Liberalisation-Open Markets, Open Skies, & Beyond

Jonathon R Nield

The Case For and Against Regulation

• Tight regulation up to 1970s• Civil Aeronautics Act of 1938- regulate competition• While air transport is not a natural monopoly,

"unregulated competitive forces may have adverse consequences for the public at large. (Richmond 1971).

The Case For and Against Regulation

• Airlines have non-differentiated product• Low barriers to entry• No significant economies of scale

The Case For and Against Regulation• Air transport is a public

utility• The nature of the

benefits of the airlines could not be jeopardized

• Strategic, Social, and Political implicationso Countries developed

one national carriero Free international

competition would put national carriers at risk.

 

The Case For and Against Regulation

• Rapid development of non-scheduled air traffic 1960s-1970s

• Chartered services would potentially jeopardize scheduled services

 

The Case For and Against Regulation

• Regulation limited pricing freedom and product differentiation, restricted capacity growth, excluded new entrants

• Benefits of a competitive environment:o lower fareso innovatory pricingo product differentiation

• Airlines forces to improve efficiency and productivity

• Some inefficient airlines may be forced out of certain markets 

The Case For and Against Regulation

• Fear of getting locked-in within industryo Equal market share and prices below

sustainable levels•  Arguments against the airline industry being

different than any other industry regarding need for consumer protections.

 

Mounting Pressures for Liberalisation

• Carter administration in the 1970s abolished CAB and the airline market was deregulated

• European airline markets soon followed with the mounting pressure from the rapid US deregulation

• Internation Air Transport Negotiations (Carter) 1977-1985: US began many bilateral negotiations to encourage competition in international markets

  

Open Market Phase of Liberalisation

• Countries wanted increased access to US market• US-Netherland Bilateral agreement set tone for future

policy:o Multiple designation acceptedo 5th Freedom Righto Dutch only given 5 pointso No restrictions on frequency or capacityo No restrictions on the 6th freedomo Unlimited charter rightso Country of origin sets tarriffs- Double Disapproval

• Pressure on other European countries   

Open Market Phase of Liberalisation

• UK-Netherlands bilateral agreement in 1984-1985 sets stage for Europe

• Succession of agreements and treaties removed many of the restrictions on routes, capacity, frequency, and pricing.

   

Open Market Phase of Liberalisation

• JAL in Japan ended its monopoly in 1986 (ANA)• Southeast Asian countries saw multiple new

airlines startup•  Asiana-South Korea•  Eva Air- Taiwan• Dragonair- Hong Kong• Qantas- Australia (Continued as deregulated sole

Intl carrier)    

Open Market Phase of Liberalisation

• US-European bilaterals often unbalanced• Intra-European bilaterals balanced• US offered more 5th freedom rights than the Intra-European

bilaterals• Most US bilaterals allowed unlimited charter flights from any

point• Unlimited or multiple designation rights• Break of gauge rights• Removal of limits on the frequecy of flights• Removal of capacity limits• Double disapproval

    

US Pushes for 'Open Skies'

• 1992 to Present• Arguments against bilateralism grew• Airlines should be able to operate as any other

international industry• Market opportunities only as great as the least

liberal state• Maturing nature of the industry and difficulty of

operating within the confines of bilaterals    

US Pushes for 'Open Skies'

• Maturing nature of the industry and difficulty of operating within the confines of bilateralso Growing concentration of US carriers (American, United)o Airline alliances and mergers internationally were becoming

more prevalento Privatization of airlines

• Morphing marketing conditions created need for successful airlines

• Airlines in US were pushing for more deregulation (American, Delta, United)

• European Community>EU also pushing for open skies    

US Pushes for 'Open Skies'

• 1992- US and Netherlands signed first 'open skies' agreement

• New features in version 2.0 of the deregulation:o Open route accesso Unlimited 5th freedom rightso No tarriff controls UNLESS too high/lowo Code-Sharingo Break of gauge

    

US Pushes for 'Open Skies'

• US pushed for open skies first with like-minded states• Reluctant states had implied threat of counter-measures• KLM filed for anti-trust immunity to better exploit the

code-share with Northwest• By 2007, over 60 'open skies' agreements• Some countries (Italy) introduce open skies in phased

bilaterals• Only two countries without open skies, UK and Japan

     

European Common Aviation Area

• Europe moving toward open skies• Different structural approach• Unlike bilateral approach of the US, Europe took a

multi-lateral approach     

Clouds in the Open Skies

• Despite the progress of the US and EU in open skies agreements, most countries still had traditional bilateral agreements

• Cabotage still not allowed• Seventh Freedom still not allowed

o Flying between two points outside airline's operations

• Airline ownership controlo  25% max in US

• Still said to be US biased     

European Court Changes Rules

• European Court of Justice 2002• ECJ was only entity able to negotiate bilateral air

service agreements• Traditional nationality clauses infringed upon

Article 43 of European community. Airlines with foreign ownership could be designated to fly between states

• Bilaterals with the US needed to be renegotiated• Open Skies to Clear Skies

  

Trans-Atlantic Common Aviation Area • European Commission wants to further

liberalise the international arena.• US political structure and law makes certain

desired freedoms difficult to attain• Airlines are seen as a component of national

security• Civil Reserve Air Fleet (CRAF)• March 2007- European Council of Ministers of

Transport opened 5th freedom rights to/from US and any point within EU member states 

•  Other efforts broke down 

Q&A