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The Conference Proceedings of the 1998 Air Transport Research Group (ATRG) of the WCTR Society, Volume 3 Tae Hoon Oum

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The Conference Proceedings of the 1998 Air Transport Research Group (ATRG) of the WCTR Society, Volume 3 Tae Hoon Oum University of Nebraska Omaha DigitalCommons@UNO Faculty Books and Monographs 12-1998 The Conference Proceedings of the 1998 Air Transport Research Group (ATRG) of the WCTR Society, Volume 3 Tae Hoon Oum Brent D. Bowen University of Nebraska at Omaha UNO Aviation Institute Follow this and additional works at: http://digitalcommons.unomaha.edu/facultybooks Part of the Aerospace Engineering Commons, Science and Technology Studies Commons, and the Transportation Commons Recommended Citation Oum, Tae Hoon; Bowen, Brent D.; and UNO Aviation Institute, "The Conference Proceedings of the 1998 Air Transport Research Group (ATRG) of the WCTR Society, Volume 3 " (1998). Faculty Books and Monographs. Book 160. http://digitalcommons.unomaha.edu/facultybooks/160 This Book is brought to you for free and open access by DigitalCommons@UNO. It has been accepted for inclusion in Faculty Books and Monographs by an authorized administrator of DigitalCommons@UNO. For more information, please contact [email protected]. THE UNO A VIA TION MONOGRAPH SERIES UNOAI Report 98-8 The Conference Proceedings of the 1998 Air Transport Research Group (ATRG) of the WCTR Society Volume 3 Editors Tae H. Oum Brent D. Bowen December 1998 UNO Aviation Institute University of Nebraska at Omaha Omaha, NE 68182-0508 Topic Area: A4. 8" World Conference on Transport Research Anthwerp, Belgium 12-17 July 1998 S c,( y'30 IMPLICATIONS OF COMPETITION IN THE EUROPEAN AIRLINE MARKET Juan Carlos Martin Gustavo Nombela Manuel Romero Department of Applied Economical Analysis University of Las Palmas de Gran Canaria Spain This paper presents some preliminary results of Strategic Organisation and Regulation in Transport (SORT-IT), project no. ST-95-SC-.402 funded by the European Commission. We wish to thank Kenneth Button for some helpful suggestions. 1. INTRODUCTION Market performance is not only a function of demand structure and cost configuration of the companies which serve a transport service. It also depends on the existence of differem types of barriers obstructing free competence between operators. Some of them come directly from the regulation conditions imposed by the governments but others do not depend of this, although can have been generated as a consequence of past regulation policies and that remain even after deregulated process. So, for example, one company can have a dominant position in a deregulated coach market if it keeps the monopoly access to an important coach station. The existence of this type of barriers can be affecting the generalised cost carried by the users, and therefore the level of welfare they obtained. Among the different state member we can find barriers which obstruct the free competence in the transport sector. In the rail market we can find many different types of barriers. In this line, one of main which is common in many state members is the existence of a regulation which obstruct the free entry of new operators in the market. Other barriers are different electric system or track gauge system. In the air sector again the regulation obstruct in some countries the free entry of new operators. Another important barrier is the limited capacity of airports, this affects directly to the slot distribution, which can determine even the presence of one carrier in some airports. The regulatory intervention has been a common place in the transport policies, but the situation has changed in the last years. Kay and Thompson (1991) identify three groups of circumstances under which market failures and inappropriate regulatory regimes can be categorised: Competitive solutions may not exist in circumstances where there is natural monopoly and high-sunk costs of market entry. Competitive solutions may exist but may not be achieved because incumbent firms may be able to successfully deter market entry, encourage the exit, merger or acquiescence of competitors and establish a dominant position. Competitive solutions may exist and be achieved but their outcome may not be considered desirable: this outcome is particularly true when externalities exist (environmental problems), where information asymmetries between market participants are important, where social concerns are considered relevant, or where a more efficient arrangement of production cannot be sustained in the face of market entry. It is important to appreciate the difference between unavoidable failures that follow directly from the economic characteristics of the sector being regulated and escapable failures, which follow from the adoption of inappropriate methods of regulation. Salop (1979) distinguish between 'innocent' barriers to entry, those that arise when incumbent pursue policies that maximise short-run profits and the 'strategic' barriers, those activities that subtract from short-run profitability but that are undertaken in the belief that they will deter entrants and add to profitability in the longer term. -1- blari_etliberalisationandthe withdrawalof the statehavefeaturesof virtually every transportmarketoverthepastfifteenyears(ButtonandKeeler,1993).Thevariouseffects of thesechangeson transporthasbeenmuchstudied.Nevertheless,theunderstandingof thenatureof whatareoftentermed"deregulation"- with no or very,little regulationof tares,entry,andexit - is still remarkablylimiteddespitetheconsiderableexperiencewe have.Thederegulationof expresscoachingin 1980(UK) andthederegulationof aviation in theUnitedStatesin 1978initiallyresultedin substantialfarereductionsassociatedwith newmarketentry.However,theseinitial effectsof deregulationin reducingpriceshave beenfollowedby increasingconcentrationin theindustW andpriceshaverisensteadilyin teattermsandarenowsubstantiallyabovethelevelsto whichtheyfell in the inmediate aftermathof deregulation. Doesthismeanthat deregulation has failed? We are sure this is not the case. However, we can argue that some competing hypothesis are not really fulfilled (Jaffer and Thompson, 1986), imperfect forms of competition and contestability (tbr example, Morrison and Winston, 1987), oligopolistic structures (Kahn, 1988) or the existence of an empty core problem (Button, 1996). It is interesting to remark that the intellectual position is not stable and some of the leading figures who initially suggested that aviation may naturally be contestable have subsequently changed their minds. "We now believe that transportation by trucks, barges and even buses may be more highly contestable than passenger air transport" (Baumol and Willig, 1986). The concepts of competition and contestability are fundamental in the study of the debate of the regulatory reform in transport policy. Baumol (1982) argued that contestabiiity is a generalisation of the concept of perfect competition. Perfect contestability is not a description of reality but a benchmark for desirable industrial organisation. Barter (1992) describes two general types of barriers that we can find in a deregulated air market obstructing the free competence between operators: structural and strategic barriers: As structural barriers: Hub airport dominance: this means the control of major airports by incumbent carriers and restricting the access for new entrants, ground handling monopolies, the control on computer reservations systems As strategic barriers: Airlines with large networks can offer selectively lower fares in response to new market entry, on contested routes and raise fares on uncontested. Also incumbent airlines can response to new entrants with collusive policies in prices and/or capacity. 2. THE DEREGULATION POLICY IN THE US AND EUROPE The regulation of civil aviation in many countries sought to control entry and exit of carriers on routes and to set the prices, frequencies and capacity offered by the carriers. This system became to be highly criticised as inflexible and incredible protective of those they were supposed to control. This was the cause that the regulation came under scrutiny among airlines and authorities. The changing of the system was possible depending on the market to be reformed. In Europe the difficulties were harder because of the subsidiary. -2- principle,bywhichtheneedof agreementbetweenthedifferentgovernmentsof theState Membersisobliged. The pressurefor deregulationwas very high in the seventies,and the Aviation DeregulationAct becamelawin 1978.Thelawsuppressedthemajorityof thecontrolsthat Civil AviationBoardhad,aswellit preparedfor theabolitionoftheCABin 1985. Restrictionon routeaccesswas relaxed.It had a dramaticincreaseon the numberof carriersprovidingscheduledservices.Theoverallconcentrationfell,buttheconcentration indexwasnot too differentto thepreviousperiodbecausethenewentrantweresmall operators.Somenewoperatorswereexistingintrastateoperators,butoftentheentrants werenewin theindustry. Theavailabilityof discountfareswaspermitted.In thiscasethebenefitsof deregulationto consumersconsistednotjustin areductionof faresto existingtravellers,butthepromotion of abig increasein traffic figures.Trafficrosedramaticallyandin 1985theincreasewas about50 per cent respectto 1978,in spiteof the existenceof a stableperiodin the recessiontime. Due to the increasedavailabilityof discountfares,morethan 80%of passengersin 1984weretravellingondiscounttickets. Many of thefavourableoutcomesof deregulationpredictedby observersof theairline industryhavein factbeenrealised,andthereexistsaconsensusto agreethatthebenefitsof deregulationhaveoverweighedthecosts.Althoughthe designersof deregulationand economistsin generalappearedto havepredictedaccuratelythe directionof welfare change,they
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