to expedite processing of various requests;

* liberalized standards for the establishment of new airlines;

* allowed airlines to take over service on routes underutilized by competitors or on which the competitor received a local service subsidy;

* authorized international carriers to offer domestic service;

* placed the evidentiary burden on the CAB for blocking a route as inconsistent with "public convenience";

* prohibited the CAB from introducing new regulation of charter trips;

* terminated certain subsidies for carrying mail effective January 1, 1986 and Essential Air Service subsidies effective ten years from enactment;

* terminated existing mutual aid agreements between air carriers;

* authorized the CAB to grant antitrust immunity to carriers;

* directed the Federal Aviation Administration to develop safety standards for commuter airlines;

* authorized intrastate carriers to enter into through service and joint fare agreements with interstate air carriers;

* required air carriers, in hiring employees, to give preference to terminated or furloughed employees of another carrier for ten years after enactment;

* gradually transferred remaining regulatory authority to the U.S. Department of Transportation (DOT), and dissolved the CAB itself.

Safety inspections and air traffic control remained in the hands of the Federal Aviation Administration, and the act also required the Secretary of Transportation to report to Congress concerning air safety and any implications deregulation would have in that matter (Airline Deregulation Act)."

A very simple way of explaining the new industry would be to simply state that competition and open market now dominated. The legacy airlines would have to adapt or fail trying to.

Now that we understand the background we have a couple of things to define and look at, the first would be a legacy carrier. A legacy carrier is a major US airline that has been around since before regulation and many would argue, needs to have been founded over 70 years ago. These are the airlines we are focusing on today, the American Airlines, Northwest, Delta, United, Continental to name a few. The next would be their competition the Low Cost Carrier, affectionately known as LCC's, these carriers are relatively new to market, save for Southwest, they focus on low prices and mainly point to point service (Tsoukalas).

This is where the problem for the legacy carrier arrives. The legacy carrier's have, been up until very recently, losing vast amounts of money since the 9/11 attacks. Historically they have been in and out of bankruptcy many times since 1978. Take this into consideration since 1978 their have been approximately 162 bankruptcy filings and the number of legacy carriers have dropped from about 20 to 7. The financial performances and difference between the legacy carriers and LCC's is even more startling. Between 2001 and 2004 the low cost carriers earned and operating income of .934 cents per available seat mile (ASM) while the legacy carriers on a whole lost an average of 3.933 cents per ASM. That is a 3 cent difference. That might not sound like a lot but when you take a closer look and define an ASM which is the number of seats multiplied by the number of miles flown you can see just how large this number can become (Treitel).

This is not the only advantage that the LCC's have over their counterparts at the legacy carriers. Many more advantages exist and they all seem to be cost driven