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One More Thing America Must Learn from Europe

Friday, July 2, 2010

Europe’s open skies versus America’s closed market.

During this summer travel season, the United States could learn a lesson from Europe: how to make flying cheaper. In the European Union, any EU-based airline from any member country can pick up and drop off passengers anywhere within the Union, regardless of whether the airline’s home base is in Ireland, Spain, France, Germany, Britain, or some other EU-member nation. The competition that freedom fosters helps control costs, and offers greater consumer choice in both airline and route.

But that’s not the case for North America. Presently, for example, Air France can fly a passenger from Paris and drop him off in New York City or Los Angeles (or any other U.S. destination to which the airline flies), or pick up in Chicago and fly to Marseilles; but Air France cannot pick up a New York passenger and fly him to Los Angeles, or vice-versa.

The lack of competition means Americans pay more. We looked at a five-flight, 3,200 mile itinerary (Los Angeles–San Francisco, New York–Boston, Chicago–Detroit, Denver–Las Vegas, and Miami–Orlando), and found that consumers would pay $722.98 for those five tickets. A comparable European itinerary (London–Edinburgh, Paris–Nice, Milan–Rome, Dusseldorf–Berlin, Barcelona–Madrid) covering 3,338 miles would only cost $379.28, despite the fact taxes compose a much larger share of the total price, at 51 per cent. (See details below.)

Green 7.1.10

Europe’s economy and consumers benefit from the competition and increased traffic that resulted from the EU’s “Open Skies” policy, which went into effect in 1997. Europe has experienced a 120 percent increase in intra-EU routes, a 320 percent increase in the number of routes with more than two competitors between, the emergence of low-cost carriers (which now constitute one-third of all intra-EU scheduled capacity), and, not surprisingly, lower fares.

As the EU summarized in a recent letter to President Obama,

Prices have fallen dramatically, in particular on the most popular routes. But it is especially in terms of choice of routes that progress is impressive. … Consumers, airlines, airports and employees have all benefited as this policy has led to more activity, new routes and airports, greater choice, low prices and an increased overall quality of service.

So how did European consumers, so overregulated in many other areas, come to a near-nirvana on airline selection and ticket prices? Back in 1997, the EU enacted reforms to what is known as “cabotage” which, in simple terms, refers to regulations that control transportation within and between countries. When the EU instituted its open-skies policy, it freed “foreign” airlines to compete with “domestic” airlines on in-country routes (as if, with widely dispersed shareholders, “foreign” and “domestic” even mean much any longer).

Savings to world-wide consumers under a truly open skies policy would amount to $5 billion annually.

What’s keeping Americans (and our Canadian cousins to the north, who fare even worse) from enjoying the fruits of open skies and competition? In 2006, talks between the United States and Europe about bringing a Euro-style open-skies policy to the United States temporarily collapsed after the previous administration withdrew a set of proposed “open skies” reforms that would have allowed foreign airlines to pick up passengers in one American city, then drop them off in another. To be fair, the Bush administration only withdrew the proposed reforms after the 2006 midterm elections, when Democratic senators Frank Lautenberg and Daniel Inouye moved to block the administration’s proposals.

A much watered-down agreement was eventually signed between the EU and the United States in 2007, effective in early 2008. But that agreement, still in force, is far from the type of open-skies agreement that exists in Europe. The weak version allows for more investment by “foreign” shareholders in U.S. air carriers, but “foreign” airlines still do not have full, European-style access to the U.S. internal passenger market.

The big losers in all this are American consumers. The EU ambassador to the United States, John Bruton, estimated in 2006 that the savings to all consumers under a truly open-skies policy would amount to $5 billion annually once the agreement was fully implemented.

Still, there may be room for hope. Back in the 1970s, it was a left-leaning president from the Democratic Party who first began to deregulate the airline industry. The boom that followed was proof enough of the wisdom and usefulness of competitive markets. There is no reason why, over two decades later, another left-leaning president, Barack Obama, cannot finish the work Jimmy Carter began.

Mark Milke is the research director for the Frontier Centre for Public Policy, a Canadian think tank, and author of Open Skies—What North America Can Learn from Europe. Kenneth P. Green is the interim Director of the Center for Regulatory Studies at AEI.

FURTHER READING: Delve more into this topic with Milke’s scholarly article, “Open Skies: What North American Can Learn from Europe.” Green and Aparna Mathur dissect “A Green Future for Just Pennies a Day?” Green also queries “Who Should ‘Go First’ on Greenhouse Gas Control?” and outlines “The Dangers of Overreacting to the Deepwater Horizon Disaster.

Image by Darren Wamboldt/Bergman Group.

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