Regulation, market structure and performance in air passenger transportation

The paper uses a data base on regulation, market structure and performance in the air passenger transportation industry, to analyse the links among liberalisation, private ownership, competition, efficiency and airfares at national and route levels. Covering the 1996-97 travel season, 21 aggregate indicators have been developed for 27 OECD countries, and 23 micro indicators for 102 air routes connecting 14 major international airports. These data are summarised by means of factor analysis. Controlling for market size, network length and other technological and economic differences, and combining national and route-level characteristics, cross-country and cross-route regressions show that i) productive efficiency increases and fares decline when regulations and market structures become more friendly to competition; ii) productive efficiency is sensitive to actual competitive pressures, as proxied by market concentration; iii) fares react to liberalisation independently from market structure, but in liberal environments their decline is amplified by actual competition between carriers; iv) business and economy fares tend to decline when they are liberalised and market concentration is reduced, but tend to increase when markets are dominated by airline alliances on the route; v) discount fares are affected by the overall market environment at route ends, charter regulations and the actual presence of challenger airlines on the route; and vi) airport congestion and dominance tend to increase fares in time-sensitive market segments.