Establishing an effective economic regulatory policy for the European airline industry

Unfettered competition in the US and Canada has resulted in a much more efficient airline industry, but the considerable economies derived from the resulting structural change has lead to greater levels of concentration than previously existed. Arguments postulated in the early 1980!s concerning the contestability of airline markets have been clearly shown to be erroneous. Megacarriers now have substantial power which they use to organise and manipulate their markets in order to extract economic rent and restrain potential rivals. Wresting organisational control from an increasingly powerful group of carriers in order to obtain a more equitable distribution of the benefits that deregulation has brought will be both expensive and highly controversial. In Europe similar opportunities exist for efficiency gains, but here it should be possible to achieve these without having to hand over market control to powerful airlines. In order to do this however a considerable reorientation and modification of existing regulatory policy is required. The priority of protecting producers' interests by limiting the competitive pressures they face is no longer warranted. Sustaining competition should now form the primary concern of regulators. The adoption of a system of route franchising with carriers being forced periodically to compete for licences provides a means by which this could be achieved.