Reregulation of the airline industry: could price cap regulation play a role?

Abstract

Almost 20 years after passage of the US Airline Deregulation Act, air transport regulatory liberalization has made inroads on all continents. But even as deregulation is still spreading, there are also calls for some form of re-regulation. The reasons are diverse and not necessarily consistent. Mergers and alliances raise fears of monopoly power, especially concerning ‘fortress hubs’ where dominant carriers can charge higher prices. The opposite concern arises from the massive financial losses which have accompanied the deregulated era. Competition appears ‘destructive,’ in modern parlance, an ‘empty core,’ there may be no sustainable set of prices to permit normal profits under competition, hence a danger of instability in the absence of reregulation. But the history of price and entry controls and rate of return regulation in airlines is not encouraging, indeed that is why deregulation came about. This paper explores the potential role of a more recent regulatory model – price cap regulation – applied to airlines. The paper concludes that price cap regulation would not be the answer, it is a regulatory form intended to restrain monopoly pricing, which is less of a problem in airlines than providing stability in an unstable oligopoly industry.