A new era for air travel

Today marks a momentous triumph for competition over protectionism. Anti-competitive practices dating back to the 1944 Chicago Convention will finally be scrapped for the new Open Skies agreement between the European Union and the United States. Currently, only British Airways, Virgin Atlantic, United and American Airlines are legally allowed to offer direct flights from Heathrow Airport to the US. But after the deregulations of transatlantic air travel, the market will at last be open to competition from challengers.

This means that any European or American airline can fly to the US from anywhere in Europe, without having to start from its home nation. For example, Air France will be able to fly to the US from Berlin or Stockholm, rather than only Paris. In fact, Air France, Northwest, Delta and Continental Airlines are already launching new routes, with budget airlines such as Ryanair also expressing interest. When competition thrives in the market, the customers vote with their money and the resources are allocated to the most efficient airlines who please their customers the most.

This is an excellent microeconomic case study for A level students who will be learning about oligopolies being protected by legal barriers to entry. But unlike a textbook example, the futures of the transatlantic air travel market are not so certain. Although the likely consequence of more competition is increased welfare for consumers, whether we see that in the form of price competition is debatable. With aviation fuel and taxes both soaring sky high (intended… X_X), it could be a while until we see any price cuts. In addition, capital is fixed in the short run: large airports such as Heathrow only have a limited number of take-off slots (although they are expanding, badly…) so newer rivals have to use smaller airports instead.

However, the deal is not equally fair – while US airlines are allowed to fly from one European city to another, European airlines still do not have access to the American domestic market, at least until the projected Open Skies II deadline in 2010. Yet with the US economy looking to go into decline, analysts are dubious as to whether the US will open up its domestic routes. “Political protectionism in the US should not be underestimated in troubled economic times,” said Ian Giles, a competition lawyer at Norton Rose. Nevertheless, the EU Commission hopes that the Open Skies agreement will create 80,000 jobs, bring in 20 million passengers and billions of revenue.