In the wake of liberalisation: long-term developments in the EU air transport market

Abstract

Using a 24-year analysis period (1990-2013), a new perspective is offered on long-term first- and second-order developments following liberalisation of the intra-EU air transport market. The focus of the analysis is on supply-side issues, such as airline output, structure of supply, yields, business models, and the position of (former) flag carriers. We find that air transport liberalisation in the EU internal market has facilitated significant growth in both the number and frequency of routes. Greater competition and lower fares at the route level went hand in hand with ongoing consolidation. The first and second liberalisation packages have enabled former flag carriers to develop into full-service hub-and-spoke carriers. It was only after the third package (1993-1997) that low-cost carriers were able to fully develop Europe-wide, point-to-point networks. They rapidly achieved a substantial market share after 2000. Following the adoption of the third package of liberalisation measures, charter operators launched scheduled operations as leisure airlines and adopted in part the new low-cost business model. Until 2013, direct competition between low-cost carriers and former flag carriers was limited due to different route development strategies. This picture has changed in recent years since more low-cost carriers have begun to focus on primary hubs. The competitive impact of the rapidly expanding new generation of hub carriers from Turkey and the Gulf has further increased competitive pressure on the former European flag carriers. Consequently, consolidation of the European airline industry is likely to continue, as well as the ongoing effort to reduce costs. Finally, rising competitive pressure may incentivise EU member states to develop a more protective national aviation policy.