Crowded Skies and Liberal Markets

The Heavens Were Not Free: Towards Airline Deregulation & Multilateral Open Skies in the U.S., EU, & ASEAN Cases

Reviewed by Nick Hallock
June 12, 2014

In his comprehensive essay on the history of airline deregulation, Vanderbilt University student Jeremy Chua presents three case studies to trace the evolution of skyscape liberalization. Tracing his historical analysis back to the Chicago Convention of 1944, Chua articulates the political and economic forces that led the United States, European Union, and Association of Southeast Asian Nations almost inevitably toward a more liberalized market for air travel.

Chua begins his argument in the United States. The Chicago Convention, the first international agreement on airline regulation, was signed in 1944 and provided for a heavily regulated infant industry with minimal competition. U.S. government regulation of the airline industry began in the 1920s and was greatly expanded after the Great Depression by President Roosevelt. Postwar technological advances led to larger planes with more seats, but by the early 1970s airlines were unable to fill these seats.

This, combined with new and higher costs and the 1973 energy crisis, led to calls for deregulation. Furthermore, the 1970s recession brought about an anti-regulation political climate, and that decade saw numerous scandals among regulating agencies. Spearheaded by Presidents Ford and Carter, as well as Senator Ted Kennedy, the bipartisan consensus against airline regulation resulted in the gutting of the Civil Aeronautics Board, the chief airline regulator, by its Chairman, Alfred E. Kahn, and the 1978 Airline Deregulation Act.

The 1946 Bermuda agreement between the United States and the United Kingdom was the framework for thousands of future such bilateral aviation agreements, and by the 1970s the United States dominated the transatlantic market, much to the United Kingdom’s dismay. In 1977, the two countries signed Bermuda II, a deal more favorable to the United Kingdom. The deal did grant long-term advantages to the United States., and the United States soon renegotiated its bilateral agreements with other countries such as the Netherlands.

Shifting to Europe, Chua argues that Margaret Thatcher’s rise in the United Kingdom caused a more deregulation-friendly outlook, and that the United Kingdom found an ally in the similarly pro-competition Dutch, with the two countries signing a deregulated agreement in 1984. Deregulation was brought to the rest of Europe with the European Economic Community’s 1986 Single European Act, which, after three liberalization packages, created the Single European Aviation Market (SEAM). The United States reentered the transatlantic market with the liberalizing Open Skies agreement, signed by the Netherlands in 1992 and soon joined by much of Europe.

The third case study shifts  far beyond the north Atlantic. Australia and New Zealand signed similar Open Skies agreements in 2000, and Singapore, Malaysia, and Brunei signed Open Skies agreements with the United States in 1997, followed by Thailand and the Philippines. However, these countries’ deregulation belies the reluctance of Association of Southeast Asian Nations (ASEAN) members to liberalize. Deregulation of the U.S. and E.U. markets influenced similar events in south-east Asia, as did the growing number of Low-Cost Carriers. The high annual GDP growth in the region caused growing demand for both traditional and low-cost airlines, which increased calls for deregulation.

Though deregulation was in the works since 1995, ASEAN hopes for Open Skies were reinforced at the 2001 meeting of the ASEAN Transportation Ministers (ATM) during an improved economic climate. Liberalization continued from there: the Roadmap for Integration of ASEAN was adopted in 2003, Multilateral Agreement on Air Services in 2009, and the Multilateral Agreement on the Full Liberalization of Passenger Air Services in 2010. Deregulation and a partial Single Aviation Market were achieved through political consensus.

These three regional case studies show how political and economic factors were taken into account in different ways in the inexorable path towards airline deregulation.

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