Demand and Consumer Welfare Impacts of International Airline Liberalization: The Case of the North Atlantic

Impacts of international airline bilateral liberalization on demand, fares, accessibility, and consumer welfare in the North Atlantic are studied, based on data for markets between the United States and five European countries. A demand model, estimated at the country-pair level, suggests that demand is slightly fare inelastic (e ~= -0.9), and that demand has responded positively, though inelastically (e~=0.2), to changes in accessibility (A measure of how much non-stop service is available). A yield model is estimated to assess the impact of bilateral liberalization status on fares, and it is found that liberal bilaterals have resulted in fare reductions of approximately 40 per cent. A similar analysis concerning accessibility reveals that liberalization increased this variable 55 per cent. In the case of both yield and accessibility, liberalization of a bilateral with one country was found to produce impacts on neighboring countries with restrictive bilaterals, suggesting that fear of traffic diversion influenced regulatory policy. Combining the estimated demand elasticities with the estimated impacts of liberalization on yields and accessibility, we estimate that, in the year 1989, passenger traffic between the U.S. and the five countries studied is 40-60 per cent greater as a result of liberalization, and that liberalization has produced consumer welfare increases of $3-5 billion, or $400-600 per traveler.