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The removal of barriers to entry into European air routes could bring
large benefits, Paul Seabright told a lunchtime meeting on 20
October, mostly from reductions in the relatively high labour and
overhead costs of EC airlines. These benefits could be eroded in the
long run, however, if dominant carriers are able to abuse market power,
so deregulation should be accompanied by measures to open up access to
take-off and landing slots at airports and a vigorous EC competition
policy. Civil aviation should benefit significantly from 1992, since it has been highly regulated. Unlike most sectors, Seabright noted, valuable evidence on its likely response to liberalization is available, from the deregulation of US airlines since the late 1970s. US deregulation initially prompted enthusiastic entry by new carriers, but this was followed by a period of exits and mergers that left the market at least as concentrated as before. The market share of the top ten US carriers fell from 91% in 1976 to 85% in 1984, but rose again to 95% by 1988. Seabright focused on international services, which account for 60% of the total traffic of the major European carriers. Bilateral regulation between governments covers the procedure for setting fares and the shares of capacity that can be offered by airlines, and allows carriers to collaborate on scheduling and to pool rev enue. It effectively prevents route entry by any except officially designated airlines. The main measures of deregulation agreed by the EC involve greater flexibility in allowing fare discounts, relaxation of capacity splits and opening up the rigid pairing of destinations. More deregulation is also on the way, and it has been accompanied by more active involvement of the Commission in recent airline merger proposals. In its own assessment of the likely gains from 1992, the European Commission estimated that liberalization of air transport could bring about a 10% reduction in costs and prices, a potential gain of around $1 bn. On the other hand, Seabright noted, the gains from US deregulation were somewhat greater and, after allowing for the different sizes of the two markets, would suggest total benefits of European deregulation of around $3.5 bn. But competition from other forms of transport, such as railways, is greater in Europe than in the United States and average journey lengths are shorter, so the benefits from deregulation in Europe are likely to be lower. Seabright's research with Francis McGowan suggested that the removal of artificial entry barriers will stimulate competition and so drive down the high labour and indirect costs of European carriers. European load factors (the average percentage of seats filled) already compare favourably with those in the United States, so they will not improve significantly. The labour costs of European carriers (except the UK airlines) are substantially higher than in the United States. Pilots at UTA are paid 78% more, and at Iberia 19% more than in the main US airlines. Alitalia, SAS and Iberia pay other cockpit staff more than double US rates while Lufthansa, Sabena and UTA pay three times or more. These differences are not reflected in higher productivity. In terms of revenue passenger miles per airline employee, the productivity of the eight major US airlines is double that of European carriers, who also have higher indirect and overhead costs; they employ on average 2.9 times as many non-flight staff as flight staff, compared to a US figure of 1.7. Deregulation would drive down operating costs, and Seabright suggested that a figure of $1.5 bn to $2 bn was a realistic estimate of the annual gains. Recent activity in the airline market has highlighted the importance of deregulation for competition policy. The US experience suggests that deregulation would not prevent incumbent carriers from exploiting substantial market power to keep out potential new entrants. Hub-and-spoke networks concentrate flights on certain routes, helping keep costs down, while frequent-flyer programmes make it costly for consumers to switch airlines. Incumbent carriers would also still be able to adjust prices rapidly in response to competitive threats. Airport congestion will exacerbate the market power of incumbents, according to Seabright. The existing system of allocating take-off and landing slots favours incumbents and so creates incentives for take-overs and mergers merely as a means of reallocating landing rights. By failing to charge carriers for the congestion costs they impose on others, the existing system also leads to greater use of hubbing, worsening the congestion problem further. Seabright argued that auctioning take-off and landing slots at airports was the only satisfactory method of diminishing the incentives for an inefficient restructuring of the industry, in which mergers occur solely to enable carriers to obtain space in Europe's overcrowded airports. Seabright argued for a rigorous policy towards mergers and restrictive agreements. While size helped to fight off competitors, his data on productivity indicators suggested that smaller airlines were no less able to provide services at low cost. Recent proposals for agreements between carriers in Europe pose potentially serious threats to competition; if they reach fruition it would be important for the Commission to react firmly. |