Wednesday, 25 September 2013

How governments rort their own countries' airline passengers

A while ago I had a go at the protectionist stupidity of typical bilateral inter-government airline agreements, as instanced on this occasion by Cathay Pacific having to get the Australian government's permission to increase the number of flights it would like to make between Hong Kong and Australia.

More recently I've come across some research documenting just how much of a dead hand these agreements tend to be, and how much more airline traffic would be enabled by having more liberal arrangements.

The research is "The Sky Is Not Flat: How Discriminatory Is the Access to International Air Services?", by Roberta Piermartini and Linda Rousov√° (American Economic Journal: Economic Policy 2013, 5(3): 287–319,

First of all, some facts. The authors have gone through a huge database of 2,300 air services agreements. These agreements tend to be quite illiberal in their provisions.

On pricing, for example, the authors say (p291) that "The most restrictive regime is that of dual approval, whereby both parties have to approve the tariff before this can be applied. The most liberal regime is free pricing, when prices are not subject to the approval by any party". Of the 2,300 agreements, fully 1,625 require dual approval, and only 381 allowed for free pricing.

On capacity ("the volume of traffic, frequency of service, and aircraft types"), again the authors note that there is a menu of potential options - "Ranging from the most restrictive to the most liberal regime, three commonly used capacity clauses are: predetermination, Bermuda I [don't ask], and free determination" - and again the data show the more illiberal terms being adopted. Predetermination and "other restrictive" provisions were adopted 1,446 times, while free determination and "other liberal" were adopted 327 times.

The authors come up with an index that measures the overall degree of liberalisation of airline services agreements, and on that basis they find (p294) that "Overall, existing agreements provide a limited degree of liberalization of the aviation market. Approximately 75 percent of agreements are very restrictive...Very few agreements introduce an intermediate degree of liberalization. A high degree of liberalization reached...only in 15 percent of country-pairs. This is mainly because of the liberalization of air services among countries within the EU".

It's not always you find the folks in Brussels on the right end of the deregulation spectrum, so chapeau! to the Eurocrats on this occasion. And boos and hisses to governments elsewhere, who to a greater or lesser degree have been colluding to prevent their own consumers (households and businesses) from getting the quantity and pricing of airline services that they should be enjoying.
Because that's what the second leg of the paper establishes: less liberal agreements prevent traffic, more liberal agreements enable it.

"Following the traditional approach of measuring the degree of liberalization by means of an index", they say (p310), "we find strong evidence of a positive and significant impact of the degree of liberalization of the international aviation market on passenger traffic. In particular, we estimate that increasing the degree of liberalization from the twenty-fifth to the seventy-fifth percentile increases passenger traffic by approximately 18 percent. This effect is shown to be robust" (to various potential statistical problems).

And that's what you get, folks, when your enlightened elected representatives put producer interests and "national champion" policies ahead of the consumer's interest.

Oh, and apart from their grotesquerie from an allocative efficiency point of view, did I mention these policies are inequitable as well? Because guess which countries' airlines tend to get least access to world aviation markets? Let's see now - would it be the low and middle income countries? Why, yes it would.

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