Deregulation and the Airline Business in Europe

Selected readings

Sean Barrett

• Publisher: Taylor & Francis
• Year: 2009
• eBook ISBN: 9781134062898
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Almost 117 million passengers flew on Europe's low cost airlines in 2006. This statistic would have seemed beyond belief in the mid-1980s when air transport was a heavily regulated sphere.

This book examines the deregulation which has taken place since then and in particular looks at the single most important reprurcussion of the deregulation of Europe's skies - the rise of the low cost airline. Sean Barret has been involved in the debates surrounding this right from the start and is well placed to provide a scholarly study of the issue. The book spends much time looking at the success of Ryanair in this period - this provides the perfect case study given the dominant role that the company has taken up over recent years.

1  The defeat of regulatory capture

Ireland was an unlikely source of contestability in European aviation in 1984. There was a long tradition of attachment to the national airline, Aer Lingus, as a symbol of economic nationalism. The airline controlled the regulatory functions of the Department of Transport, as is shown in Chapter 8. While there was growing consumer resistance to the perceived high levels of fares charged by Aer Lingus and British Airways it seemed powerless against the national airline and its hold over the Department of Transport. The Irish parliament, the Dail, had a strong tradition of party discipline with few cases in which the government did not get its way when proposing legislation. On 27 June 1984 however a parliamentary revolt against the Air Transport Bill set in train a policy change which led to the foundation of Ryanair. The first Ryanair route, from Waterford to Gatwick, started in November 1985 and was followed by entry on Europe’s busiest route, Dublin to London, in May 1986. The consumer response to competition between Dublin and London was overwhelmingly positive. Ryanair’s projected passenger numbers for 2008 are 58 million compared with 10 million for Aer Lingus, the previously protected national airline. In 2006 the Ryanair share of Europe’s low-cost airline market of 117 million passengers was 29.9 per cent. A parliamentary revolt in a country with under 4 million population gave Ryanair first mover advantage and had impacts throughout Europe.

The Air Transport Bill 1984 was introduced in the Irish parliament because the Supreme Court had lifted a temporary injunction restraining Transamerica from selling unapproved fares which were lower than those approved by the Minister. The High Court had granted the temporary injunction at the request of the Minister. A full determination of the action was likely to take up to a year. Rather than wait for a full determination the Minister decided to introduce emergency legislation to close off what was presented as a legal loophole. The penalties for discounting airline tickets were a £100,000 fine, two years in prison and the loss of the travel agent’s licence. The Bill was introduced because selling tickets below approved prices was ‘undermining the system of control’. Without the Bill, ‘the Minister’s powers to control airfares would be undermined. Discounting and other malpractices could take place on a scale that would undermine approved tariff structures and could have serious implications for airlines generally and for Aer Lingus in particular.’

The parliamentary opposition to the Bill was led by Mr Desmond O’Malley, then an independent member. As a member of the dominant Fianna Fail party he had served as Minister for Justice and Minister for Industry and Commerce. He returned to the latter department in the years 1999–2003 as minister in a coalition government of Fianna Fail and the Progressive Democrats, the party he founded in 1985. Mr O’Malley had been expelled from the Fianna Fail party in 1983 for refusing to support legislation to confine the sale of condoms to pharmacies on medical prescription. He was a highly respected member of parliament and his opposition attracted support from both the government backbenches of the Fine Gael party and the opposition benches of the Fianna Fail party.

The Bill failed to pass all stages when Mr Bertie Ahern, opposition chief whip, and later Taoiseach (prime minister) declined to support it. The newspaper headlines on the following day included ‘Air fares Bill anti-consumer, say deputies’ (Irish Times) and ‘Air fares Bill hits turbulence’ (Irish Press). In the Irish Times the Dail Sketch by Maev Kennedy was entitled ‘Trying not to agree with Dessie’, an acknowledgement of the crucial role of Mr O’Malley in provoking opposition to the Bill.

The Irish economy in the early and mid-1980s was in serious difficulties. The level of unemployment and the national debt doubled between 1982 and 1987. This was in marked contrast to the period since 1987 in which employment doubled and the unemployment rate fell from 17 to 4 per cent. The protection of employment in state companies such as Aer Lingus was espoused as a goal of policy rather than the wider interest of reducing access costs to an outer offshore island. Ten economists in universities and financial services petitioned against the Air Transport Bill 1984. Their petition is shown in Exhibit 1. The petition was circulated to the media and attracted headlines such as ‘Top economists attack Aer Lingus “monopoly” ’(Irish Press, 28 June 1984). In addition the Irish Independent on the morning of the Dail debate carried an interview with the present author by Stephen O’Byrnes under the title ‘Air fares bill is anti-consumer’. This is reproduced in Appendix 1 to this chapter.

The decision by the Irish government to licence Ryanair on Waterford–Gatwick at first and then on Dublin–London (Luton) showed a change of heart by the government. The Transport Minister, Mr Jim Mitchell, had been in Japan when the Air Transport Bill was moved in the Dail on 26 June 1984. He readily adopted a more competitive stance on his return. The Taoiseach, Dr Garret FitzGerald, a former economist at Aer Lingus and lecturer in transport economics at University College Dublin also embraced the more competitive era in Irish aviation policy after June 1984. The u-turn from protectionism to competition in Irish aviation was so swift that Ireland moved instantly from being one of the most conservative countries in aviation policy in Europe to being best positioned to avail of the market opportunities when the EU single market developed in the 1990s.

The heavily protected sole Irish airline, Aer Lingus, had 2.2 million passengers in 1983/4. In the deregulated market in 2008 the projected passenger number on four Irish airlines is 72 million. The development of competition in the sector is described in the following chapters. The impact of the leading new market entrant, Ryanair, is described in Chapters 4 and 5. Chapter 6 describes the development of Cityjet, a new entrant full service airline. Chapter 7 deals with the commercialisation of Aer Lingus in response to deregulation leading to its privatisation in 2006. Chapters 8 and 9 examine the implications for airports of airline deregulation in Europe. Chapter 10 summarises the transformation of Europe’s aviation sector since deregulation.

Exhibit 1: The economists’ petition

The Air Transport Bill 1984

We the undersigned regret the hasty introduction of a Bill designed to limit competition among airlines and travel agents to the obvious detriment of the fare paying public. The attempt to pass the Bill by agreement and without proper debate which such a measure requires is wholly at variance with public pronouncements on the need to encourage efficiency and lower costs and further lowers public confidence in our legislators.

The speed with which this Bill was introduced contrasts with the lethargic pace adopted in implementing many other reforms. It would appear that the Government and Opposition care more about the interests of state monopolies than the public as a whole.

We can find no justification for this price increasing legislation in any of the 1982 election manifestos. It is wholly at variance with the commitment in the Programme for Government to make ‘a determined and sustained attack on the domestic factors which push our inflation rate far beyond the average EEC level’. It flatly contradicts the Fine Gael manifesto commitment to regulate cost increasing actions by domestic monopolies.

Our present economic difficulties stem as much from the lack of debate over legislation concerning publicly owned bodies as from undisciplined fiscal policies. The current Bill continues the steady rise in concern for the interests of public monopolies as the expense of consumers.

Sean Barrett, Brendan Dowling, Joe Durkan, Tony Garry, Patrick Geary,
Robert Kelleher, John Kennan, Antoin Murphy and Douglas McLernon.

Appendix 1: Interview published on the date of publication of the Air Transport Bill 1984

27 June 1984, Irish Independent: ‘Air fares bill is anti-consumer’ by Stephen O’Byrnes

The Government plans to outlaw cut-price air fares with its Air Transport Bill, which it hopes to get through all stages in the Dail today, has been attacked by Trinity College economist, Sean Barrett, as a negation of any commitment to open policy making.

He also points out that the bill was not available to the public at the Government Publications Office yesterday, and will only go on sale this morning.

In a paper on the impact of the proposed legislation, Barrett points out that it proposes to increase fines on airlines and travel agents who charge fares lower than those authorised by the Minister for Transport.

‘The Minister for Communications had previously intervened to prevent price competition on air routes to Britain and Continental Europe. He had failed, however, in the Supreme Court in his case against Transamerica Airlines and apparently feels that it is in the Irish national interest to rush through this legislation at breakneck speed.’

‘New legislation is better introduced after calm consideration of all the diverse factors which make up the national interest in aviation, international trade, tourism, regional development and employment. These factors are so diverse and complex that they cannot be dismissed by this hasty bill,’ Mr Barrett says.

‘International air travel is controlled by a series of bilateral agreements between governments. The Agreements can be highly restrictive in terms of price competition and the entry of new airlines to the. market or permit many carriers to charge different fares. The former type of agreement is usual in Europe, while the United States and Britain favour the latter, Ireland’s geography means that we cannot set our trans-Atlantic air fares regardless of current thinking in the United Sates and Britain.’

‘The entry to the market of low-cost carriers such as Virgin and People Express, and the availability of lower fares out of Northern Ireland than from the Republic made the market for lower air fares which the Minister now seeks to abolish. By abolishing these fares he will divert business away from Shannon in particular, since the target airline in this legislation, Transamerica, has its Irish operation centred at Shannon.’

Mr Barrett continues: ‘In examining the operation of air services within both the United States and Britain, the Minister should note that deregulation has produced far lower fares than the anti-competition policy of the Irish government.’

Dublin–London is a 290 mile air journey compared to 292 for New York to Buffalo. The fares are £95 and $35.19 respectively. The fare are thus 39 cents a mile on Dublin–London, compared to 12 cents in the US. Rather than legislating against competition the Minister should be learning from it.

Is there any case for tightening controls over competition in air fares as this bill seeks? The answer must be that there is not. The pro-competition approach is the better buy.

1. Ireland is the beneficiary of the present Ireland–US air agreement since the Irish carrier has 85 per cent of the traffic. Seeking to increase this even further runs the risk of retaliation which could lose Irish landing rights in the United States. The present air market regulation between the two countries strongly favours Ireland. US airlines come from a market where price competition is the norm. Preventing them from engaging in price competition is obviously designed to reduce their market share further.
2. Tourism is a two-way traffic. If the higher air fares out of Ireland sought by the Minister are achieved traffic will decline. Planes will thus have smaller load factors ex-Shannon for outward passengers and the ability of the carriers to offer lower fares to Ireland undermined. Ireland hasn’t lost out continuously to Britain in its share of the US tourist dollar since the US and Britain cut air fares between them.
3. Air ticket retailing should be a competitive business. The bill makes the travel agent an extension of the airline and compels him to charge fees stipulated by the Minister. The travel agent acting in the consumer interest is abolished by the bill. The Minister for Trade, Mr Bruton, recently referred the question of competition among travel agents to the Restrictive Practices Commission. Today’s bill re-empts the result of the inquiry and negates the consumer interest in price competition between both travel agents and airline.
4. Government intervention to prosecute people for charging too little for goods and services makes a nonsense of Government policy to reduce inflation.
5. The bill will enlarge the black hole in balance of payments. Those seeking lower air fares will use travel agents in Newry airports in Britain and Northern Ireland, and lower cost foreign airlines.
6. The bill is decidedly anti-consumer. No Irish Transport Minister used his powers to reduce air fares in recent times. Most of them used their powers to retrospectively sanction fares which had already been charged by the airlines.

Irish industry has faced free competition in world markets for many years. Our tourism must also compete with a wide range of destinations. A competition minded Communications Minister would never have introduced the Air Transport Bill 1984.

2 A Europe of national airlines Introduction

Air transport in Europe has been highly regulated, based on national sovereignty and non-competing national airlines. Air transport between European countries was typically confined to the national carriers of the countries concerned, with independent airlines excluded from the market as were third-country airlines. The fares charged were agreed upon by the airlines in advance and ratified by governments. Market capacity was also decided in advance, as was its division between the airlines. This regulatory system was frequently criticised because it resulted in high fares and high cost airlines. The fares charged by European scheduled airlines have traditionally been the highest in the world and approximately three times those charged by Europe’s charter airlines, which operated under a more competitive regulatory system.

Liberalisation measures were introduced between Britain and the Netherlands in 1984 and between Britain and Ireland in 1986. In the remainder of the EC, gradual liberalisation has been under way but the results have not been dramatic. Liberalisation of the EC market is scheduled for completion in 1997. Agreement with the EFTA countries has also been reached for a free-trade area in aviation encompassing both the EC and EFTA members.

Serious difficulties have nonetheless presented themselves in the way of a contestable market in European aviation. These include a series of mergers between airlines which might have been expected to otherwise compete, difficulties in achieving slots at hub airports for new airlines, predatory pricing, computer reservation system bias, ground handling monopolies, frequent flyer programmes and state subsidies to national airlines.

While aviation is not currently included in General Agreement and Tariffs and Trade (GATT) negotiations, countries with large service sectors such as the United States have argued for its inclusion in future trade liberalisation rounds.The competitive position of a unified European aviation system, compared with regions such as North America and the Asia-Pacific region, is important in any future liberalisation of the sector worldwide. In addition, the economies of Eastern Europe have the potential to play a significant part in a deregulated aviation market because of their lower labour costs.

The efficiency of European airlines

Europe in world aviation

Table 2.1 shows that the share of world aviation performed by European airlines has declined from 36.1 percent in 1971 to 31.9 percent in 1990. The American share of world aviation has declined 48.1 percent to 38.5 percent although its share increased slightly during the 1980s. The fastest growing airlines are those in the Asia-Pacific region, whose growth of the industry worldwide was 10 percent and in the 1980s it was 8 percent.

Passenger traffic generates two-thirds of international airline revenues, with freight accounting for one-third. Freight grew rapidly in the 1960s. While its growth rate declined in the 1980s, it remained ahead of the growth in passenger traffic. Increasingly, freight is carried on passenger aircraft. All cargo operations have declined. Air freight is particularly suited to the long-distance transport of goods with a high value-to-weight ratio. The increased location of world manufacturers in the Asia-Pacific region and the growth of product markets such as computers, cameras, videos and medical and pharmaceutical goods have favoured the development of air freight.

In the last 20 years, integrated carriers such as Federal Express and DHL have grown rapidly. They provide door-to-door service and specialise in carrying small items and documents. The development of just-in-time (JIT) production methods has focused a...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Foreword by Professor Alfred Kahn
• About the author
• Preface
• List of tables
• Acknowledgements
• 1 The defeat of regulatory capture
• 2 A Europe of national airlines
• 3 Deregulating the Dublin–London route
• 4 Ryanair’s market entry: peripheral market entry, product differentiation, supplier rents and sustainability in the deregulated European aviation market – a case study
• 5 The sustainability of the Ryanair model
• 6 The new-entrant full-service airline: market entry to the full-service airline market – a case study from the deregulated European aviation sector
• 7 Commercialising a national airline: the Aer Lingus case study
• 8 Airport competition: low-cost airlines and low-cost airports
• 9 Regulating and dismantling a national airport monopoly: a case study
• 10 Summary: a sector transformed