Airline industry deregulation and changes in systematic risk: Fid-Bau Portal

Airline industry deregulation and changes in systematic risk

Allen, Steven A. / Cunningham, Lawrence F. / Wood, Wallace R.

Abstract Deregulation of U.S. Airline Industry may have lowered systematic risk because pricing freedom and route flexibility improved airline management reaction to various economic conditions. Reduced systematic risk offers lower cost of equity capital for the industry as a whole as well as for individual carriers. Previous research has had mixed results in identifying a relationship between deregulation and airline industry cost of capital. This study plots airline industry Beta coefficients across the years 1963 to 1987 and clears up previously conflicting research findings. Beta coefficients had been falling since the fuel crisis of 1974 and continued to fall through 1980. Fluctuations since deregulation have been relatively minor and systematic risk has leveled off at a significantly lower value than before deregulation. Studies which concentrate on the fluctuation in Beta since 1978 are dependent on the exact time period of analysis, and their conclusions that deregulation raised or lowered systematic risk are likewise suspect. A broader view of systematic risk changes in the deregulatory era shows airline Betas peaking from 1971 to 1973 and a gradual decrease as deregulation was being discussed, implemented, and legally mandated. This gradual decline from 1974 to 1980 may be attributed to such factors as fuel prices, interest rates, general inflation as well as deregulation. In any case systematic risk of the U.S. Airline industry has been lower since deregulation than in decades before.