Here is the rought draft of a short term paper I am writing for an Economic Globalization course. I'd appreciate any input or corrections. Thx!
Air transport is one of the most crucial enablers of the process that is Globalization. The technological marvel of multi-ton metal airplanes lifting off into the sky with loads of passengers in the hundreds serves to deliver passengers and goods at the speed of business to destinations worldwide. They are pinnacles of modern achievement. Of the many labels, the “Global Dreams”, of the twentieth century, we refer to the heightened state of economic, sociopolitical, and technological development entailed by the rise of free-market capitalism after World War II as “the jet age”.
Air transport is crucial because of the multiplier effects it produces. One United Airlines flight to Asia from the US carries 32000 lbs. of cargo, cargo like electronics, fish, and goods originating from China, and whatever other high demand products, including US exports. This does not factor in the effects of carrying passengers, whose total contribution to the world economy is much, much more than the fare they paid to fly; they could be on crucial business trips. On the basis of cargo alone, it is estimated that with just two daily flights from the US to China, Federal Express cargo planes will generate $6 billion dollars of economic benefit and 48,000 new jobs over a two year period . It is a staggering effect, and it underscores the point that much of the flow of international business is routed through airlines, directly and indirectly. Affordable, high speed transport has accelerated the pace of global trade.
However, even as key as air transport is to driving globalization, it has been slow to adapt, “owing to the peculiarities of its organization and the embedded weight of a half-century of national and international regulation .” Air transport volume is dictated by external demand, and given the barriers to entry of air transport (high and time-intensive capital requirements), it is hard for airlines to allocate the right capacity to each market. It is very difficult to run an airline based on simple economic projections, let alone embrace the forces of globalization as swiftly and successfully as other industries.
In specific, the crutches facing airlines in adjusting to worldwide competitive realities include even more intense domestic competition, an unproductive regulatory environment, and volatility of investment in terms of both travel demand and the consequent demand for their stocks. Inasmuch as the airlines fuel the processes of globalization, from serving as communication networks for corporations to arrange deals and inspect future business sites, to physically transporting world workers and serving as the symbolic means of the hyper mobility of capital and labor, they are the first to feel the slightest effects of economic boons or crises. And despite the existence of seemingly “domestic-only” air routes, the demand for intra and interstate travel is equally affected.
California provides an excellent example of how globalization is affecting the business prospects of what were thought to be sheltered, domestic markets in the airline industry. In the days of regulation by the CAB , the government told the airlines which routes they could fly and what prices they could charge; the government oversaw their books and made sure they ran profitably. The problem was that, unlike everything else in the free-market US economy from the 1950s onward, the air transport’s “product” was not as affordable and as efficiently “produced” as it needed to be. Because airlines had no incentive to put expensive, new jet aircraft except on guaranteed high-fare transcontinental routes, California remained a market underserved. The CAB did not have the reasonable ability to assess what the right supply was for the California air travel market, and indeed any air travel market, regional or national. The airlines could not adjust their California offerings to efficiently match the economic demand.
Then came airline deregulation. Much like any industry deregulation, the inefficient firms were weeded out. In California, airlines with the lowest cost structures moved in to fly people and cargo between the state’s economic centers, and from nationwide points, for the first time at market price. As demand for air travel finally caught up with demand for goods and services that flowed to or originated in the state, three major California carriers emerged: United Airlines , PSA, and Western Airlines. United was a national carrier at the time, and served the California market with both passengers that were traveling intrastate and those that came from all over the nation. PSA and Western were regional carriers who served the Californian market mainly with interior flights and limited flights to other western states.
The 1980s were the toughest times in US airline industry due to the drastic change of regulatory environment in conjunction with real global competition. Actual global competition for US carriers occurred after 1979, when the international US airlines (e.g. Pan Am and TWA) had to compete on costs with foreign-national airlines (e.g. British Airways). The US flag carriers, whose business procedures were still inextricably linked to a regulated environment, were not able to compete. As they failed, national US carriers like United and American acquired their assets, and were able to use them much more productively due to their success in the (then) much more sheltered deregulated domestic landscape. And as rapid advances in the technology of important factors of production enabled and encouraged more international business, the now major US carriers were growing more rapidly. In the late 1980s, the airlines started to recognize the boon of California’s industry. In addition to a rapidly developing technology industry, California was a burgeoning economy of scope for exports, both for manufactured products and farming.
As nationwide and global investment flocked to California, so did air travel demand from more varied geographical areas, domestically and internationally. The major carriers sought to have a piece of the California pie, and like a gold rush, snapped up the now three regional Californian airlines. US Airways purchased PSA. Delta acquired Western. American bought out the successful startup AirCal, who rode high on the booming California economy. Unfortunately, an economic recession was just around the corner. From 1989-1993, the airlines suffered again. Those three said carriers pulled out of the market, paving the (run)way for United to strengthen its position, and more significantly, for wildly successful low-fare competitor extraordinaire Southwest to seize the day.
Because travel demand became low on intra-California routes, the only way to keep passengers flying was by offering ultra low airfares. Southwest, with an extremely low cost structure, was able to do just that. Suddenly, United found itself confronted by a growing Southwest. To protect its market, it launched a low-fare arm of its own airline, dubbed United Shuttle. Luckily for both airlines, the greatest global economic boom times, characterized by dotcom capitalism, were to follow from 1994-2000. United Shuttle and Southwest thrived in California, as evidenced by economic data . From 1994-1999, total gross state product increased from 6,930,791,000,000 to 9,308,983,000,000. California-generated air travel grew from 62,454,000,000 to 94,996,000,000 – a higher growth rate than the GDP increase.
In the last two years, labor at United began clamoring for more money as a result of the good times the last half decade had seen. Nowhere would this impact be more felt than in California, as we see now. A great deal of United’s growth in California resulted from growth of its western hub at San Francisco, and the establishment of a new hub at Los Angeles. For the sake of globalization, an airline hub is an economy of scope in the air transport world. They are developed to feed traffic in and out of destinations offering strategic location advantages. For United, SFO and LAX were economies of scope because of their booming industries: the high-tech clustering in the Bay Area, and the mass exportation in the LA Basin. They also offered a locational advantage in being the two largest US gateways for Pacific Rim travel, the metropolises themselves harboring many Pacific Rim expatriates.
During this period, United grew to offer as many as 285 and 195 departures in any given day from SFO and LAX, respectively. Many of these flights were intra-California shuttle routes. Between Los Angeles and San Francisco alone, there were 38 daily flights on United Shuttle. That is more than 3 flights per business hour, and existed alongside Southwest’s 25 daily flights from Oakland to LAX. The corridor between SFO and LAX contained the highest volume of flights than any other market in the world at the time. Clearly, this was the effect of a boom-time, global expansionary economy.
When the world economy started to lose its luster was exactly when United finally granted its workers higher wages. Between the summer of 2000 and 2001 United became the victim of expansionary wage premiums in a rapidly declining market. The new wages were based on a forecast for continuing high-dollar value in an expanding world market. In reality, the California economy plummeted. California exports plunged nearly 20% in August even before the tragic events . The airline started to suffer huge losses. Other airlines serving intra-California routes pulled back as the state economy, both in real terms of exports and high-tech business, shriveled. United scaled back its SFO/LAX operations to 219/177 flights, respectively, before September 11th. After the terrorist attacks, as the airlines suffered their worst losses in history, United cut back its SFO/LAX flights to 160/104, respectively, contributing to a total system wide furlough of 20,000 employees. In totality, the airlines laid off more than 100,000 workers.
Despite the continuing high-value of the dollar as a result of our position in this new war, California’s economy will keep shrinking. Other country’s exports to us will shrink, and so it follows their ability to by our exports will shrink. California’s exports are higher than any other state and account for as much as 15% of its economy . As a result, global trade dries up, and demand for air travel sharply drops. With many of the 20,000 furloughed from California, United has decreased its contribution to the state dramatically. California was United’s region of growth, and that growth has been pulled back. As a result, even though United has farmed out some of its routes to regional airlines with much cheaper cost structures (much like farming out labor to workers with less expectations), travelers will have less choice in California. Southwest remains, but will it want to fill the gap United has left? The dramatic growth and shrinkage of the air traffic within California only proves more how globalization can make good times great by multiplying economic activity around the world, but by the same token also make rough times even harsher. Who knows if California air travelers will ever have the same choice?
Department of Transportation Docket Document OST-1999-5539-2
Department of Transportation Docket Document OST-1999-5671-1
Fettered Flight: Globalization and the Airline Industry
Civil Aeronautics Board: the regulatory agency of the airlines until the Airline Deregulation Act of 1979
United’s historically strong western presence was the result of its initial focus on coast-to-coast routes.
Provided by Bureau of Economic Analysis
Source: California Chief Economist