Connections Transport & ICT Is EU’s Open Aviation Policy Good for Air Transport? Megersa A. Abate and Panayotis Christidis International air transport is at a crossroads. The 20% aviation industry’s center of gravity has moved toward the East, with main hubs in the Gulf region and ever- increasing passenger markets located in Asia. Long- haul inter-continental low-cost-carriers have emerged. Global alliances and their effects on competition The decrease in fares have come into question. These outcomes have led when countries to a reignited interest in the issue of liberalization in liberalize air aviation: European regulators now need to balance transport markets concerns about fair competition with their own with the EU. decades-long push for the multilateral liberalization of the aviation industry. The European Union has been at the forefront of market liberalization in international air transport for the last few decades, relaxing the conditions of market access such as airline designation, fare setting, and flight frequencies. After deregulating its domestic market in the 1990s, in 2005 the EU began exporting its open market policies to its neighbors and key strategic partners through comprehensive aviation liberalization packages. With this pioneering approach, individual countries handed over the economic regulation of their international air markets to regional bodies like the EU. This ushered in the era of a potential multilateral approach for achieving global air transport market liberalization.1 In a recent study, we looked at the economic effects of the EU’s external aviation policy with third countries, focusing on 27 countries with which the EU has Air Services Agreements with varying degrees of liberalization.2 Perspectives on Aviation Liberalization OECD forecast of global air transport demand iden- tified the beneficial and welfare effects of liberal- In the last few years there has been renewed interest ization. But big airlines in the EU and the U.S. are in air transport liberalization, with a number of stud- pointing to possible negative effects of liberaliza- ies looking at its impact in many parts of the world tion, citing “destructive competition” or “heightened and its role in future market developments. A recent competition” as more and more markets open up. 1 Other regional approaches to air transport negotiations do exist elsewhere. Notable examples are the 1999 Yamoussoukro Decision which liberal- ized intra-African air transport market and the 2000 Asian Pacific Economic Community (APEC) Agreement between the U.S., Brunei, Singapore, Chile, Peru, and New Zealand. Recently, the Association of Southeast Asian Nations (ASEAN) has been negotiating with the U.S. and EU to put in place multilateral liberalization. The signatory members of these regional arrangements, however, still maintain greater freedom in the economic regulation of their domestic and international air transport markets compared to EU member states. 2 The full report can be accessed at http://publications.jrc.ec.europa.eu/repository/handle/JRC105822. It was written during Abate’s tenure at the Swedish National Road and Transportation Research Institute (VTI) before he joined the World Bank. Panayotis Christidis is a Big Data Lead Scientist at the European Commission’s Joint Research Centre. The views expressed here are purely those of the authors and may not in any circumstances be regarded as stating an official position of the World Bank or the European Commission. JUNE 2017 NOTE 2017 - 3 These fears correspond to the expansion of the Gulf We compared the change in passenger flows within region’s airlines, the new flights by inter-continental a country pair before and after the introduction of low-cost carriers, and the dominance of global airline the EU’s external policy (the treatment group) with alliances.3 The result has been policy uncertainty in the corresponding flows calculated for countries that major aviation markets such as the EU and the U.S., maintain traditional bilateral agreements with the which endangers liberalization efforts. EU (the control group). The study analyzed traffic flows between EU countries and external partners on Studies have shown that cost structure, cyclical four continents where the EU has varying degrees demand, fuel price fluctuations, and infrastruc- of liberalization, and found that the external policy ture bottlenecks determine the fortunes of the air resulted in up to a 20 percent reduction in fares. transport industry––not “destructive competition.” These changes in fares spurred a 27 percent increase European major carriers usually have a higher cost in demand. Although the external agreements had base, especially in labor costs, when compared with no statistically significant effect on flight frequen- their rivals. Some argue that this high cost base, not cies, carriers that operated in routes governed by an liberalization, is making Europe lag other regions in external policy had higher capacity utilization. terms of connectivity and airline profitability, to the extent that it is bypassed as a global hub. The Way Forward Thanks to deregulation, the expansion of low-cost Although the EU has always been considered as the carriers has stimulated cost cuts throughout the “vanguard” of the movement for liberalized interna- aviation industry. The benefits of market forces in tional air transport markets, the progress in terms of the confines of the European Union are well docu- agreements actually signed is still slow. mented. What remains to be seen is whether the EU and its non-EU partners could benefit from a more • The progress in negotiations with each of the liberal aviation policy. EU´s external partners depends on several eco- nomic, geographic, market, or political aspects The Impact of Liberalization that often raise concerns about the impact that opening up the market could have on the avia- Over the past 10 years, the EU has concluded or tion market of the EU or its partner. negotiated External Agreements with more than 50 • While the overall policy strategy of the EU is countries, including the open skies policy between building open aviation partnerships in many the EU and the U.S. in 2008. The EU is the larg- parts of the world, its recent emphasis on “fair est regional group that negotiates comprehensive competition” and “level playing field” has been Air Services Agreements on behalf of its members. interpreted by some as protectionist. There are three types of external agreements: • There will always be winners and losers in a competitive air transport market, as in any other • Horizontal Agreements, which extend to other industry. There are also legitimate fair competi- (European) community carriers the provisions tion issues as rivalry between players continues of Bilateral Air Services Agreements that exist to intensify. Such outcomes are best dealt with between an EU member country and a non-EU by market forces and through general competi- member country, regardless of how liberal the tion policies rather than by direct government provisions are involvement in the economic activity of the • European Common Aviation Area Agreements, industry. which are signed with the EU’s neighbors • Key Strategic Partners Agreements, which are Our study provides compelling evidence that the comprehensive liberalization packages signed EU’s external policy, for the most part, has had posi- with countries elsewhere in the world tive economic effects. It is crucial that the EU con- tinues its pioneering role by expanding its external Our study explored whether routes governed by aviation policy. Given the well-documented benefits external agreements with 27 of these countries have of liberalization, protectionism is neither desirable lower fares and higher service quality and load fac- for a well-functioning airline industry nor beneficial tors (the percentage of available seats filled or of to the society at large, especially for those in much freight capacity utilized) compared with those gov- of the developing world where the industry is still erned by traditional bilateral agreements. tightly regulated. 1 There are three main global alliances: Star, SkyTeam, and Oneworld. They account for more than 60 percent of the global market share, mea- sured in revenue passengers-kilometres. Connections is a series of knowledge notes from the World Bank Group’s Transport & Information and Communication Technology (ICT) Global Practice. Covering projects, experiences, and front-line developments, the series is produced by Nancy Vandycke and Shokraneh Minovi. The notes are available at http://www.worldbank.org/transport/connections. JUNE 2017 NOTE 2017 - 3