Liberalization of Air Transport

Abstract

ABSTRACT Several countries and regions have liberalized air transport markets, spearheaded by the US Deregulation Act of 1978. The historic and political drivers and expectations associated with liberalization are examined and how the regulatory environment developed during the post deregulation years both in the USA and Europe. Four principal areas of regulatory reforms in air transport are covered: (1) domestic markets; (2) air services agreements; (3) associated services; and (4) inter-regional open aviation areas. Examples are discussed of each: Deregulation in the US and liberalization in the EU as an example of the first; open skies air services agreements of the second; ground-handling, charter and air cargo liberalization of the third; and European Common Aviation Area (ECAA) and the Open Aviation Area (OAA) of the fourth. The chapter covers the unfounded expectation of stability and equilibrium to form over time in liberalized air transport markets: Airline executives are misled to view industry concentration as inevitable where only few players will survive. In the chapter it is argued that liberalized air transport markets are expected to have relatively low entry and exit costs and therefore non-existence of market equilibrium: Whenever there is short-run excess capacity, there is unlikely to be a competitive equilibrium. In such a situation, the resources are allocated inefficiently and actors will attempt to cooperate in their activities or merge. Concentration means opportunities for new entry as remaining players pursue cost restructuring and the industry de-concentrates as new players gain foothold. The history of liberalization in air transport markets has shown that successes, small and large, were made, but also a great number of failures, as incumbent airlines tried to adjust to the new environment and new airlines entered. The chapter covers why troubled and failed airlines have not called for re-regulation in the pursuit of stability. It also discusses if regulation is the way to secure stability and whether airlines in their decisions are in a better position to cope with market instabilities than the regulator. The conclusion of this history overview of air transport liberalization is that raising regulatory barriers to entry, a full-scale re-regulation, will neither achieve financial stability nor raise consumer benefits in the long-term.