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List
of contributors
Guillaume Burghouwt, Royal Schiphol Group, Schiphol, Netherlands
Sven Buyle, Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium
Carlo Cambini, Department of Management, Politecnico di Torino, Turin, Italy
S. Sera Cavusoglu, CERIS, Instituto Superior Técnico, DECivil, Transportation Systems, Lisboa, Portugal
Raffaele Congiu, Department of Management, Politecnico di Torino, Turin, Italy
Duarte Cunha, CERIS, Instituto Superior Técnico - Universidade de Lisboa, Lisbon, Portugal
Jaap de Wit, Emeritus Professor, University of Amsterdam, Amsterdam, The Netherlands
Wouter Dewulf, Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium
Colm Fearon, Business School, University of Birmingham, Birmingham, England
Silke Forbes, Department of Economics, Tufts University, Medford, MA, United States
Laura Khammash, CERIS, Instituto Superior Técnico, Lisbon, Portugal
Yufei Li, Department of Economics, Tufts University, Medford, MA, United States
Rosário Macário
CERIS, Instituto Superior Técnico, Universidade de Lisboa, Lisbon, Portugal
Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium
Carlos Filipe Marques, Faculty of Business and Economics, Antwerp, Belgium
Gianmaria Martini, Università degli studi di Bergamo, Department of Economics, Bergamo, Italy
Juan Carlos Martín, Institute of Tourism and Sustainable Economic Development, University of Las Palmas de Gran Canaria, Las Palmas de Gran Canaria, Spain
Heather McLaughlin, De Montfort University, Leicester, England
Antonio Musso, DICEA, Department of Civil, Building, and Environmental Engineering, “Sapienza” University of Rome, Rome, Italy
Chaouki Mustapha, Air Transport, ICAO, Montreal, QC, Canada
Cristiana Piccioni, DICEA, Department of Civil, Building, and Environmental Engineering, “Sapienza” University of Rome, Rome, Italy
Vasco Reis, CERIS, Instituto Superior Técnico, Lisbon, Portugal
Andrea Stolfa, DICEA, Department of Civil, Building, and Environmental Engineering, “Sapienza” University of Rome, Rome, Italy
Siri P. Strandenes, Department of Economics, Norwegian School of Economics, Bergen, Norway
Thomas Van Asch, Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium
Eddy Van de Voorde, Department of Transport and Regional Economics, University of Antwerp, Antwerp, Belgium
Lisanne van Houten, Royal Schiphol Group, Schiphol, Netherlands
Augusto Voltes-Dorta, The University of Edinburgh Business School, Edinburgh, United Kingdom
Preface
If a far-sighted capitalist had been present at Ki y Hawk, he would have done his successors a huge favor by shooting Orville down. 1
The year is 2021 and the aviation industry is in trouble. The COVID-19 pandemic has created tremendous stress in the industry, with aviation traffic slashed due to border closures and lockdown orders. Governments have pumped billions of dollars into aviation to save airlines from bankruptcy, protect jobs, and help airports survive a cash-flow crunch. But the current pandemic is far from the first time the aviation industry has been saved through government action. Previous rescues, although, perhaps, not quite as widespread as the current initiatives, have occurred with regularity over the past hundred years.
Recessions, pandemics, wars, and terrorist incidents have all broadsided the aviation industry leading to requests for regulatory fixes and government bailouts. Aviation liberalization, the open skies movement, and the privatization of industry players were supposed to have led to a market-based industry, where efficient, well-run firms survived and other, less efficient firms, exited the industry. Yet, the pro-cyclical nature of aviation, booming during good times and busting during bad, along with the fixed capital expenditures for aircraft and airports, the highly cyclical price for fuel, and the seemingly reckless capacity expansions by new and existing airlines, make the industry vulnerable to cash flow crunches.
Government subsidies have been a feature of the aviation industry since the beginning, with inflated airmail contracts providing funds to keep the early airlines afloat. When governments chose not to
subsidize private sector operators, they, instead, invested public money to take ownership of airlines, airports, and air navigation providers. While governments have been willing to let other industries die (not much apparel manufactured in the United States anymore), the aviation industry has been deemed too vital to fail. Every country, seemingly, must have a flag carrier. Airports require new terminals, additional runways, and the latest in passenger amenities. If the private sector is unwilling to invest capital to fund aviation, governments step in to provide funds. Aviation investments are deemed so important that they take priority over expenditures for education and poverty reduction. Why are aviation markets so fragile? Why have governments been so willing to intervene in these markets?
The air transportation industry: Economic conflict and competition a empts to help us understand the functioning of markets in the aviation industry. How do airline pricing strategies impact competition? What is the impact of government regulatory policies on airlines? How do aviation labor markets function? How should scarce slots at airports be efficiently allocated? How should risks be considered in implementing airport security? What is the value of connecting cities to aviation networks? Is there value to privatizing air traffic control? Does fuel hedging pay off for airlines? How do aviation accidents impact aircraft sales? These are all questions addressed in this interesting look at aviation-related markets.
Take the recent example of two fatal crashes of Boeing 737 Max aircraft. A casual observer might have thought that these tragic accidents would have dealt a death blow to Boeing's 737 Max. But this does not seem to have been the case. Although there were some order cancellations for the aircraft, other airlines doubled down on their purchases, reconfirming orders or placing new orders. Airlines and leasing companies placed these orders even after investigations showed major flaws in the processes Boeing employed leading to the regulatory approval of the aircraft.
The Boeing 737 Max was not the first aircraft for which Boeing's development processes have been shown to be less than adequate. For example, the Boeing 787 was grounded in 2013 shortly after its service was inaugurated. In their interesting analysis of “The effect of accidents on aircraft manufacturers competition,” Dewulf, Forbes, and Li (Chapter 18) show that, over the years, accidents have appeared to have had li le impact on aircraft manufacturer sales.
Does this finding indicate a market imperfection? Perhaps, yes. Given the duopoly structure of the industry, buyers may see li le choice in continuing to buy Boeing aircraft, despite the potential problems with the purchased aircraft. Moreover, many airlines are heavily invested in Boeing products, especially low-cost carriers with standardized Boeing fleets. So, switching to another manufacturer will require significant investments in aircraft and training. Finally, is Airbus any be er? What good would there be cu ing ties with Boeing if an Airbus fleet is similarly vulnerable?
It is not clear how to best fix the imperfections in the market for aircraft. Fixed costs and other barriers to entering the industry are high. Perhaps, government investments may be needed. This is, perhaps, why the Chinese government has invested heavily in the development of aircraft through COMAC. But the Chinese could take heed from Canada's failed experiment with Bombardier, sinking hundreds of millions of dollars into an unsuccessful bid to maintain a locally owned and controlled commercial aircraft manufacturer.
Other chapters in the book provide equally interesting examinations of the functioning of aviation markets. How privatization might affect the operations of industry participants has been analyzed extensively over the years. Researchers have compared the efficiency of privatized airlines to the efficiency of publicly owned airlines and the operations of privatized airports to the operations of publicly managed airports.
Buyle (Chapter 15) examines the impact of privatization or “commercialization” on the operations of air navigation service
providers. Until the COVID-19-related decline in air traffic, the air transport network had become increasingly crowded, contributing to flight delays, excess flight costs, and additional carbon emissions as aircraft circled, waiting for permission to land. Does the privatization of air navigation service providers increase the efficiency of our aviation networks leading to lower costs for system users? Unfortunately, Buyle's analysis does not provide a positive indication that privatization contributes to lower user costs, even if efficiency improves. He concludes his chapter with the following statement:
Overall the privatization and commercialization of [air traffic control] have not been the economic game-changer that governments hoped for … The winners are the shareholders, who achieve be er returns and generate enough cashflows to make the necessary investments in new technologies and infrastructure. Airspace users who had hoped for lower air navigation charges often find themselves disappointed. The total user cost did not significantly decrease, as reductions in charges (if they exist) go hand in hand with higher delay costs.
Unfortunately, the conclusions are hardly a ringing endorsement of the air navigation privatization effort.
Cambini and Congiu (Chapter 7) provide us with more positive news. The authors examine the impact of a change in Italian regulatory policy on the costs of airport operations. In 2014, following a European Union directive, a newly formulated “dualtill,” price-cap regulatory policy was instituted, but only for some of Italy's airports. The new approach allowed airports to share in profits generated by productivity improvements, thus encouraging the airports operating under the new regulatory formula to increase efficiency.
The implementation of the regulatory measure for select airports afforded the researchers the opportunity to examine the impact of the regulatory change using a different-in-difference methodological approach. Analyzing data from twenty-two Italian airports over the
period, 2008–18, the authors find that the imposition of the regulatory approach did lead to lower costs at the airports. Given the goals of regulation to keep costs down and improve efficiency, Cambini and Congiu have been able to uncover a successful regulatory intervention.
In addition to examining how government initiatives, such as privatization and regulation, impact markets, chapters in the book also examine how strategic behavior can impact market outcomes. The book's editors, Macário and Van de Voorde, contribute a chapter (Chapter 7) on how airline incumbents use strategic pricing behavior as a barrier to new entry. While reading this chapter, I was reminded of an article published in the Wall Street Journal about 30 years ago describing how airlines use coded information in computer reservation systems to strongly discourage rivals from competing too strongly in important markets. 2 I was also reminded of the demise of Laker Airways, a pioneer low-cost carrier, driven from the North Atlantic market by fierce competition from entrenched rivals.
Macário and Van de Voorde describe a case study of an incumbent network airline using a combination of low prices and increased capacity to fend off the entry by two low-cost airlines in their major market. The incumbent carrier is Brussels Airline. Vueling, a Spanish-based carrier, was the first of the low-cost carriers to enter multiple routes from Brussels. Its larger rival, Ryanair, joined the competitive onslaught with several new services from the same airport. The decision to provide services from Brussels represented a departure from Ryanair's traditional strategy of flying routes from secondary airports, with a direct a ack on the incumbent network carrier and the smaller low-cost rival at a first-tier airport. As a result of the expansion of services at Brussels airport, a price war ensued involving the two low-cost carriers and Brussels Airline. It was only after both Vueling and Ryanair retreated from their Brussels airport services that the price war ended. Brussels Airline had been able to use its pricing and capacity strategy to successfully compete with the low-cost carriers, although at a severe cost to its finances.
van Houten and Burghouwt (Chapter 8) also describe how airlines use strategic behavior to gain competitive advantage. In this case, the strategic behavior is concerned with gaining access to scarce slots at congested airports. Slot rules generally allow airlines to maintain slots (“grandfather” rules) if they are being actively used (“use it or lose it” rules). With limited capacity and growing demand at busy airports, one would expect airlines to increasingly use larger aircraft at these airports. Moreover, load factors at congested airports should rise as demand increases. However, in their study of congested Schipol Airport in Amsterdam, the authors find that, in fact, both aircraft size and load factors may be falling. Although some of these changes may be due to airport policy changes (e.g., restrictions on wide-bodied aircraft during certain operating periods), airline operating changes may also be partially due to strategic behaviors.
van Houten and Burghouwt note that current grandfather rules provide strong incentives for airlines to deter entry by rivals by hoarding slots. In addition, airlines may downsize their aircraft and spread passenger traffic over greater frequencies to maintain control over scarce slots. However, new entrants can also use strategic behavior when competing for slots. European Union rules allow new entrants special access to slots at airports. These new entrants are defined as airlines that hold fewer than 5% of the slots at a particular airport or 4% of the slots at the airport system level. Airlines can evade these restrictions by flying under multiple operating authorities. Using this loophole, airlines can appear as new entrants even if they have already established operations at an airport, thus gaining access to airport slots. Perhaps, the European Union should consider adopting a fairer and more rationale system for slot allocation, along the lines outlined by Cavusoglu (Chapter 9).
Although standard Econ 101 still teaches the functioning of perfectly competitive markets along the lines espoused by Adam Smith, we know from experience that most markets are imperfect. Competition is not perfectly competitive and is subject to manipulation by strategic behavior of market participants. Governments a empt to regulate this behavior with mixed success.
The air transportation industry: Economic conflict and competition very intelligently describes the workings of the many aviation-related markets. The chapter authors assess the efficiency of the markets and offer proscriptions for ways to improve efficiency.
The pause in the growth of air transport due to the COVID-19 pandemic has resulted in a rare opportunity to reassess the functioning of aviation markets. Hopefully, our policymakers and regulators will make good use of the analyses presented in this book.
Martin Dresner
R.H. Smith School of Business
University of Maryland College Park, MD, USA
1 Quote a ributed to billionaire investor, Warren Buffe , h ps://nymag.com/intelligencer/2020/05/warren-buffe -shouldhave-listened-to-himself-on-airlines.html, accessed April 25, 2021.
2 The most famous of these was the “FU” fare code.
