Barriers to contestability in the deregulated European aviation market

The deregulation of aviation in the United States and intercity bus transport in the United Kingdom initially resulted in substantial fare reductions associated with new market entry. Many new market entrants subsequently left the market and fares increased. International aviation in Europe has been operated by national airlines with price collusion and capacity sharing and a ban on new entrants. The normal economy fares charged on air services within Europe are the highest in the world. Therefore, there is significant scope for fare reductions when the European Community (EC) internal market comes into operation in 1993. Deregulation of market access will, however, leave unaddressed other barriers to contestability in the deregulated European aviation market. The structural barriers to contestability include hub airport dominance by the incumbent airlines, ground handling monopolies, and computer reservation system (CRS) bias. The paper proposes measures to ensure access to major airports for new entrant airlines on equal terms with incumbent airlines and the deregulation of the market for airport ground handling. The EC code of conduct for the neutral operation of CRS for incumbent and new entrant carriers is an important precedent. The strategic obstacles to contestability in a deregulated European airline industry are anticompetitive mergers and predatory pricing. In recent years national airlines have acquired several independent airlines in important European markets. It is recommended that such takeovers be prohibited because of their anticompetitive implications in the absence of competition between national airlines. The large networks of national airlines allow them to pursue policies of geographical price discrimination with reduced fares on contested routes and higher fares on uncontested routes. Price surveillance is recommended to explain fare differences between contested and uncontested routes. It is recommended that the EC competition policy exemption for price consultations between airlines be ended. Without measures to tackle the structural and strategic obstacles to competition in European aviation, its liberalization may have no impact on the present high-cost system.