Deregulating European aviation — A case study

European international scheduled aviation has been characterised by bans on market entry, price collusion, and capacity sharing. High fares were charged compared to world standards and the fares charged by European charter airlines.In May 1986 new entrants with pricing freedom were permitted on the London-Dublin route which was then the third largest in European scheduled international aviation. Prior to deregulation the route experienced high fare growth. The unrestricted fare ex-London increased 72.6 per cent compared to a Retail Price Index increase of 41.5 per cent. There was a growth in passenger numbers in the years 1980–85 of 2.8 per cent.Since deregulation passenger numbers have risen to 2.3 million compared to 994,000 before deregulation. Fares have declined by an estimated 37 per cent ex-Dublin and 42 per cent ex-London in real terms. There have been four cases of market entry and one of market exit. The estimated share of the new entrants in the second half of 1989 was 28 per cent. The preregulation earnings data of Aer Lingus, the market leader, indicated that protection allowed staff to earn economic rents. A two-tier structure was introduced in response to competition.Remaining barriers to contestability in UK/Ireland aviation include hub airport dominance, ground handling monopolies, and the ability of airlines with routes in both regulated and deregulated markets to engage in geographical price discrimination against airlines with routes in deregulated markets only. A pro-contestability aviation policy in Europe will require measures to prevent the abuse of dominant positions by established airlines over new market entrants and to prevent collusion between established airlines.