Air Transport Deregulation

Air Transport Deregulation

Before discussing the UK’s experience of air transport deregulation, consider first the special characteristics of air travel

i Aviation generates significant externalities including noise, climate change, and diminished air quality. Planes burn most fuel during take-off. Therefore short flights are disproportionately polluting The Dept of Transport estimates a £3 tax on short-haul, and £20 on a long-haul flight, is needed to internalise the externality ie make the polluter pay.

i Airport development involves significant land use and consequent urbanisation of the surrounding area

i In the UK and Europe, the supply of airspace and landing slots at major cities is limited.

i The current airports, runway and air traffic control infrastructure lacks the capacity to handle the projected number of flights

Air transport is made up of several interlocking components:

i Airline operators in the private sector commercial airlines such as Virgin or state own ‘flag carriers’ such as Air France, low cost companies such as Ryan Air and charter airlines used by holiday firms

i Infrastructure: airports and air traffic control systems

Air travel markets are segmented into submarkets: first class & economy class, low cost, leisure & business domestic, short & long haul. Evaluation requires performance indicators. The criteria to evaluate the performance of air transport include fares, the number of services, service frequency, quality of service, changes in demand, loading.

Air transport is a heavily regulated industry because:

i Travel by air is potentially dangerous and any accident involves hundreds of people
i Air flights pass through the airspace of different countries and so pose a potential security threat

The first country to deregulate air transport and allow new carriers to enter the market was the USA in 1978, resulting in a proliferation of smaller airlines, competing against established major airlines.

During this period European air transport was dominated by state-owned 'flag carriers'. Governments negotiated bilateral agreements eg BA flies from Heathrow to Geneva and Swiss Air form Geneva to Heathrow. Resultant barriers to entry meant virtually no competition and high prices.

Starting in 1987, UK air transport deregulated as part of an EU wide process. Additional 1993 reforms granted all European airlines the right to offer international flights within Europe and most domestic routes. Airlines became free to set their own fares.

The result has been to replicate the US experience. There has been an explosion of low cost operators such as EasyJet challenging established state owned carriers.

Europe is now moving towards an open skies policy where the air transport industry is liberalised and governed by an EU regulatory framework. Increasing competition involves allowing more airlines to fly to destinations. To encourage new entrants, the EU allocates 50% of unused or newly created slots to newcomers to the market.

The impact of deregulation varies between sub markets:

i Low cost operators like Easyjet and Ryanair have rising profits and are expanding by offering low cost flights.
i Premium carriers such as BA are losing business passengers and profits to cheap fares airlines