The Outlook for European Aviation

In postwar Europe aviation markets were controlled by bilateral agreements which confined the market to one airline per country. The airlines charged the same fares and divided the markets. Economists from Adam Smith to William Baumol recommend that governments should not ban new entrants or otherwise prevent competition and the examination of the current state of European aviation in this paper confirms this policy prescription. European air fares are the highest in the world and Europe's share of world aviation is falling steadily. European airlines are characterised by high costs and low productivity. The economic rent from protectionism in the sector has been absorbed by a combination of high wage costs and productivity some 36% lower than in North America. The paper then examines the impact of the deregulation of the Ireland/United Kingdom air services market in 1986. The results in terms of growth in a previously static market and reductions in fares have been dramatic beyond the expectations of proponents of deregulation. The paper concludes by reviewing the post-deregulation barriers to contestability in aviation and the movement of aviation from the public to private sector.