Dorothy Robyn, senior consultant at the Washington-based Brattle Group, spells out the benefits to both consumers and airlines of a transatlantic open skies agreement
Although the USA has negotiated so-called "Open Skies" agreements with 11 of the 15 European Union (EU) countries, the USA and Europe maintain substantial restrictions on transatlantic competition and investment in aviation. This distorts competition and constrains the ability of carriers to adjust to market conditions.
The Brattle Group recently completed a major study which found that air travel would surge and fares would drop if existing restrictions were lifted. At the request of the European Commission, we analysed the economic effects of creating a single, open market in aviation covering Europe and the United States. We concluded that an EU-US "Open Aviation Area" would:
Increase transatlantic travel by up to 11 million passengers a year - up 24%. Boost intra-EU travel by up to an additional 35.7 million passengers a year - a 14% increase. Create about $5.2 billion a year in consumer benefits through lower fares and increased travel, with more than half of those benefits going to transatlantic passengers. Increase economic output in directly related industries by $3.6 billion to $8.1 billion a year.To arrive at these aggregate figures, we examined three separate efficiency effects that an Open Aviation Area would have.
First, increased competition and consolidation would produce cost savings, because less efficient airlines would be acquired by, or forced to adopt the business practices of, more efficient airlines. Using route-level cost data for EU and US carriers, we identified cost categories with the greatest potential for efficiency gains, and determined a conservative "best practice benchmark" for costs in each category. If all high-cost carriers reduced their costs to the benchmark level, airline costs would drop by 4.2 % - nearly $3 billion a year - largely from improvements in intra-EU operations. Because airlines compete vigorously for passengers, over time these cost savings would get passed on in the form of lower fares.
Second, improved co-ordination on transatlantic interline routes would lead to lower fares. By permitting mergers and other forms of integration between US and EU carriers, an Open Aviation Area would result in improved price co-ordination on transatlantic interline journeys. When interline carriers can co-ordinate their pricing rather than setting the fare for each segment independently, they reduce their fares so as to increase combined profits. Based on empirical evidence that existing EU-US airline alliances have lowered transatlantic interline fares by 18-28%, we calculated that an Open Aviation Area would bring additional benefits to transatlantic passengers of as much as $1.35 billion a year.
Third, elimination of the four non-Open Skies agreements would lead to increased passenger travel. Current bilateral agreements between the USA and the UK, Greece, Ireland, and Spain restrict the quantity of transatlantic travel. To estimate the impact of replacing these restrictive bilaterals with an Open Aviation Area, we used regression analysis to calculate the impact of the 1990s Open Skies agreements between the USA and other EU countries, which replaced similarly restrictive agreements.
Our analysis - the first rigorous assessment of the impact of Open Skies agreements - shows that these agreements led to a 10% increase overall in the number of transatlantic passengers. By extrapolation, we calculated that eliminating the remaining restrictive bilateral agreements would yield a gain of at least 2.2 million passengers a year, largely on USA-UK routes, and an increase in consumer benefits of between $600 million and $1.5 billion a year. This is a lower-bound estimate, because it is based on the impact of bilateral Open Skies agreements, and an Open Aviation Area would provide for still greater liberalisation.
If an Open Aviation Area is such a good idea, why have not Europe and the USA created one? Largely because of vocal concerns about the potential impact of liberalising international aviation in three key areas: US national security (specifically, the Civil Reserve Air Fleet, which provides commercial airlift in a military emergency); US labour (pilots claim they would be replaced by lower-paid EU counterparts on transatlantic flights); and airline safety. Our study looks in detail at each area of concern. We conclude that an EU-USA Open Aviation Area would maintain if not improve airline safety and US national security, and that harm to US airline workers would be limited.
It is time to listen to the voice of efficiency. Current restrictions impose significant costs on consumers and air carriers alike. An Open Aviation Area would allow EU and US carriers to organise efficiently to offer combined domestic and international air service in the Europe-USA market. Passengers would benefit from lower fares and expanded service options. Airlines would gain as well. With many transatlantic carriers in an economic tailspin, regulatory reform that helps producers and consumers should be a no-brainer.
Source: Airline Business
