The Outlook for European Aviation
JEL Classification
Sean Barrett
Department of Economics, Trinity College, Dublin 2, Ireland
Abstract
In postwar Europe aviation markets were controlled by bilateral
agreements which confined the market to one airline per country. The airlines
charged the same fares and divided the markets. Economists from Adam Smith to
William Baumol recommend that governments should not ban new entrants or
otherwise prevent competition and the examination of the current state of
European aviation in this paper confirms this policy prescription. European air
fares are the highest in the world and Europe's share of world aviation is
falling steadily. European airlines are characterised by high costs and low
productivity. The economic rent from protectionism in the sector has been
absorbed by a combination of high wage costs and productivity some 36% lower
than in North America. The paper then examines the impact of the deregulation of
the Ireland/United Kingdom air services market in 1986. The results in terms of
growth in a previously static market and reductions in fares have been dramatic
beyond the expectations of proponents of deregulation. The paper concludes by
reviewing the post-deregulation barriers to contestability in aviation and the
movement of aviation from the public to private sector.