Liberalisation-Open Markets, Open Skies, & Beyond

1. Liberalisation-Open Markets, Open Skies, & Beyond Jonathon R Nield

2. 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).

3. The Case For and Against Regulation • Airlines have non-differentiated product • Low barriers to entry • No significant economies of scale

4. 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 implications • Countries developed one national carrier • Free international competition would put national carriers at risk.

5. The Case For and Against Regulation • Rapid development of non-scheduled air traffic 1960s-1970s • Chartered services would potentially jeopardize scheduled services

6. The Case For and Against Regulation • Regulation limited pricing freedom and product differentiation, restricted capacity growth, excluded new entrants • Benefits of a competitive environment: • lower fares • innovatory pricing • product differentiation • Airlines forces to improve efficiency and productivity • Some inefficient airlines may be forced out of certain markets 

7. The Case For and Against Regulation • Fear of getting locked-in within industry • Equal market share and prices below sustainable levels •  Arguments against the airline industry being different than any other industry regarding need for consumer protections.

8. 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

9. Open Market Phase of Liberalisation • Countries wanted increased access to US market • US-Netherland Bilateral agreement set tone for future policy: • Multiple designation accepted • 5th Freedom Right • Dutch only given 5 points • No restrictions on frequency or capacity • No restrictions on the 6th freedom • Unlimited charter rights • Country of origin sets tarriffs- Double Disapproval • Pressure on other European countries

10. 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.

11. 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)

12. 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

13. 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

14. US Pushes for 'Open Skies' • Maturing nature of the industry and difficulty of operating within the confines of bilaterals • Growing concentration of US carriers (American, United) • Airline alliances and mergers internationally were becoming more prevalent • 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

15. US Pushes for 'Open Skies' • 1992- US and Netherlands signed first 'open skies' agreement • New features in version 2.0 of the deregulation: • Open route access • Unlimited 5th freedom rights • No tarriff controls UNLESS too high/low • Code-Sharing • Break of gauge

16. 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

17. European Common Aviation Area • Europe moving toward open skies • Different structural approach • Unlike bilateral approach of the US, Europe took a multi-lateral approach

18. 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 • Flying between two points outside airline's operations • Airline ownership control •  25% max in US • Still said to be US biased

19. 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

20. 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

21. Q&A