Journal of Air Transport Management 15 (2009) 59–71

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Journal of Air Transport Management

journal homepage: www.elsevier.com/locate/jairtraman

The impact of US–EU ‘‘Open Skies’’ agreement on airline market structures and
airline networks
Kenneth Button
School of Public Policy, George Mason University, MS 3C6, Fairfax, VA 22030, USA

a b s t r a c t

Keywords: The gradual liberalization of international air transport has largely benefited the traveling public.
Transatlantic Progress since the development of concepts such as ‘‘Open Skies’’ in the late 1970s as an alternative to the
Airline alliances restrictive bilateral air service agreements that had effectively controlled most international air transport
European Union
since the mid-1940s has been uneven and spasmodic. The recent move to open the North Atlantic more
Chicago Convention
fully to competition has proved a particularly challenging task, and the agreement between the US and
the European Union is still both partial and conditional. This paper offers an overview of the economics
of the situation and provides insights into the reasons why it has developed in the way it has, the
outcomes that we may expect from it, and some consideration of the wider, non-commercial, impacts
that it may have.
Ó 2008 Elsevier Ltd. All rights reserved.

1. Introduction Understanding a little of the history of the recent develops on

the North Atlantic helps us appreciate why the current
From the late 1970s, when first the US domestic cargo market arrangements exist, and offers some insights into likely future
was liberalized followed by the domestic passenger sector, there institutional changes. It is inevitable that the current regime is
has been a gradual withdraw of the state from the specific only a stepping-stone. Understanding the nature and economics
economic regulation of airlines. Internationally, the initial moves at of the airline industry helps in appreciating how carriers, and
deregulation can be traced to the initiation of the US’s ‘‘Open Skies’’ other suppliers such as airports, are likely to react to the new
policy from 1979. The recent opening up, at least to a substantial situation. It is also helpful to look beyond the narrow and
extent, of the US–EU1 transatlantic market is the one of the most specific confines of air transportation issues to explore the
significant measures of international airline liberalization since the implications of more generic policies, such as industrial and
removal of international market barriers within the European security policies, may be for the long-term development of the
Union (EU). The US–EU passenger market is substantial. In 2007 it North Atlantic market.
accounted for 55 million passengers, 385 flights per day in each
direction and 235 nonstop city-pairs served by 45 airlines
comprising eight from the US, 26 from the EU and 11 others. 2. Institutional background
Geographically, 32 airports in 23 states were served on the US side
and 53 airports in 19 countries in the EU. International air transportation has, until recently, been one of
The development comes at a time when similar measures have the most regulated of industries. The Chicago Convention of 1944
been initiated in other long-haul markets (e.g. between the US and laid down a basis upon which a system of international bilateral
Australia), and when there are similar, some complementary, air service agreements (ASAs) was founded.2 This was a compro-
changes taking place within air transportation more generally, mise arrangement that attempted to reconcile the very liberal,
including initiatives to improve air navigation systems, the coming free market ideas of the US on the one hand and the more
on-line of new aircraft, developments in the way that airports are restrictive ones of countries such as Australia (that wanted
used and financed, and structural changes within the industry as a single global carrier) on the other. There were particular fears in
a new wave of merger takes hold. some countries that the US, that had the largest fleet of

2
The Convention also established the United Nations’ International Civil Aviation
E-mail address: kbutton@GMU.EDU Organization (ICAO) to oversee international agreements. Importantly, the ICAO
1
US–EU is used throughout rather than EU–US simply because of where the also has remits that cover a range of safety and security oversight matters that has
author is currently based. largely allowed these to be treated separately to issues of economic regulation.

0969-6997/$ – see front matter Ó 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jairtraman.2008.09.010
60 K. Button / Journal of Air Transport Management 15 (2009) 59–71

commercial aircraft at the time and the potential of adding to this a double coincidence of interests.5 US policy makers first muted the
by converting surplus military hardware, would dominate any general idea of bilateral ‘‘Open Skies’’ policies to replace the highly
largely market-based outcome and thus an institutional structure restrictive air service agreements as early as 1979, but it took
emerged that led to piecemeal, and restrictive, practical another dozen or so years before the first major one, with the
arrangements. Netherlands, was signed. Since that time, a further 60 or so liberal
The Convention did not stipulate any particular form of interna- agreements, of varying importance, have been signed between the
tional service structure but rather established national sovereignty US and partners, including many European states. The emergence
over airspace and an institutional framework within which nations of the large free trade area in air transportation service within
could essentially trade these rights (‘‘freedoms of the skies’’) amongst Europe from the mid-1990s was another element in freeing-up
themselves. The outcome was a mass of bilateral agreements other international markets by having both knock-on and demon-
between countries that, in general, stipulated which airlines that stration effects for regions outside of the European area.6
could fly between them, the capacity of each airline, the fares to be
charged, and, often, how the revenues generated were to be shared 3. The economic condition of the airline industry
between the carriers. Similarly, air navigation services were sover-
eign responsibilities and a patchwork of systems emerged that Airlines find it difficult to recover their full costs in competitive
impinged upon any notion of seamless air travel. markets. As seen in Fig. 1 that reports operating margins,7 both
These restrictive bilateral ASA regimes were, at the time, seem globally and for two of the largest markets, there are clear cycles in
as a step forward from the ad hoc and often opaque institutional the financial performance of the industry that correlate with the
structures that existed before, and they came at a time when larger business cycle. But, in addition, taken overall, the airline
international air transportation was still relatively new with many industry has performed badly across cycles. In the US, for example,
markets small and embryonic after the devastation of the Second over the past 20 years or so the operating margins of US airlines has
World War. Because of this, they probably did little to impede the been about 0.4% compared with an average of well over 5% for US
development of the sector for some time. Additionally, domestic industry as a whole. The period has also seen a number of tradi-
markets were normally regulated although the structure differed tional airlines cease operations permanently (e.g. Pan Am and TWA
between countries. In some countries there were single state- in the US and Sabena and Swissair in Europe) as well as a much
owned monopoly carriers whereas in others, such as the US, there larger number of new entrants, and particularly low cost carriers.
were private airlines but competition was highly regulated. In many There have been a number of ‘‘events’’ in recent years that
cases, institutional barriers prevented domestic and international particularly impacted on commercial aviation, adding the to
carriers of a country operating in each other’s markets. normal market uncertainties of the industry and the larger,
The macro-economic conditions of the late 1970s (‘‘Stagfla- temporal trends that are on-going.
tion’’), combined with background pressures generated in part by
a series of academic studies, led to a sea-change in policy thinking.
The US initially legally removed most economic regulation from its 3.1. September 11th, 2001 terrorist attacks
domestic market in 1978 and other countries, either through de jure
reforms or de facto actions, gradually loosened theirs. The move The attacks on the US in 2001 had implications for the global air
towards greater economic and, to a lesser degree political, inte- transportation market. It not only led to an immediate shutting-
gration in Europe in the 1990s brought with it the creation of down of large parts of the system, most notably those associated
a Single European Market, including that for air services. This with the US market, but also to a longer-term reduction in demand
embraces not simply the ability of airlines that meet safety and as concerns about the safety of air travel emerged. The additional
environmental criteria and do not violate European Union (EU)3 security measures that were put in place following 9/11 added to
competition policy from operating anywhere within Europe, but it the cost of air travel, not simply in monetary terms but also because
also removed any ownership restrictions for airlines offering purely of the additional time and inconvenience associated air travel. This
domestic or intra-Union services. came at a time when there was already a downturn in the business
The experiences of deregulation (or in Europe, ‘‘liberalization’’) cycle that began in the US in 2000.
of air transport markets over the past quarter of a century are
generally seen as having produced significant economic benefits.4 3.2. Severe acute respiratory syndrome (SARS)
Not everyone has gained, certainly some communities have lost
services or have seen service quality decline, some airlines have The SARS epidemic had a severe, albeit it relatively short-term
gone bankrupt, and some classes of passengers are now paying impact on the international civil aviation market in 2003, and in
higher fares, but for those few that have been adversely affected particular adversely affected a number of Asian markets. While
there are many more who can fly more cheaply, have a greater difficult to isolate out the particular implications of the disease of
variety of services to choose from, or have found jobs in the the finances of the sector, the Official Airline Guide shows that flights
extended air transportation value chain. No positive change occurs to China fell by 45% between June 2002 and 2003, by 36% between
without disruption, and that has certainly been the experiences of
airlines, but these negative features have been far outweighed by
the positive effects. 5
In addition, liberalization of other elements in the air transportation supply
International air transportation deregulation was generally chain (airports, air traffic control, etc.) has been slow leading to continuing
slower to emerge than domestic reform because of the need for distortions in both domestic and international markets that inevitably will limit any
gains from the further liberalization of airline markets.
6
Organization for Economic Cooperation and Development (1997) provides an
account of wider trends in international air transportation, and offers some alter-
3
For ease of drafting, the title European Union (EU) is used throughout although natives for moving forward with market liberalization.
7
legally it has changed over time. Operating margins are reported rather than net margins that can be influenced
4
For example see Button (2004) for an examination of the European experience, by vagaries in tax structures and lumpy investments. Estimates by IATA Fact Sheet,
and Morrison and Winston (1995) for an account of the effects of deregulation in March 2007 are that the net margins for its members were 1.5%, 0.8% and 0.1%,
the US. Following the initial moves to creation of the Single European Aviation respectively, for 2004, 2005, and 2006. Physical measures – revenue passenger
Market in 1993 the average annual growth rate in traffic between 1995 and 2004 kilometers and revenue ton kilometers are the standard industrial parameters – are
was almost double the rate of growth from 1990 to 1994 (InterVISTAS-ga2, 2006). not used because they do not directly affect the financial performance of airlines.
 K. Button / Journal of Air Transport Management 15 (2009) 59–71 61

6 Europe US Global

0
88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06
19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20
-2

-4

-6

-8

-10

Fig. 1. Operating margins of airlines (1988–2006). Notes: (i) a lack of a bar indicates a missing observation and not a zero operating margin, (ii) memberships of the various
reporting bodies vary over time and thus the reported margins reflect the associated carriers at the time of reporting. Sources: Boeing Commercial Airplane, Association of European
Airlines, Air Transport Association of America, International Air Transport Association.

Europe and Hong Kong, by 69% between the US/Canada and Hong airline personnel. The broader economic impacts on industrial
Kong, and by 3% globally. structure and regional economic development have largely been
assessed indirectly through impact studies of the airports that
3.3. 2nd Gulf War handle the larger traffic volumes. The evidence from this, however,
combined with the few impartial studies that have directly sought
The impact of the 2nd Gulf War on the airline industry over- to link airline deregulation to economic development, is that more
lapped with the SARS epidemic but its main impacts were in commercial sensitive domestic airline markets do facilitate
different markets; e.g. most flights to Israel and Egypt were economic growth in regions.
immediately suspended together with some flights to Athens, Analysis of international airline market deregulation is sparser.
Istanbul and Ankara and Karachi. The wider geographical impacts From the studies that have been completed, it is clear that more
were on tourist traffic due to fears of potential terrorist attacks. open-air transportation markets foster trade and stimulate the
growth of major industries such as tourism. Air transportation, and
3.4. High fuel prices international air transportation in particular, is a key input to the
location and production product positioning decisions of many
There have been unprecedented rises in costs of aviation fuel multi-national corporations. This is not surprising given that air
(kerosene) since 2001. The price of jet fuel has risen from $30.5 transport carriers transport about 40% the world’s trade by value
a barrel in 2001 to $81.9 a barrel in 2006, to $113.4 in December and its importance is growing as structural economic changes take
2007 and is over $140 at the time of writing (July, 2008). The result place. While excessive transportation will always be wasteful,
is that for international airlines, fuel costs that constituted 13% of optimal transportation supply as determined by market forces,
operating costs rose to 26% by 2006 and has climbed since. This has constrained within appropriate institutional structures, is a major
put financial pressures on the airlines to the extent that some have facilitator of economic development and allows countries and
imposed fuel surcharges that are impacting adversely on the fares regions to exploit their comparative advantages more fully.
paid by passengers.8 Open Skies air service agreements have not only removed
restrictions governing rates and fares, market entry, and the ways
4. Overall analyses of regulatory change revenues are allocated, but have also permitted the emergence of
various forms of business alliances. Strategic alliances now domi-
Much of the analysis of the effects of market change has inevi- nate international air transportation. Although not all have been
tably focused on domestic liberalizations, with a particular successful, in a commercial world there are inevitably failures, they
emphasis on the post-1978 US market. Not only is this the world’s have allowed wider network economies of scope, and density on the
largest air transport market, and one where, because of the 10% costs side, and economies of market presence on the demand side to
sampling of tickets, there is an abundance of information and data, be exploited. They also provide a degree of protection for airlines
but it is also one that until comparatively recently, because of the that would otherwise, in excessively competitive conditions that can
relatively small amount of external traffic, is closely geographically emerge in aviation, find it difficult to recover their full costs even if
bounded. Added to this, the geography of the country makes air they are highly efficient.9 This is confirmed in a variety of previous
transportation the only viable mode for long distance travel, and as studies that have looked at some of these alliances. Although the
such stimulates public interest. links have seldom been explicitly drawn, the enhanced efficiency of
The emphasis, however, has largely been on the direct effects of international airlines, given the derived nature of the demands for
deregulation on the airlines and their customers with rather less on their services, would seem inevitably to have improved the vitality
the implications for overall employment, other than narrowly for and economic performances of the regions they serve.

8 9
In the first three months of 2008, for example, American Airlines recorded Technically, there is evidence that scheduled air services offered in a competi-
a loss of $328 million, United, $542 million, and Delta, $274 million. tive market suffer from the problems of an ‘‘empty core’’ (Button, 2005).
62 K. Button / Journal of Air Transport Management 15 (2009) 59–71

60 5. Transatlantic air service bilaterals

The ASAs that have governed much of the global international

50 air transport market since the 1940s have changed considerably
over the past 25 years. They have largely moved from being highly
restrictive on the fares that can be charged and the capacity that is
Passengers (millions)

40
provided to become a relatively liberal regime of agreements under
which trade in air transportation services is comparatively free in
30 many parts of the world. There are also increasing numbers of very
liberal multilateral agreements, as for example within Europe.
There is even some very limited involvement of the World Trade
20 Organization (WTO) to remove some ‘‘soft rights’’ technical limi-
tations to trade in air transportation services.11
Different regions and countries have moved at their own paces,
10 and change has not been continuous. Countries whose airlines have
benefited under restrictive bilateral ASAs have often encountered
pressures to resist reforms from their carriers and their labor forces.
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 There have been three major developments as far as transatlantic
air transportation is concerned.
Fig. 2. US–EU transatlantic air passengers.

The case for continually reviewing the nature of the institutional 5.1. Traditional ASA bilaterals
structure within which air transportation services are delivered
becomes stronger when taken in the context of changes in the Traditional ASAs that grew up from the immediate post Second
global market. Air transportation is clearly growing in many rela- World War period varied somewhat between the country pairs
tive new markets in Asia, particularly China and India, but it is also involved, but had many common features. The changes that have
forecasted to expand in some more traditional markets such as the taken place have also not been entirely consistent across country
North Atlantic; Boeing Commercial Airplane (2005) suggests pairs. Table 1, however, provides details of the general character-
a growth rate of about 4.6% over the next two decades, if current istics of US ASA bilaterals prior to the move to the Open Aviation
relationships continue. But even if the long-term projections prove Area (as favored by the EU side) and Open Skies model (the
excessive, there is a strong case for ensuring that the full compar- preferred, and currently accepted, favored by the US). A major
ative economic advantages of the EU economy are exploited. While difference between bilateral ASA involving the US prior to the
there have been short-term disruptions to the growth in US/EU 1980s was that charter traffic was regulated in addition to sched-
passenger movements, the evidence is that the downturn in uled services.12 Within Europe, while intra-Union international
international trade in air services across the Atlantic that followed scheduled services were subjected to fare and entry controls, the
the events of September 11th, 2001 has passed and there is once charter market was somewhat more liberal, although still encum-
again an outward shift in the demand for air transportation (Fig. 2). bered by restrictions that sought to limit its use to leisure travelers.
The matter is effectively one of balance. Although it would be
economically inefficient to over invest, or otherwise seek to artifi- 5.2. The bilateral Open Skies agreements
cially stimulate this market, impeding market driven international
transportation with inappropriate institutional barriers equally The US initiated liberal international air service agreements as
stymies the economic performances of the macro-economies of a logical extension of the regulatory reforms of its domestic market;
both the US and countries within the EU. Air transportation is the term ‘‘Open Skies’’ was first used by Alfred Kahn, the chairman of
a matter of everyday public concern, especially regarding such the Civil Aeronautics Board, in 1979 when discussing objectives to be
things as safety matters, but the general evidence is that market pursued after the enactment of the 1978 Airline Deregulation Act.
liberalization has produced net benefits of a more durable kind. Initially the response of European governments was tepid, in part
Although there is evidence that regulatory reforms in the interna- because the focus of the EU at the time was more on internal trans-
tional air transportation market have largely been beneficial, there are portation matters, especially surface transportation, and because the
groups that are, for a variety of reasons and quite understandably, at the efficiency of US carriers induced many European airlines to believe
micro-level, opposed to further reform. In the US, for example, there are that they would be at a significant competitive disadvantage.13
military concerns about losing the lift capabilities under the Civil Reserve The practical outcome within the EU was a series of liberalizing
Air Force program that are made available at time of national emergency; agreements between a number of European states (e.g. the UK with
US carriers provide equipment and crew at such times and there is a fear Netherlands, Belgium, Germany and Luxemburg) in the 1980s.
this will not be available if US carriers become foreign owned. There have These did not, however, represent full market liberalization
been traditional concerns expressed by airline employees about erosion (government intervention remained potentially significant) but
of their higher pay scales should EU workers be able to work in the US. rather they were a relaxation of the older regimes. They gave much
This argument, however, seems rather moot in 2008 given the state of US more flexibility to the routes that could be served, removed
airlines’ finances and of the US dollar. Equally, in the UK and other capacity and service level constraints on these routes, and moved
countries where restrictive ASAs still exist, there are those that would
lose out should there be a regime change; for example, it would affect the
relative competitive position of their airlines and airports.10 11
Findlay (2003) puts the role of the WTO measures into a wider aviation market
context.
12
Indeed, one of the reasons the US signed an early Open Skies policy with the
Netherlands was to allow its charter carriers access to Amsterdam.
10 13
Some of the challenges facing the authorities in Europe regarding further In particular the domestic reforms in the US had considerably improved the
efforts to liberalize North Atlantic services are summarized in UK House of Lords efficiency of the US airlines; see Good et al. (1993) for an empirical examination of
Select Committee (2003). the relative efficiency of US and European airlines between 1976 and 1986.
 K. Button / Journal of Air Transport Management 15 (2009) 59–71 63

Table 1
Main features of US bilateral air service agreements.

Pre-1978 bilateral air 1978–1991 Open market bilaterals Post-1991 Open

service agreements Skies bilateral
US airlines Foreign airlines
Market access Only to specified points From any point in the US to Access limited to a Unlimited
specified points in foreign countries number of US points
Limited 5th freedom rights Extensive 5th freedom rights granted Unlimited 5th
granted to US carriers freedom rights
Charter rights not included Unlimited charter rights
7th Freedom rights not granted
Cabotage not allowed

Designation Single – some multiple Multiple

Airlines must be ‘‘substantially
and effectively controlled’’
by nationals of designated
state

Capacity Capacity agreed or shared 50:50. No No frequency or

capacity/frequency controls in liberal capacity controls
bilaterals, but subject to review
Break of gauge permitted in Break-of-gauge
some agreements rights granted

Tarrifs Approval by both governments Double disapproval (filed tariffs Free pricing
(double approval) operative unless both governments
or as agreed by IATA disapproval) or country
of origin rules

Code sharing Not part of bilateral Code-sharing permitted

away from the double approval of fares to one based upon double time also facilitated the process by offering a relative simple
disapproval. The nature of the European industry at the time, and template Open Skies agreement with standard clauses in it. By
the domination of state-owned ‘‘flag carriers’’, together with the 2007, of the 19 of the European countries offering direct US–EU, 16
size of markets still generally limited them to one airline per route, already had Open Skies agreements corresponding to 54% of seat
whereas within the US by this time more than one US carrier served capacity across the North Atlantic.
the same route. Not all European countries, however, had Open Skies agree-
The growth in air traffic as incomes grew and trade expanded, ments with the US, and in some cases they are not fully operational
coupled with the generally favorable views on domestic reforms and (Table 2). In particular, the important US/UK air services market still
the extension of hub-and-spoke operations to international markets, operated under the ‘‘Bermuda II’’ agreement originally signed in
resulted in pressures emerging in many countries for the removal of 1977, although amended periodically since its inception. This limits,
further constraints on air transportation provisions. In Europe, the besides other things, the number of carriers that can serve London
move to commercialize air transportation, as well as removing Heathrow Airport to two from each country (American Airlines and
institutional barriers to trade, resulted in flag carriers seeking to United Airlines, and British Airways and Virgin Atlantic respectively
develop their networks as they were weaned off long-standing from the US and UK) and the number of US gateways served.
regimes of state subsidies and turned over to private ownership. Greece, Ireland, and Spain also have restrictions; e.g., Ireland
The outcome, from 1992, was a series of bilateral ‘‘Open Skies’’ required one US flight through Shannon for everyone to Dublin, and
agreements between EU states and the US. These first involved the limits fifth freedom rights, and Greece, besides limiting fifth
Netherlands but then extended to other EU member countries freedom rights also limits the gateways served, the number of
(Table 2). These ‘‘Open Skies’’ agreements allow fights to any two airlines on some routes, and freedom of fare setting. Others have
points in the signatory countries, with no restriction on fares, similar deviations from a market-based agreement.
service level, or fifth freedom operations. Charter operations are Additionally, Open Skies bilateral agreements do not mean
included as well as scheduled services. They also, through parallel entirely open markets in the conventional economic sense. There
measures in the realm of anti-trust and competition policy, allow are ‘‘nationality clauses’’ that affect the carriers that may enter
code sharing and other strategic alliance activities. The US at this markets; in the US case they must be ‘‘substantially and effectively
controlled’’ by nationals of the designated state or by its nationals.
Table 2 While outwardly aimed at preventing third parties entering the
The European based ‘‘Open Skies’’ initiatives (passenger services). bilateral, de facto nationality clauses act to impede the full func-
Netherlands In Force 10/14/92 tioning of international air transportation capital markets. Linked
Belgium Provisional 3/1/95 with this, foreign ownership of carriers operating in US and intra-
Finland In Force 3/24/95 European markets is also limited, both in terms of the share
Denmark In Force 4/26/95 ownership permitted and the voting power of these shares. For
Norway In Force 4/26/95
Sweden In Force 4/26/95
example, the Air Commerce Act 1926 requires that US citizens own
Luxembourg In Force 6/6/95 at least 51% of any individual aircraft in order for it to be registered
Austria In Force 6/14/95 under the US and the Civil Aeronautics Act 1938, Congress requires
Czech Repub. In Force 12/8/95 that US citizens own or control at least 75% of the voting interests of
Germany Provisional 2/29/96
US airlines.14 This standard has remained the same since. This
Italy Comity and Reciprocity 11/11/98
Portugal In Force 12/22/99
Malta In Force 10/12/00
Poland In Force 5/31/01 14
What constitutes US ‘‘citizenship’’ posed problems with the package carrier
France In Force 10/19/01
DHL in 2002.
64 K. Button / Journal of Air Transport Management 15 (2009) 59–71

makes mergers and cross investment impossible outside of the Table 3

limits set and, because of the lack of control over its use, is not Extent of Open Skies coverage as a result of the 2007 agreement.

exactly an incentive for foreigners to invest their money. There are, Originally covered Now
in addition, regulations over the nationality of who may hold senior Austria, Belgium, Czech Republic, UK, Bulgaria, Cyprus,
managerial positions.15 Denmark, Finland, France, Germany, Italy, Estonia, Ireland, Greece,
There are also rules regarding cabotage, or eighth freedom Luxembourg, Malta, Netherlands, Hungary, Latvia, Lithuania,
Poland, Portugal, Romania, Slovakia, Spain, and Slovenia
rights. In the US, domestic services can only be provided by an
and Sweden
airline ‘‘established’’ in the country. This, because of the inability to
create feeder services, limits the capability of a non-US carrier to
develop a full double hub-market across the Atlantic. The emer- 1990s, and after the liberalization of internal air transportation
gence of strategic alliances may be seen as a second-best attempt to market, legal issues also emerged regarding extra-Union authori-
circumvent the restriction. ties; specifically matters of the respective responsibilities of the
Within Europe, because of the sovereignty of each nation, US Union and of the individual member states that transcend narrow
carriers can only fly where they can obtain appropriate fifth and aviation considerations. The European Commission questioned the
sixth freedom rights to carry passengers between states, although legality of the existing Open Skies agreements that effectively gave
not within them. The US also prohibits ‘‘wet leasing’’ – the leasing preferential treatment, through the nationality rules, to the Euro-
of a plane and crew – although this practice is legal in European pean national carriers involved. The ruling of the European Court of
countries, and this constrains the efficient movement of physical Justice, although not precluding strategic alliances and revised
capital by airlines between international markets to meet excep- liberal agreements, effectively resulted in the Commission gaining
tional needs. In addition, the Fly America requirement means that power in June 2003 over extra-EU air services policy involving
US government and military personnel must normally use a US relations with the US.
carrier or one that is part of an approved strategic alliance with Negotiations subsequently took place but while there was some
relevant anti-trust immunity for international air travel. initial progress through compromise in a number of technical areas,18
little substantive agreement emerged for some time regarding the
key and fundamental economic issues; there were 11 rounds of
6. EU/US negotiations on open skies
negotiations. The interests of the domestic coalitions that influence
the US stance strongly favor a US/EU Open Skies arrangement, whilst
The EU as an entity had set the creation of a Common Transport
the Union has favored a much more free market approach that allows
Policy (CTP) as one of its two major goals under the founding Treaty
for cabotage and flexible movement of capital, as is the case within
of Rome. Air transportation was, mainly because of its relative small
Europe via an Open Aviation Area. The impasse was broken in March
size and the magnitude of the task of tackling distortions in other
2007 with a compromise, short-term agreement that effectively
transport markets, explicitly excluded until it was felt a Union-wide
opened the skies over the North Atlantic but not the factor markets.
approach was needed. Progress on the CTP was snail-like until the
An agreement was signed the following month.
creation of the Single European Market in 1992. By this time air
transportation had grown in importance, and, in part stimulated by
a series of legal judgment and proactive initiatives from the Euro- 7. The new situation
pean Commission, had become an issue of political concern
(Button, 2004). A number of ‘‘Packages’’ successively, liberalized The new transatlantic agreement, that is provisionally being
and standardized exiting ASAs, deregulated the market for intra- applied beginning March 30, 2008, extends Open Skies principles
European international traffic, and, finally, liberalized the entire to 11 EU countries where the US has had previously held restrictive
internal market by allowing cabotage. agreements or none at all, including Greece, Ireland, Spain, and the
At the same time the US effectively developed and spread its UK. The US and the EU have agreed to begin second-stage negoti-
Open Skies strategies by stimulating beggar-thy-neighbor policies ations on further liberalization within 60 days of application of the
in Europe as the aviation component of the CTP evolved.16 The US agreement. Putting the structure into a global perspective, since
sought to breakdown the highly restrictive ASAs by initiating 1992, US policy has resulted in the conclusion of Open Skies ASAs
a liberal agreement with one major EU international aviation with partners from every region of the world. By 2007, there are
country and, thereby, to force others to follow suit to retain market more than 60 such partners (including some with no airlines or US
share. Added to this, some EU airlines found that their domestic and air services), including the 27 countries of the EU (Table 3). The
EU markets were constrained by regulation and sought outside extension to all EU countries may thus be important, but is only
expansion – hence, the adoption of the Netherlands and others of a part of larger changes.
more open agreements at a fairly early stage.17 This in turn put The new agreement contains these major provisions:
pressure on others to emulate.
The growth in demand for transatlantic travel from the mid-  Open Skies between the US and the EU and its member states;
1990s (see again Fig. 2) stimulated significant numbers of larger  Broader entry into cooperative marketing arrangements for
European airlines to seek even more reforms in extra-EU markets to code sharing, franchising, and leasing;
allow them to exploit their scale economies and extra-EU service  Creation of a cooperative joint committee to further airline
networks (Association of European Airlines, 1999). From the late deregulation;
 Guarantees for US investors to participate as minority share-
holders in any majority-EU-owned airline (effectively
15
For example the Chief Executive Office is legally required to be a US citizen. The including minority shares of state-owned firms);
fact that the Canadian, Donald Carty held the post at American Airlines for some  Restatement of US investment policy in US airlines (25% leg-
years suggests the US Empire is somewhat larger than many think.
16
islated cap on voting equity, 25%-minus-one-share regulatory
A similar strategy was used at the early phase of the initiative in Asia with little
success, in part because of the nature of the Asian airline industry, but has proved to
be more powerful in recent years as market in Asia have in general become more
18
liberalized. Common ground for example has been reached reading, wet leasing, compe-
17
These countries were also the first to seek more liberal bilaterals within the EU tition rules, the EU nationality clause, and market access (with the exception of
(Button, 2004). cabotage).
 K. Button / Journal of Air Transport Management 15 (2009) 59–71 65

cap on non-voting equity). The US will consider foreign $ Capacity

requests to hold larger shares of non-voting equity, including constraint
C1
combinations in which the total of voting and non-voting
equity exceeds 50%;
 For EU carriers, the ability to route flights between any EU
member state and the US without touching the home country’s
‘‘community carriers’’ (for example, a German Lufthansa flight can C2
go from Paris to the US, without having to pass through Germany);
F1
 US agreement that purchased by an EU carrier or investor of
a controlling share in a carrier (passenger or cargo) from third
F*1
countries that have Open Skies agreements with the US – such as
Switzerland, Liechtenstein, members of the European Common F2
Aviation Area (ECAA), Kenya, or African countries – would not
jeopardize the acquired airlines’ rights to operate in the US; D2
 Authorization for EU carriers (scheduled and charter, passenger
and cargo) to carry certain Fly America traffic, except for the US
D1
Department of Defense; and
 For EU cargo carriers, the ability to route flights between third- 0 Q1 Q*1 Q2
party states and the US without touching the home country,
Fig. 3. The simple economics of Open Skies policies.
and between the US and members of the ECAA.
under the Open Skies arrangements, results in competition for air
As can be seen, while this institutional structure is often touted
services, and a move towards cost-recovery pricing strategies by
as an Open Aviation Area in Europe the lack of a fully open factor
the carriers. This would reduce fares to F*1.
market and cabotage makes it, de facto, an Open Skies arrangement.
Open Skies policies, coupled with the permitting of strategic
These wider matters are to be discussed in the ‘‘second phase’’. The
alliances, not only removes the capacity constraint but also affects
negations, in effect, however, avoided addressing the important
both the demand and supply curves for transatlantic air travel. The
concerns of organized labor regarding job security and remunera-
ability of airlines to more effectively feed their transatlantic routes
tion and of the US military regarding the continuation of a civilian
and coordinate their activities, through the restructuring of their
airlift capacity under the Civil Reserve Air Fleet (CRAF) program.
business and networks, will reduce the average cost of carriage to
This is aside from broader questions of different generic approaches
C2 in the figure. The effect is often reinforced due to downward
to competition and mergers policies on either side of the Atlantic.
pressure on costs because, although not strictly part of the Open
Skies framework, the wider competitive environment within
8. The economics of the subject Europe, and the privatization of many carriers, by heightening
commercial pressures, reduces the amount of both static and
The restrictive ASA bilaterals that typified the institutional dynamic X-inefficiency in the airline industry. In other words, there
structure of international airline markets before the advent of Open is the combined pressure of both free airline markets across the
Skies manifestly had a number of adverse effects on the efficiency Atlantic and within the two feeder markets at either end.
of supply and, specifically, on the levels of benefits society could The Open Skies policy also has stimulation effects on the
reap from air travel. These effects are not easy to isolate in a simple demand side. By allowing more effective feed to the long-haul stage
way but Fig. 3 offers a general representation of the issues that are of transatlantic services through the concentration of traffic at
involved. In particular, it highlights the potential fare and output international hub airports, it increases the geographical market
implications of the various types of transatlantic regulatory being serviced and also generates economies of scope and scale.
regimes.19 The larger physical market demand, combined usually with the
The initial position of the demand curve for transatlantic improved quality of the ‘‘product’’ that accompanies more inte-
services under the pre-1980s regulatory regime is assumed linear grated services, such as code sharing, interchangeable frequent-
and shown as D1 in the figure, and the average cost curve per flier programs, common lounges, and through baggage checking,
passenger, which for simplicity is assumed to rise more than line- pushes out the demand for international air services to D2 in Fig. 3.
arly with quantity, as C1. Market forces, however, because of the The outcome of the lowering of costs and the outward shift in
institutional interventions in place, did not determine fares and demand is that the number of passengers traveling increases to Q2
capacity across the Atlantic. Capacity under this system was limited and, because Open Skies allow price flexibility, the fare falls to F2 in
(seen as the ‘‘capacity constraint’’ in the figure) and fares were the way our example is drawn. It should be noted that fares might
regulated. If we assume that the terms reached under the bilateral not actually fall; indeed they may rise as the result of the freer
agreement regarding fares allowed for at least cost recovery by the market conditions. The reason for this is that the outward shift in
partners’ airlines this implies a fare levels up to F1.20 The removal of demand reflects a better ‘‘quality’’ of service – e.g., more convenient
both this capacity constraint and of negotiated pricing, as happens flights, transferability of frequent-flier miles, and seamless ticket-
ing – and that, on average, potential travelers are willing to pay
more for this than the generic portfolio of features that were found
19
The treatments of elements in the figure are static in the sense that technology under the old bilateral ASA structure. (In Fig. 1, the shift out in
is held constant. Modern economic theory holds that at least part of technical demand may counteract the fall in costs resulting in F*1 < F2).21
change is endogenous and thus a function of market and institutional structures.
20
In practice, fares tended to reflect the bargaining power of the parties and the
objectives of the countries’ overall approaches to the airlines market. Continental
European airlines have had a long tradition of supporting their flag carriers for
21
a variety of reasons that are linked to their perceptions of their national interest. In If there are economies of scope or density from offering air services in this
some cases, the fares may have been below the level required for cost recovery market, as is often the case, the cost curve would be downward sloping and in this
whilst in others it may have been higher if, for example, one partner sought to case the outward shift in demand reinforces the cost curve more and fares will
cross-subsidize domestic services. always fall.
66 K. Button / Journal of Air Transport Management 15 (2009) 59–71

x a
y b

z
A B
c
j
i

Fig. 4. The ‘‘dog-bone’’ international hub-and-spoke network.

What does become pertinent, however, is the extent to which larger economic impacts of regulatory changes on the North
the fare structure is influenced by the market power of the airlines. Atlantic. After all the aim of policy is generally seen to be social
The analysis presented in Fig. 1 assumes that, in the Open Skies welfare and not that of any particular industry. The narrower,
environment, fares are set to recover costs; in other words, purely airline, effects are treated in less detail.
competition and mergers policy can effectively fulfill the role of
regulation. This raises issues as to the nature of a market served by
9.1. Impacts of airline alliances
a relatively small number of network carriers. A degree of compe-
tition exists between the various alliances for the trunk hauls
International airline alliances involving transatlantic services began
market, and there is also competition at either end of routes with
to emerge in the late 1980s as carriers sought to create the economies
many other, including low cost, carriers competing for passengers
of scope and density on the cost side and market presence on the
in overlapping feeder and origin-destination traffic to international
revenue side. These were being enjoyed in domestic markets but
hub airports. There are also theoretical reasons derived from game
because of capacity and fare-setting constraints of the traditional ASAs
theory suggesting that the outcome in a market with three players
could not be enjoyed on non-European international routes. Compe-
approaches that of competition. Nevertheless, each alliance by dint
tition and mergers policy also made takeovers and mergers a more
of product differentiation (e.g., they serve different airports) inev-
cumbersome business, even if nationality rules could be circumvented.
itably enjoys some degree of monopoly power. This could lead to
The long-haul nature of the transatlantic market, the density of traffic,
fares higher than F2 and a smaller output than Q2 with conse-
and nature of the potential feeder market at either end of the trunk
quential reductions in consumer surplus.22
haul offered the potential to reap the diverse benefits of larger scale
The effects of a full Open Aviation Area – a genuine open market –
operations. The restrictive characteristics of the prevailing bilateral
can be seen as an extension of this framework. Free capital markets,
ASAs effectively forced the airlines to move to a second-best alliance
together with the ability to have more flexible feeder networks
approach to squeeze out synergies from their various operations.
owned by the truck carrier at both ends of transatlantic services,
The alliances took a variety of forms but essentially entailed
would further lower costs and may generate additional economies
code shares and coordinated frequent-flier programs that have, as
of market presence, although this latter effect is unlikely to be large.
ASA reforms have progress, resulted in rationalization of schedules.
The ability to invest across national boundaries provides for short-
Fig. 4 offers a simple representation of the ‘‘dog-bone’’ networks
term support in situations of local market fluctuations and more
that have emerged. Taking B as a major European hub, the European
integrated long-term planning of infrastructure; it would in effect
partner airline would use its domestic and intra-European network
produce air networks akin to those enjoyed by US railroads that can
to feed traffic from a, b, c,., i into intercontinental hub. Similarly, in
move investment funds across states rather than have separate rail
the US the American partner would consolidate traffic from its
companies each limited intra-state operations. In terms of Fig. 3, it
domestic services, x, y, z,., j into its hub A. The combined flows
would mean lower fares and larger air traffic volumes with
create density economies and the consolidation process from
concomitant increases in society benefits.
a variety of short haul services provides scope.
The number of strategic global alliances has stabilized and
9. The potential quantitative effects of transatlantic air virtually all the major air carriers belong to one of the three global
transport liberalisation strategic alliances (the Star Alliance, oneWorld, and SkyTeam) that
now dominate much of international aviation (Table 4).23 The
The changes that have taken place in the regulation of trans- alliances differ in detail and in their operations, but the largest
atlantic air transportation have not gone entirely unresearched. The variation is in term of the US anti-trust immunity that they enjoy. In
studies have looked at a variety of different aspects of the trans- particular, oneWorld has no such immunity, mainly because the UK
atlantic market, but especially the implications of the situation for has no Open Skies agreement with the US, and that limits the ability
their industrial structure and for wider, economic develop effects. of its members to fully exploit synergies in their business.
The changes embodied in the transatlantic agreement are also The impacts of the long-haul hubbing phenomenon have
likely to be somewhat less than they would have been if the two attached considerable attention since its inception, not least
internal markets involved (the EU and the US) had not already been because of anti-trust considerations, the problems encountered by
liberalized, there were not already in place alliance agreements that the hubs in handling massive banks of international traffic, and the
allow airlines and their customers some of the benefits of an Open concerns of airlines that are outside of the alliance structures. The
Skies, and if many of the main transatlantic routes were not already illiberal elements of ASAs that have remained, or are only slowly
subjects of individual liberal national bilateral agreements. been reformed, have weakened the effectiveness of strategic alli-
We provide a brief summary of some of the more germane work ances on many routes, and thus impeded the full emergence of the
that has been done and the findings that they report. In general the gains from network operations.
emphasis is, because air transport is an intermediate activity, on the

23
There are also very many alliances that cover individual routes and services that
22
If there are declining costs, however, this monopoly power may be needed to are not included here. These often provide additional feed into the larger carriers’
allow for the recovery of the fixed costs of providing a scheduled service. networks. Airline Business publishes a full list of the main alliances annually.
 K. Button / Journal of Air Transport Management 15 (2009) 59–71 67

Table 4 in a variety of ways, including consumer and producer surplus

The main US and European airlines that are part of the major strategic alliances gains, and airline cost savings, and under a variety of scenarios
Star Alliance oneWorld SkyTeam regarding cost effects, elasticities, and the efficiency of airports at
United Airlines American Airlines Delta Airlines handling additional traffic. The analysis seeks to embrace the full
Lufthansa British Airways Continental network effects involving feeder services and other services with
bmi Aer Lingus Northwest the European and the US as well as the implications for direct
TAP Portugal Air France Alitalia
transatlantic services.
Finnair Iberia Air France/KLM
Lauda Air CAS Czech Airlines The study focuses mainly on looking at the implications of the
LOT Polish Airlines open area on the air transport industry and on the consumers’
Spanair surplus generated through lower airfares. It does, however, also
SAS Scandinavian Airlines offer some indication of employment generating effects, notably for
Austrian Airways
Tyrolean Airlines
airports under a number of different scenarios and these are laid
out in Table 6.25 Given that airport jobs are but one of the
employment effects of air transportation, the suggested impact is
Table 5 provides a brief survey of the main studies that have
significant.
been conducted on the impact of strategic alliances on the North
The study’s findings on airline productivity indicate a gain that
Atlantic routes. They focus mainly on the implications for the
would reduce costs by about 4.2%, the vast majority of which would
airlines involved, their competitors, and the traveling public.
be linked to enhanced efficiency of intra-EU airline operations.
Because it takes time for the effects of alliances to be fully realized,
Translated into consumers surplus for passengers this amounts to
the nature of the analysis varies; however, most use data from the
some V2.9 billion per annum, with a further V370 million from
1990s when the composition of the alliances was somewhat
lower fares that additional competition would generate. In physical
different and the number of strategic alliances larger (e.g., KLM and
terms, the forecast is that a full, open transatlantic aviation market
Northwest were allied and outside of the SkyTeam).
would lead to between 4.1 million and 11.0 million additional
The various analyses do not paint an entirely consistent picture;
transatlantic passengers and, through network effects, between
one reason for this was that they often differ in the underlying
17.7 million and 46.7 million passengers on intra-EU routes. These
question being asked. Many, for example, were more concerned
gains would not, though, be evenly spread. Amongst the current
with competitive effects between the alliances and other carriers
non-Open Skies countries, the UK, by far the largest market, would
rather than with the overall effect of strategic alliances. Additionally,
take the majority of the benefits with Greece, Ireland and Spain
the earlier alliances took somewhat more limited forms than those
assuming lesser benefits.
found today and there was far more experimentation going on. The
The study, as it must, does rely on a variety of assumptions
lack of a fully liberalized EU market, prior to the mid-1990s, also
regarding fare elasticities, the reaction of airlines and airports to
added constraints to what could be achieved in the transatlantic
new market conditions under Open Skies, and on diversion effects
market. Finally, there are qualitative differences in the work done;
through a network system in which many economies have already
generally speaking, the more detailed studies suggest that the ability
been exploited. For example, it is assumed that there will be a 10%
to form alliances added to the efficiency of the airline market.
increase in traffic volume across the Atlantic that flows directly
from full liberalization that is independent of any natural growth
9.2. The General Accounting Office report rate. These are subjective assessments.

The US General Accounting Office Report (GAO) (2004) study 9.4. Chamber of commerce of Ireland report
relied mainly on published evidence and interviews, rather than
mathematical modeling and econometric analysis, to look at the Ireland is one of the EU countries that did not have an Open
implications for US airlines and passengers of removing the ‘‘nation- Skies agreement with the US. This study (Sørenson and Dukes,
ality’’ clauses from ASAs with EU countries. The broad conclusions are 2005) explicitly looks at the potential gains that the country could
that not only would there be benefits from greater access to Heathrow enjoy of a more liberal regime were introduced. The study makes
Airport in the UK but also to other European hubs that had tradi- extensive use of the findings of the Brattle Group to derive esti-
tionally and continue to be dominated by a local carrier. The removal mates specific to Ireland by focusing at the micro-level on the
would also benefit US passengers if it facilitated more consolidation of country’s airports. Many of the findings are qualitative rather than
European airlines that in turn would allow access to more on-line quantitative and rely on a variety of published material. Overall, it is
services, albeit at the possible cost of reduced competition. concluded, ‘‘Benefits will accrue to business interest in Ireland,
including tourism, and to transatlantic passengers to and from
9.3. The Brattle report Ireland.’’

In 2002, the Brattle Group reported to the European Commis- 9.5. The Button and Taylor study
sion on the expected impacts of an Open Aviation Area (that
embraces the removal of all foreign ownership restrictions and To gain a better handle on the implications of a country not
cabotage restrictions as well as liberal air service agreements) on having an Open Skies agreement with the US, and ipso facto what
Europe and the US. The analysis covered a number of dimensions of would happen by opening the market, Button and Taylor (2000)
the subject, although the matter of economic development was not used simple regression analysis and looks specifically at variations
at its core. in high-technology employment between European regions. High-
The benefits of the Open Aviation Area are divided between technology employment follows the EU definition, which it is quite
those associated with the ability of airlines to set fares as they broad and is adopted to reflect the attraction of a region for the
please (‘‘pricing synergies’’) and those associated to adjust output more mobile elements of modern production. The level of analysis
(‘‘No output-restricting ASA bilaterals’’).24 The gains are measured

25
The Nomenclature des Unites Territoriales Statistiques (NUTS) is the five-tier
24
These are essentially a primary multiplier effects. hierarchical structure used in the European Union to standardize territorial units.
68 K. Button / Journal of Air Transport Management 15 (2009) 59–71

Table 5
Studies of the effects of strategic alliancea.

Study Alliances Period Findings

Gellman Research Associates (1994) BA/US Air, KLM/NW 1994 Profits increased for all parties with
BA and KLM gaining more than
their partners

Youssef and Hansen (1994) Swissair and SAS 1989–1991 Increases in flight frequency; variations
in fare levels; the strongest service
levels had the lowest fare increases

US General Accounting Office (1995) KLM/NW, US Air/ 1994 All carriers enjoyed increased revenues
BA, UAL/Lufthansa and traffic gained at competitors’
UAL/Ansett, UAL/BMA expense, not industry growth

Dresner et al. (1995) Continental/SAS, Delta 1987–1991 Mixed successes with traffic
Swissair, KLM/NW volumes; in general alliances
did not benefit partners

Park (1997) KLM/NW, Delta/ 1990–1994 Traffic increases at the expense of rivals.
Swissair/Sabena Complementary alliances lowered fares
while parallel alliances increased fares

Oum et al. (2000) Star Alliance, oneWorld 1992–1994 Increased traffic on alliance routes
SkyTeam, KLM/NW

Brueckner and Whelen (2000) US international alliances 1999 Fare are some 18–20% lower on
international alliance, interlining routes
a
These effects may be seen as the removal of the capacity constraint and the downward movement of costs illustrated in Fig. 3.

is a mixture of European NUTS 226 and NUTS 3 regions because The study estimates that some 72,000 jobs will be created across
NUTS regions are administrative units rather than economic units, the EU and US over five years as a result of the Open Skies agree-
and countries differ in the ways that their administrative units are ment, with a 1–2% boost to the cargo market and 26 million more
defined. To allow for this, where a nation has relative small districts passengers being carried. In economic terms this is translated into
or counties these are aggregated to make them more comparable a gain of $160 to V340 million per annum with fare reductions of 2–
with NUTS level 3 regions elsewhere. 6%. These figures may be seen as quite modest compared to the
The estimations indicated that the move to an Open Skies impacts of existing bilateral transatlantic Open Skies agreements.
agreement would result is some 30,000 jobs for the surrounding Earlier US work (US Department of Transportation, 2000) had
region of each major airport.27 This standard error is somewhat shown that fares on US–EU Open Skies bilateral routes between
high, however, as may be expected given the diverse nature of the 1996 and 1999 and after the two major alliances had been given
national air markets in which these regions are located. From anti-trust immunity, had fallen by 20.1% overall and by 23.9% in
a forecasting perspective, the high-technology employment crea- beyond European routes compared to 10.3% overall for non-Open
tion from expanding the existing national Open Skies arrangement Skies routes.
to a full EU agreement may be below the 30,000 figure because In terms of broader effects, the study used standard economic
there will be some diversionary effects from regions benefiting multiplier analysis to estimate potential employment creation in
from existing Open Skies; there are also capacity constraints in both the US and the EU, separating out the affects into the gains
some of the regions in countries that did not previously have from removal of output restrictions and the gains from additional
a liberal ASA with the US that will dampen the effects of liber- interlining. The results suggest that more than 70,000 additional
alization. Counter to this, however, there will also be the ‘‘low- long-term jobs will be created as a result of the increased traffic
technology jobs’’ created that come through subsequent multiplier
effects.
Table 6
The Brattle Group’s estimates of the direct employment effects for Europe of an
Open Aviation Area (in thousands of employed).

9.6. The Booz Allen Hamilton report Airline Airport Airport

employment employmenta employmentb

With the move towards agreement, the European Commission Low bound scenarioc
Pricing synergies 600 188 481
commissioned the consultants Booz Allen Hamilton (2007) to
No output-restricting ASA 1587 436 1092
essentially up-date the work of the Brattle Group and their work is bilaterals
based on the broadly the same rationale and same four countries
Total 2178 624 1573
with the addition of Hungary as the Brattle study.
Low bound scenariod
Pricing synergies 3523 1124 2820
26
As with most work of this kind a constant technology is assumed. Both the No output-restricting ASA 1578 436 1092
theory underpinning the New Regional Economics and the empirical evidence that bilaterals
has been produced in its support indicate that there are endogenous growth effects
Total 5101 1560 3912
from agglomeration. A free transportation market generally facilitates more effi-
cient dynamic urban structures. Source: Adapted from Brattle Group (2002).
27 a
There is a major problem, however, in the New York–London market one of the High ideal airport capacity.
b
busiest markets in the world. Most of the major airports in each metropolitan area Low ideal airport capacity.
c
are officially slot-constrained, and they include London’s Heathrow and Gatwick, Assumes volume growth from an 18% reduction in prices following the creation
and New York’s JF Kennedy and La Guardia. Furthermore, five of the top 10 of an Open Aviation Area, where price elasticity is unity.
d
US-based gateways to the world feature Heathrow as the foreign gateway and they Assumes volume growth from a 28% reduction in prices following the creation of
include JFK, Los Angeles, Chicago, San Francisco, and Washington DC. an Open Aviation Area, where price elasticity is 2.5.
 K. Button / Journal of Air Transport Management 15 (2009) 59–71 69

that will accompany the new transatlantic passenger arrange- Table 7

ments, with over 1800 additional jobs stemming from pricing Number of round-trip flights US–London Heathrow (June).

efficiencies gains from interlining. Up to another 20,000 jobs would Airline 2007 2008
result from the more flexible cargo market. Air France 0 1
American 10.9 12.8
9.7. The impacts so far British Airways 12.7 16.2
Continental 0 4
Delta 0 3
It is clearly early days, and especially at a time of record fuel Northwest 0 3
prices, a low US dollar, and a general slowing of many economies, United 0 1
extrapolating long-term from the developments to date on the US Airways 0 1
North Atlantic is virtually impossible. A simple examination indi- Source: Sabre Airline Solutions.
cates that there have been new US services established at Heathrow
(Table 7) and from June, transatlantic travelers could choose from individual passengers over time, the sheer growth of traffic
95 flights a day each way between Heathrow and the US, 18 more continues to pose concerns at the global level because of CO2
than a year earlier. Airlines have also spent on buying access to the emissions and at the local level because of noise nuisance.
market, e.g. Continental paid about $209 million to secure four Focusing on global concerns, the impacts of the North Atlantic
daily landing slots at Heathrow. Not all airlines have begun new Open Skies on the environment become particularly difficult to
services or, as in the case of British Airways, transferred services isolate at time when other measures are being introduced that will
from Gatwick. Virgin Atlantic, for example, has not done so and either implicitly or explicitly impact on airline fuel efficiency. The
bmi, which holds the second largest number of slot at Heathrow new generation of large aircraft, the Boeing 787 and the Airbus 380
(Table 8) has not entered the UK–US market. These are commercial will provide for more fuel efficiency and less noise per passenger or
decisions have a degree of confidentiality surrounding them, but ton carried, and modifications of existing hardware also reduce
one motivation that may be of concern is that the second phrase of their adverse environmental impact. Hopefully, the initiatives of
negotiations that have to be completed by 2010 will fail, and the UK the US’s Federal Aviation Administration and the EU’s EURO-
authorities will then revert back to the Bermuda II bilateral struc- CONTROL, through its Single European Sky strategy, to up-grade
ture. The airlines do not want to sink costs with this uncertainty. their air navigation systems, together initiatives to allocate airport
slots more effectively, will increase the efficiency with which
10. Some broader issues airspace is used and hence reduce fuel wasted from congestion.
More directly, there are initiatives to introduce what amount to
10.1. Airport capacity allocation carbon taxes to influence airlines to make more effective use of fuel
and, through fare adjustments, to make air travelers cognizant of
While there are some airports in the US with severe capacity the external costs that they impose.
problems, there is in general not a significant capacity problem The opening up of the remaining transatlantic routes will
overall. In contrast, most of the major European international generate additional traffic and, despite and off-setting effects of
airports do have capacity issues (Debbage, 2002).28 The ways in new technology, this will have some environmental implications.
which slots29 reallocated also differs on either side of the Atlantic. Focusing largely on the generated tourist traffic effects that will
In the US there are, with some few period exceptions, no explicit accompany new fare levels and service developments, and making
slot allocations – essentially the air traffic control takes planes as assumptions about when peak US base trips and EU based trips take
they arrive with adjustments being made for technical reasons such place, Mayor and Tol (2007) estimate that CO2 emissions would rise
as the size of the hardware. In contrast, the systems in Europe by a maximum of 0.7%. One reason for this relatively low figure is
involve scheduling committees at airports that allocate the slots the adjustment made for trip diversion – many leisure travelers will
periodically, initially to improve interlining arrangements, gener- be switching from other destinations to US–EU routes thus
ally giving preference to the ‘‘grandfathering’’ of incumbent reducing emissions elsewhere.
carriers.30 The EU has intervened in the past, and particularly since
2004, to force reallocation of little used slots. Nevertheless, as can
10.3. Safety
be seen from Table 8 the main international airports in Europe are
still dominated by the traditional ‘‘flag carriers’’, and this includes
There would seem to be no evidence that the increase in Open
those long under Open Skies agreements.
Skies style arrangements across the globe has in anyway impacted
The transatlantic Open Skies agreement does little to resolve the
adversely on air transport safety. Indeed, there may be very good
congestion issues either at airports or regarding air traffic control,
reason to expect safety to improve somewhat as a more flexible
and the potential of additional North Atlantic traffic that feeds into
international airline market stimulates the expansion of the
US and European banks of flights for connection purposes is likely
to add to difficulties. Table 8
Market share of passengers by airline at European’s largest airports (2002).
10.2. The environment
Airport Carriers 1 Carrier 2 Carrier 3
London Heathrow British Airways bmi 12.1% Lufthansa 4.8%
Air transport is environmentally intrusive. While there have 41.6%
been significant decreases in the environmental footprint of Frankfurt Lufthansa 59.4% British Airways Austrian 2.9%
3.6%
Paris Charles de Air France 56.6% British Airways Lufthansa 4.9%
28 Gaulle 5.15
Normally defined as permission to schedule a flight at a particular airport at
Amsterdam KLM 52.2% Transavia 5.5% easyJet 4.3%
a particular time.
29 Madrid Iberia 57.0% Spanair 12.7% Air Europa 7.1%
Grandfather rights mean that an airline that held and used a slot last year is
London Gatwick British Airways eastJet 12.8% flybe British European
entitled to do so again in the same season the following year.
30 55.1% 5.6%
There are also lurking memories of the problems that arose in the past when
Rome Alitalia 46.2% Air One 10.0% Meridiana 3.9%
British Airways invested in the then US Air and KLM in Northwest when the
Munich Lufthansa 56.8% Deutsche BA 6.6% Air Dolomiti 6.5%
European carriers felt they had insufficient control over their assets.
70 K. Button / Journal of Air Transport Management 15 (2009) 59–71

strategic alliances with the larger carriers putting pressure on their in the US domestic low cost carrier JetBlue, and in the context of its
smaller partners to maintain safety standards (Button, 1997). The history of investing in airlines to bolster feeder traffic. It owns
freer transatlantic market will also have a trade diversion effect European regional airlines Air Dolomiti and Lufthansa CityLine, as
taking some, albeit probably small, amount of traffic from other less well as the Swiss International Air Lines and has a 49% stake in
safe routes. Eurowings, a 30% stake in bmi, and a 13% stake in Luxair. In a similar
Perhaps as important is the strength of the international insti- vein, Virgin Atlantic Airlines own 23% of recently launched Virgin
tutional structure that oversees aviation safety. The UN’s Interna- America that will provide feed for its North Atlantic routes at JFK
tional Civil Aviation Organization (ICAO) develops and sets safety and other international gateways. In the US and Europe there has
standards that are adhered to by all nations under the US–EU been a considerable shift by the legacy carriers to develop their
transatlantic Open Skies agreement. In addition, member countries transatlantic services and, as part of a wider strategy, to consoli-
have their own safety authorities that generally apply standards in date, although at the time of writing exactly what combinations of
excess of the minimum ICAO requirements and also allow other carriers will combine is still far from certain.32
countries involved in their air transport market to inspect on
a reciprocal basis to ensure compliance.
The fear is that market liberalization could weaken this struc- 11. Conclusions
ture because airlines would be driven to neglect safety in pursue of
a viable return in a more competitive commercial environment. The experiences of deregulation (or in Europe, ‘‘liberalization’’)
Evidence from other airline markets, for example domestic markets of air transportation and other markets over the past quarter of
within the EU and within the US and international markets that a century are generally seen as having produced significant
have long established Open Skies agreements, provide no evidence economic benefits. Not everyone has gained, certainly some
of diminished safety (Robyn et al., 2005). The gradual increase in air communities have lost airline services, some airlines have gone
transportations safety that has been a feature of the industry has bankrupt, and some classes of passengers are now paying higher
continued unabated. fares, but for those few that have been adversely affected there are
Security is an on-going issue, but again it is difficult to see why many more who can fly more cheaply, have a greater variety of
the challenges of ensure adequate standards will be compounded services to choose from, and have found jobs in the extended air
by the new agreement. There is no evidence that security is less transportation value chain. No positive change occurs without
tight for markets under bilateral Open Skies agreements, and there disruption, this has certainly been the experience of airlines, but
may be arguments that the new structure, by stimulating more these negative features have been far outweighed by the positive
alliance activities may make security easier. As with safety, national impacts.33 One would expect very much the same general outcome
and international arrangements, including the role of the ICAO, from the transatlantic Open Skies agreement. Since the move is to
dominate the effectiveness of security at airports and on airlines. a more market-based system, the exact outcomes of the new
Frictions that have emerged in the past between the EU and US, for institutional structure are, almost be definition impossible, to
example over documentation and release of passenger lists, are foresee; after all if one could predict them then these could have
really unrelated to the nature of the air ASA in place. been enacted through command and control measures.
The emergence of more flexible international air transport
regimes for extra-European movements has benefited those
10.4. Regulation and competition policy
involved. Efforts to get a comprehensive Transatlantic agreement
have proved challenging, however, in part because of somewhat
The EU and US have somewhat different overall approaches to
differing views in Europe and the US on the meaning of free trade.
such things as anti-trust and mergers policy that extend well
What does seem to be clear, from a European perspective, is that
beyond the air transportation sector. In 1991 the European
there are benefits for the Union as a whole in adopting a uniform
Commission and the US competition agencies, the Federal Trade
Open Skies agreement with the US, although there may be addi-
Commission and the Department of Justice, entered into a cooper-
tional gains in extending this to a full and genuine Open Aviation
ation agreement on competition policy enforcement. Progress on
Area of the type found within the US and the EU. The challenge now
convergence has been slow and the new aviation arrangements are
is to develop a mutually acceptable framework that allows both
unlikely to affect this pattern.
parties to move from a simple, product based, Open Skies to one
Open Skies agreements between individual EU states and the US
that embodies the mobility of factors of production as well within
have often involved a concomitant agreement that the US would
a full open market.
give anti-trust immunity to alliances between airlines of the
participation countries – the lack of anti-trust immunity for
American airlines and British Airways within the oneWorld alliance
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