Competition Policy
Airline deregulation

Most price controls in the European air transport market have now been removed and there has also been some progress in improving market access, but constraints on airport capacity and air traffic control have caused prices to react much faster than market shares. In Discussion Paper No. 776, Martino Ajmone Marsan and Research Fellow Fiorella Padoa Schioppa Kostoris examine the effects of increased competition on fare behaviour using an unpublished 1990 data set on the eight fare categories adopted by Alitalia on medium-range international routes (to Europe, North Africa and the Middle East). The authors distinguish `business' routes, on which higher fares are served first and others made available later to raise the load factor, from `tourist' routes, on which lower fares are served first and rationing devices used to meet excess demand by charging higher prices than those booking later expected. Their theoretical model divides routes according to the regulatory framework (intra- or extra-EC) and into business, tourist or mixed routes.

Throughout Europe, the average revenue per passenger kilometre and arithmetical average fare are greater for business than for tourist routes, while fare variability is slightly less; but routes beyond Europe show no such clear pattern. Within the Community the fare spectrum for business routes widens with the introduction of more expensive fares. For tourist routes such widening reflects the introduction of lower fares and reduces revenue per passenger, although higher variability of passenger distribution is associated with higher revenues per passenger, which is consistent with demand rationing.

The authors use an index of competitive pressure to show that competition is stronger and market concentration weaker within the Community than elsewhere, which generally reduces fare levels and raises their variability. This is more evident on EC business routes, since charter flights provide competition on tourist routes. On non-EC, regulated routes, fares do not depend on the number of carriers, since they may collude to raise prices. The authors conclude by noting the remarkable similarity of Alitalia's fare behaviour to that found in the US following the 1978 airline deregulation: the expected difference in prices paid by two randomly selected passengers is 35% of the mean for the US and 36% for Alitalia's medium-range routes.

Competition Through Fares and Fare Accesses on the Air Transport Market
Martino Ajmone Marsan and Fiorella Padoa Schioppa Kostoris

Discussion Paper No. 776, February 1993 (AM)