Abstract:The Association of European Airlines (AEA) has expressed strong opposition to what they see as attempts at U.S.-style airline deregulation. The AEA and many other opponents of European airline competition argue that deregulation has not been successful in the U.S. Individuals on both sides of the debate point out the differences between the U.S. experience and the circumstances in Europe: Higher population densities in Europe make airport expansion more difficult and make high-speed ground transportation more viable. Compatibility difficulties across countries make air traffic control (ATC) less responsive to changes than in the U.S. EEC countries have more heterogeneous goals and much more autonomous authority than the states of the U.S. For instance, each EEC member makes some independent decisions on questions of national security, an issue often tied to airline policy. For national security and other reasons, most of the EEC scheduled airlines are owned and subsidized by member countries.

Some concerns about the sustainability of airline competition in Europe do mirror those that were raised prior to U.S. deregulation and have reappeared in the U.S. over last few years as the number of major airlines has declined. Not only are there now fewer competing airlines in the U.S. than shortly after deregulation, it appears that each remaining successful carrier has established its own area of dominance at a hub airport. The airlines compete in carrying passengers who change planes at their hubs, but each carrier exercises substantial market power over the passengers who travel to or from the city in which its hub is located. If a similar situation were to arise in Europe, the airlines that are already established at the centrally located European airports would be at a substantial advantage.

Airport capacity constraints, the most pressing concern about European airline deregulation, became a primary focus of U.S. airline policy only many years after deregulation. This problem has already arisen in Europe both because population density is greater and because airport construction has not been pursued as aggressively. In Europe, however, the idea of rationing airport use with fees is better accepted.

This paper investigates these and other issues in the liberalization or deregulation of the European airline industry. Because so much has been written on the successes and difficulties with airline deregulation in the U.S., I do not include a thorough review of that topic. I use previous analyses of the U.S. experience as a springboard to studying the prospects for competition in European air travel. I also do not attempt to forecast the economic benefits of European airline deregulation, though they could be substantial. Rather, I study the factors that are most likely to impede movement towards a competitive airline market in the EEC.

Section II gives a brief overview of the historical and current state of airline regulation and the airline industry in Europe. Section III discusses the political barriers to competition among European airlines. Section IV focuses on the institutional constraints, most importantly the shortage of airport capacity, that could lessen the gains from European airline deregulation. Section V discusses the industry and market constraints on airline competition that have appeared in the U.S. and the potential for such difficulties arising in Europe. Some final comments and conclusions comprise Section VI.

Note:Published in Europe After 1992, ed. W.J. Adams, Ann Arbor: University of Michigan Press.