Open Collections

UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

The international regulation of air transport : changing regimes and price effects Dresner, Martin Elliot 1989

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1989_A1 D72.pdf [ 13.92MB ]
Metadata
JSON: 831-1.0098281.json
JSON-LD: 831-1.0098281-ld.json
RDF/XML (Pretty): 831-1.0098281-rdf.xml
RDF/JSON: 831-1.0098281-rdf.json
Turtle: 831-1.0098281-turtle.txt
N-Triples: 831-1.0098281-rdf-ntriples.txt
Original Record: 831-1.0098281-source.json
Full Text
831-1.0098281-fulltext.txt
Citation
831-1.0098281.ris

Full Text

THE  INTERNATIONAL REGULATION OF AIR TRANSPORT: CHANGING REGIMES AND PRICE EFFECTS By MARTIN ELLIOT DRESNER B.Comm., The U n i v e r s i t y o f Toronto, 1979 M.B.A., York U n i v e r s i t y , 1980  A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE  REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY  in THE  FACULTY OF GRADUATE STUDIES  FACULTY OF COMMERCE AND BUSINESS ADMINISTRATION  We a c c e p t t h i s t h e s i s as conforming to the r e q u i r e d  THE  standard  UNIVERSITY OF BRITISH COLUMBIA J u l y 1989  © M a r t i n E l l i o t Dresner, 1989  In  presenting  degree  this  at the  thesis  in  University of  partial  fulfilment  British Columbia,  freely available for reference and study. copying  of  department  this or  publication of  thesis by  this  for  his thesis  or  scholarly her  Co  The University of British Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date  the  I agree  requirements  for  may  representatives.  It  be is  advanced  that the Library shall make it  I further agree that permission  purposes  an  granted  for extensive  by the head  understood  that  for financial gain shall not be allowed without  permission.  Department of  of  of  my  copying  or  my written  ABSTRACT  The  thesis  regulatory from  the  changes  theory  explain  the  explain  some  was  of  used  to  there  to the  regulations  In  the  maximizing routes.  competing  on  of  principles  to  assumptions  a i r routes  areas  with  in  States  empirical arose  first  versions  from  the  of  of  world,  the  introduced  liberal  i n an attempt to not  adequately  political at  a  model  and more  added  Finally,  the model  I t was  predicted  from  as  air  Europe,  developed  differences  model  were  services and  that  that  on  from  profit-  international air  airlines  competing  on  p r i c i n g behaviour, while c a r r i e r s to  set  practices.  liberal  model were used agreements.  such  a model was  colluded  industry  gained  traced  liberalized.  price  the  be  were  arrive  industry.  to  engaged i n B e r t r a n d  the  to  section,  o f hegemonic  comprehensive  credit  i n t e r n a t i o n a l a i r r o u t e s between the y e a r s 1976 United  first  could  order  i n the  thesis,  explain of  theory  The  l i k e l y to be  the  industry  o f regime developments.  developments  n o n - l i b e r a l routes  consistent  the  a d d i t i o n a l domestic  change.  political  part  hegemonic  introduced  regime  developed  second  that  were  A modified  a p p l i e d to the  developments,  i n these areas are  Major  liberalized  were  in  present.  and  In  future  still  In  version  the  explanation  predict  liberalization  of  sections.  to  major  model  major  industry  formulated  the  was  two  international a i r transport  structural variables  significantly  that  the  developments.  comprehensive  was  in  of  Second World War  stability  market  consists  The  prices. Data  and  were  1981,  bilateral to  test  findings  These  assumptions  gathered  on  51  the p e r i o d when the agreements.  for  price  were  that  Several  effects the  that  liberal  agreements  contributed  necessarily consistent bilateral  to  with  to  significantly  significantly the use  lower  of greater  normal  price  agreements.  iii  lower  discount  fares.  discrimination  The  fares  but  findings  under  the  not were  liberal  TABLE OF CONTENTS  ABSTRACT  i i  TABLE OF CONTENTS  .  iv  LIST OF TABLES  x  LIST OF FIGURES  x i i  ACKNOWLEDGEMENTS  xiv  PART ONE:  I.  INTRODUCTION  1  A.  Research Issues  1  B.  C o n t r i b u t i o n s o f the T h e s i s  4  C.  L i m i t a t i o n s o f the T h e s i s  5  1.  L i m i t a t i o n s on the D i s c u s s i o n o f A i r F r e i g h t  5  2.  L i m i t a t i o n s o f the Econometric Model t o P r i c e Comparisons .  7  D.  II.  INTRODUCTION  Structure of Thesis  DEVELOPMENTS A.  7  IN INTERNATIONAL AIR TRANSPORT  9  I n d u s t r y Growth  9  1.  T o t a l and I n t e r n a t i o n a l Growth L e v e l s  2.  Regional  3.  Scheduled v s . C h a r t e r Growth  Growth  .  9 13 16  B.  The U n i t e d S t a t e s ' P o s i t i o n i n A i r T r a n s p o r t  19  C.  IATA's P o s i t i o n i n A i r T r a n s p o r t  21  D.  Trends i n A i r C a r r i e r F l e e t s  31  E.  Trends i n P r i c i n g and Products  32  F.  F i n a n c i a l P o s i t i o n o f the A i r l i n e I n d u s t r y  34  G.  A i r Transport  37  H.  Summary  Safety  39  iv  PART TWO:  HEGEMONIC THEORY AND REGIME CHANGES IN INTERNATION AIR TRANSPORT  I I I . HEGEMONIC STABILITY THEORY AND ITS CRITICS A.  Introduction  42  B.  C r i t i c i s m s o f Hegemonic S t a b i l i t y Theory  44  C.  E m p i r i c a l T e s t s o f Hegemonic S t a b i l i t y Theory  45  1.  J o n s s o n (1987)  49  2.  Busza (1987)  56  D.  Reformulation  E.  Other  Factors  Relevant  to  the Explanation  64 o f Regime 67  1.  Domestic A f f a i r s  69  a)  Politicians  69  b)  Bureaucrats  70  c)  I n t e r e s t Groups and t h e i r L o b b y i s t s  72  d)  Voters  74  3. F.  o f Hegemonic S t a b i l i t y Theory  Development  2.  IV.  42  S t r u c t u r a l Factors  77  a)  Number o f Producers  78  b)  New Technology  79  c)  Economic Downturns  80  d)  Height  80  o f E n t r y (and E x i t ) B a r r i e r s  O v e r r i d i n g State I n t e r e s t s  Summary  80 82  APPLYING HEGEMONIC STABILITY THEORY TO REGIME CHANGES IN INTERNATIONAL AIR TRANSPORT  84  A.  Introduction  84  B.  The 1946 Bermuda Regime  85  1.  Developments Leading  t o the F o r m a t i o n o f the 1946 Bermuda  Regime  89  a)  The R e g u l a t i o n o f A i r T r a n s p o r t b e f o r e World War Two . 89  b)  The Chicago Conference o f 1944  91  c)  The F o r m a t i o n o f IATA  93  d)  The Bermuda 1 Agreement  94  v  2.  Analysis  o f the Formation  o f t h e Regime  Using  the  M o d i f i e d Hegemonic S t a b i l i t y Theory 3.  Results  from  the A n a l y s i s U s i n g  96  the M o d i f i e d  Hegemonic  S t a b i l i t y Theory 4.  5. C.  Other  Factors  101  i n the E x p l a n a t i o n  o f the A d o p t i o n  o f the  1946 Bermuda Regime  101  a)  Domestic A f f a i r s  101  b)  S t r u c t u r a l Factors  108  c)  O v e r r i d i n g State I n t e r e s t s  108  Summary  109  The 1965 Post-Bermuda Regime 1.  2.  Developments Leading  t o the Formation o f the 1965 Post-  Bermuda Regime  115  a)  B i l a t e r a l Regulation  115  b)  IATA and M u l t i l a t e r a l P r i c e - S e t t i n g  118  c)  Non-IATA A i r T r a n s p o r t a t i o n  122  d)  Post-Bermuda Developments - A Summary  124  Analysis  o f the Maintenance  M o d i f i e d Hegemonic 3.  110  Results  from  o f the Regime  Using  the  S t a b i l i t y Theory  the A n a l y s i s U s i n g  125  the M o d i f i e d  Hegemonic  S t a b i l i t y Theory 4.  5. D.  Other  Factors  130  i n the E x p l a n a t i o n  o f the A d o p t i o n  o f the  1965 post-Bermuda Regime  132  a)  Domestic A f f a i r s  132  b)  S t r u c t u r a l Factors  134  c)  O v e r r i d i n g State I n t e r e s t s  137  Summary  138  The 1981 L i b e r a l Regime 1.  Developments L e a d i n g  139 t o the 1981 L i b e r a l Regime  143  a)  P r e - L i b e r a l Developments - 1966-1977  143  b)  The U.S. Pro-Competitive  149  c)  F u r t h e r Developments  d)  Developments L e a d i n g Summary  Policy  - 1977-1981  156 t o the 1981 L i b e r a l Regime  - A 159  vi  2.  A n a l y s i s o f the Formation o f the L i b e r a l Regime U s i n g the M o d i f i e d Hegemonic S t a b i l i t y Theory  3.  Results  From  the A n a l y s i s U s i n g  160  the M o d i f i e d  Hegemonic  S t a b i l i t y Theory 4.  5. E.  164  Other F a c t o r s i n the A d o p t i o n  o f the 1981 L i b e r a l Regime  a)  Domestic A f f a i r s  165  b)  S t r u c t u r a l Factors  169  c)  O v e r r i d i n g State I n t e r e s t s  175  Summary  175  The 1986 P o s t - L i b e r a l Regime  176  1.  177  Developments Under the P o s t - L i b e r a l Regime a)  The U.S.-E.C.A.C. Memorandum o f U n d e r s t a n d i n g  b)  The Re-Establishment  . . . . 181  o f a P r o - A i r l i n e P o l i c y by the  U.S  182  c)  L i b e r a l i z a t i o n i n Europe and Elsewhere  185  d)  Developments Under  t h e P o s t - L i b e r a l Regime  - A  Summary 2.  187  A n a l y s i s o f P o s t - L i b e r a l Developments U s i n g  the M o d i f i e d  Hegemonic S t a b i l i t y Theory 3.  Results  from  188  the A n a l y s i s U s i n g  the M o d i f i e d  Hegemonic  S t a b i l i t y Theory 4.  5. F.  . 165  Other  Factors  2.  i n the A d o p t i o n  o f the 1986 P o s t - L i b e r a l  Regime  193  a)  Domestic A f f a i r s  193  b)  S t r u c t u r a l Factors  195  c)  Overriding State Interests  .  Summary  Conclusions 1.  191  196 197  and Future P r o s p e c t s  198  Conclusions  198  a)  1946 Bermuda Regime  198  b)  1965 Post-Bermuda Regime  c)  1981 L i b e r a l Regime  199  d)  The 1986 P o s t - L i b e r a l Regime  199  Future Prospects  .  . .  199  200  vii  PART THREE: V.  PRICING ON INTERNATIONAL AIR ROUTES  PRICING ON  INTERNATIONAL AIR ROUTES  204  A.  Introduction  204  B.  Research Methods f o r Comparing A i r l i n e P r i c e s  205  1.  I n f o r m a l Approach  205  2.  Simple R e g r e s s i o n Approach  207  3.  S i n g l e E q u a t i o n , M u l t i p l e R e g r e s s i o n Approach  208  4.  M u l t i p l e E q u a t i o n Approach  209  5.  Cost-Based  213  C.  A  Approach  Theoretical  Model  for  Comparing  Prices  Across  Airline  Markets 1.  D.  214  P r i c i n g Assumptions Under the T r a d i t i o n a l and  Competitive  Agreements  214  2.  The  Cost E q u a t i o n  218  3.  The  P r i c e E q u a t i o n Under a C o m p e t i t i v e Agreement  219  4.  The  Price  Equation  Under  a  Traditional  Bilateral  Agreement  220  5.  R e c o n c i l i n g the P r i c e s  221  6.  U s i n g the Model w i l l Route S p e c i f i c Data  223  7.  Comparison to P r e v i o u s Work  226  Estimation: 1.  2.  Model and Data  226  The Model  226  a)  Price  227  b)  No  228  c)  Route S p e c i f i c Costs  230  d)  Passengers  232  e)  Form o f E s t i m a t i o n  232  Competitive B i l a t e r a l  The Data  235  a)  Routes  235  b)  Prices  235  c)  Passengers  237  d)  Distance  237  e)  Non-Competitive Routes  238  f)  P o p u l a t i o n and Income  239  g)  Descriptive Statistics  239  viii  E.  Results of Estimation 1.  2.  R e g r e s s i o n s on the F u l l P r i c e  242  a)  Linear Regressions  242  b)  Log-Linear Regressions  249  c)  Summary o f Major R e s u l t s  255  R e g r e s s i o n s on the D i s c o u n t P r i c e  255  a)  Linear Regressions  255  b)  Log-Linear Regressions  261  c)  Summary o f Major R e s u l t s  267  F.  Residual Analysis  267  G.  Conclusions  268  PART FOUR:  VI.  242  CONCLUSIONS AND FUTURE RESEARCH  CONCLUSIONS AND FUTURE RESEARCH  271  A.  Regime Changes  271  1.  Conclusions  271  2.  F u t u r e Research  271  B.  Price Effects  272  1.  Conclusions  272  2.  F u t u r e Research  272  APPENDICES  274  Appendix A:  Data T a b l e s C o r r e s p o n d i n g  to Figures i n Text  Appendix B:  Freedoms o f the A i r  Appendix C:  Evidence o f C a r r i e r S p e c i f i c P r i c i n g on the N o r t h  290  A t l a n t i c and North P a c i f i c Appendix D:  Regressions Using D i f f e r e n t F i r s t  Appendix E:  E r r o r s i n V a r i a b l e Problem  REFERENCES  275  291 Stage E q u a t i o n s  . . .292 303  305  ix  LIST OF TABLES  T a b l e 3.1  P a r t i c i p a n t s i n the P o l i c y - M a k i n g P r o c e s s :  Goals  and  Roles  75  T a b l e 3.2  S t r u c t u r a l F a c t o r s I n f l u e n c i n g the Maintenance o f a C a r t e l  81  T a b l e 4.1  Snap-Shot o f the 1946 Environmental  T a b l e 4.2  T a b l e 4.3  T a b l e 4.5  Post-Bermuda Regime and R e l a t e d I l l  L i b e r a l Regime and R e l a t e d  and I n d u s t r y F a c t o r s  Snap-Shot o f the 1986 Environmental  86  and I n d u s t r y F a c t o r s  Snap-Shot o f the 1981 Environmental  T a b l e 4.4  and I n d u s t r y F a c t o r s  Snap-Shot o f the 1965 Environmental  Bermuda Regime and R e l a t e d  . . . .  140  P o s t - L i b e r a l Regime and R e l a t e d  and I n d u s t r y F a c t o r s  178  A p p l y i n g M o d i f i e d Hegemonic S t a b i l i t y Theory to the D i f f e r e n t R e g u l a t o r y Regimes  T a b l e 5.1  Advantages and Disadvantages  192 o f the Approaches to the  Comparison o f A i r Fares  215  T a b l e 5.2  Descriptive Statistics  - Routes  240  T a b l e 5.3  Descriptive Statistics  - Variables  241  T a b l e 5.4  L i n e a r R e g r e s s i o n s on the F u l l P r i c e  243  T a b l e 5.5  Log-Linear Regressions  on the F u l l P r i c e  250  T a b l e 5.6  L i n e a r Regressions  on the D i s c o u n t P r i c e  256  T a b l e 5.7  Log-Linear Regressions  Table A l  Scheduled A i r l i n e  S e r v i c e s - Tonne K i l o m e t r e s  T a b l e A2  Scheduled A i r l i n e  S e r v i c e s - Passenger K i l o m e t r e s  T a b l e A3  Scheduled A i r l i n e  S e r v i c e s - Passengers  T a b l e A4  Scheduled A i r l i n e  S e r v i c e s - Average Annual Growth i n  on the D i s c o u n t P r i c e  262 275 . . . .  Passenger-Kilometres T a b l e A5  Scheduled A i r l i n e  S e r v i c e s - R e g i o n a l Breakdown o f 279  Scheduled A i r l i n e  S e r v i c e s - Growth Rates i n R e g i o n a l  Tonne-Kilometres T a b l e A7  Charter A i r l i n e  277  278  Traffic T a b l e A6  276  280 S e r v i c e s - I n t e r n a t i o n a l Tonne-Kilometres  and P e r c e n t o f T o t a l A i r l i n e T r a f f i c  x  280  T a b l e A8  U.S.  Scheduled A i r l i n e  S e r v i c e - Passenger  P e r c e n t o f World Scheduled T a b l e A9  Schedule  Airline  Traffic  281  Services - T o t a l Passenger-Kilometres  P e r c e n t o f World T r a f f i c T a b l e A10  K i l o m e t r e s and  Scheduled A i r l i n e  - Top Ten C o u n t r i e s i n 1985  and . .  282  S e r v i c e s - I n t e r n a t i o n a l Passenger-  K i l o m e t r e s and Percent o f T o t a l I n t e r n a t i o n a l T r a f f i c Top Ten C o u n t r i e s Table A l l  IATA A i r l i n e s ' World Scheduled  T a b l e A12  282  Traffic  - Tonne-Kilometres  and P e r c e n t o f  Traffic  283  IATA and T o t a l Scheduled  S e r v i c e s - Comparison o f Growth  Rates i n Tonne-Kilometres T a b l e A13  IATA A i r l i n e s '  284  International Traffic  -  Tonne-Kilometres  and P e r c e n t o f I n t e r n a t i o n a l Tonne-Kilometres  284  T a b l e A14  IATA Membership by Type o f Member  285  T a b l e A15  A c t i v e IATA Membership  - Airlines  o f Developed Non-  Communist, E a s t B l o c and D e v e l o p i n g C o u n t r i e s  286  T a b l e A16  IATA Members' A i r c r a f t  286  T a b l e A17  D i s t r i b u t i o n o f IATA Fare C l a s s e s on Scheduled  Fleet North  A t l a n t i c Services T a b l e A18  287  Scheduled A i r C a r r i e r s  - O p e r a t i n g Revenues and O p e r a t i n g  Profits T a b l e A19  288  S a f e t y on Scheduled A i r S e r v i c e s - A i r c r a f t I n v o l v i n g Passenger Million  Table Dl  Fatalities  Accidents  and F a t a l i t i e s p e r 100  Passenger-Kilometres  Regressions  on the F u l l P r i c e U s i n g D i f f e r e n t  289 First  Stages T a b l e D2  Regressions  293 on the D i s c o u n t P r i c e U s i n g D i f f e r e n t  Stages  First 297  xi  LIST OF FIGURES  Figure  2.1  Schedule A i r l i n e  Services:  T o t a l Tonne-Kilometres and  I n t e r n a t i o n a l Tonne-Kilometres, 1950-1985 Figure  2.2  Scheduled A i r l i n e  Services:  10  T o t a l Passenger-Kilometres  and I n t e r n a t i o n a l P a s s e n g e r - K i l o m e t r e s , 1945-1985 Figure  2.3  Scheduled A i r l i n e  Services:  . . . .  T o t a l Passengers and  I n t e r n a t i o n a l Passengers, 1945-1985 Figure  2.4  Scheduled A i r l i n e  11  Services:  12  Growth i n T o t a l  Passenger-  K i l o m e t r e s and I n t e r n a t i o n a l P a s s e n g e r - K i l o m e t r e s , 1951-1985 Figure  2.5  Scheduled A i r l i n e Traffic,  Figure  2.6  14 Services:  R e g i o n a l Breakdown o f A i r l i n e  1951-1985  Scheduled A i r l i n e  15 Services:  Growth Rates i n R e g i o n a l  A i r l i n e Tonne-Kilometres, 1951-1985 Figure  2.7  Charter A i r l i n e  Services:  17  I n t e r n a t i o n a l Tonne-Kilometres  and P e r c e n t o f T o t a l I n t e r n a t i o n a l T r a f f i c , Figure  2.8  U.S. Scheduled A i r l i n e  Services:  Figure  2.9  2.10  Scheduled A i r l i n e  Services:  1955-1985  . . . .  18  20  T o t a l Passenger-Kilometres  and P e r c e n t o f World T r a f f i c  - Top Ten C o u n t r i e s ,  Scheduled A i r l i n e  I n t e r n a t i o n a l Passenger-  Services:  . .  U.S. P a s s e n g e r - K i l o m e t r e s  and P e r c e n t o f World Scheduled T r a f f i c , Figure  1971-1985  1985  22  K i l o m e t r e s and P e r c e n t o f T o t a l I n t e r n a t i o n a l T r a f f i c Top Ten C o u n t r i e s , Figure  2.11  IATA A i r l i n e s ' Services,  Figure  2.12  1985  Traffic:  23 IATA P e r c e n t o f World Scheduled  1955-1985 . . . .  IATA and T o t a l Schedule S e r v i c e s :  24 Comparison o f Tonne-  K i l o m e t r e Growth Rate, 1955-1985 Figure  2.13  IATA A i r l i n e s '  International T r a f f i c :  26 IATA I n t e r n a t i o n a l  Tonne-Kilometres and IATA P e r c e n t o f I n t e r n a t i o n a l Scheduled S e r v i c e s , Figure  2.14  IATA Membership:  1965-1985 .  T a r i f f Coordination,  and A s s o c i a t e Members, 1951-1987  xii  27 Trade A s s o c i a t i o n 29  F i g u r e 2.15  A c t i v e IATA Membership: Communist,  Airlines  o f Developed Non-  E a s t B l o c and D e v e l o p i n g  Countries,  1950-1985  30  F i g u r e 2.16  IATA Members' A i r c r a f t  F i g u r e 2.17  D i s t r i b u t i o n o f IATA Fare C l a s s e s : Atlantic  F i g u r e 2.18  Operating  Revenues and  Operating  1960-1985  36  I n v o l v i n g Passenger F a t a l i t i e s  F i g u r e 3.1  Scheduled N o r t h 35  S a f e t y on Scheduled A i r S e r v i c e s :  Million  33  S e r v i c e s , 1950-1986  Scheduled A i r C a r r i e r s : Profits,  F i g u r e 2.19  F l e e t , 1960-1985  Passenger-Kilometres,  Aircraft  Accidents  and F a t a l i t i e s p e r 100 1950-1985  38  The Post-Bermuda Regime i n the Context o f the M o d i f i e d Hegemonic S t a b i l i t y Theory  68  F i g u r e 3.2  P u b l i c Choice Model o f P o l i c y - M a k i n g  76  F i g u r e 4.1  The Bermuda Regime i n the Context o f the M o d i f i e d Hegemonic S t a b i l i t y Theory  F i g u r e 4.2  The Post-Bermuda Regime i n the Context o f the M o d i f i e d Hegemonic S t a b i l i t y Theory  F i g u r e 4.3  102  The L i b e r a l  131  Regime i n the Context o f the M o d i f i e d  Hegemonic S t a b i l i t y Theory  xiii  166  Acknowledgements  I  gratefully  acknowledge  the f i n a n c i a l  Institute  o f International Relations  Programme  and t h e h e l p  supervisory William and  friends  provide  and g u i d a n c e  who  Ilan Vertinsky were  always  gathering  data,  estimations  from  f o r this  Tretheway  Canada U n i v e r s i t y My  thesis  ( s u p e r v i s o r ) , Tae Oum,  my many Ph.D.  a v a i l a b l e to discuss  c o n s t r u c t i n g the d a t a  by U.B.C.'s  the f o l l o w i n g :  and Mark Zacher;  a d v i c e on r e s e a r c h i n p r o g r e s s ;  provided  and the T r a n s p o r t  committee c o n s i s t i n g o f M i c h a e l  Stanbury,  assistance  research  colleagues  ideas  and t o  Dave Hobden, who was i n s t r u m e n t a l i n base,  t h e s i s and p r o d u c i n g  doing  many  o f the p r e l i m i n a r y  the f i g u r e s i n Chapter 2; Sue L u i  who d i d most o f the word p r o c e s s i n g and a c t e d as my Vancouver c o n t a c t a f t e r I moved t o Maryland; and l a s t b u t c e r t a i n l y n o t l e a s t , my w i f e L o r r i e , who n o t only  helped  me  gather  data  but provided  complete the t h e s i s .  xiv  the e m o t i o n a l  support  I needed to  PART ONE: I.  INTRODUCTION  A.  Research Issues  The  last  transport.  Civil  Since that of  forty  transporting  creation  This ways.  the  aviation  changes  i n international a i r  had come t o a v i r t u a l h a l t  d u r i n g World War Two.  since  constructed  has grown t o become, by f a r , the p r i m a r y means I n the l a s t  the t h e s i s  uses  regulatory  World War Two t o t e s t  to test  regime  i n the l a t e  thesis  include  four  decades,  t o as our g l o b a l v i l l a g e .  examines developments i n i n t e r n a t i o n a l  o f hegemonic  Does  1  has emerged as one o f the key b u i l d i n g b l o c k s i n  o f what i s w i d e l y p r e f e r r e d  thesis  theory  seen p r o f o u n d  passengers over l o n g d i s t a n c e s .  a i r transport  First,  transport  have  time, a i r t r a n s p o r t  international the  years  INTRODUCTION  stability.  the p r i c e 1970s.  effects  a i r transport  developments  a political Second, from  i n two  i n international a i r  t h e o r y o f regime changesan  econometric  model i s  the change t o a more c o m p e t i t i v e  The s p e c i f i c r e s e a r c h  issues  addressed  i n this  the f o l l o w i n g :  the theory  o f hegemonic  stability  provide  e x p l a n a t i o n o f regime changes i n i n t e r n a t i o n a l  an  adequate  a i r transport?  Can  On the N o r t h A t l a n t i c , f o r example, a i r l i n e s s u r p a s s e d ocean l i n e r s i n terms o f passengers c a r r i e d i n 1958. I n 1952, a i r l i n e s c a r r i e d o n l y 34 percent o f North A t l a n t i c passengers. By 1957, t h i s f i g u r e had r i s e n t o j u s t under 50 p e r c e n t , and by 1960, t o 69 p e r c e n t (Armstrong, 1961, p. 223). C u r r e n t l y , v i r t u a l l y a l l North A t l a n t i c passengers t r a v e l by a i r . 1  1  additional p o l i t i c a l  and economic  f a c t o r s add s i g n i f i c a n t l y  to our  the  can  u n d e r s t a n d i n g o f the developments? What  are  the p r i c e  appropriate  model  effects be  from  constructed  assumptions and be used to t e s t  regime  change?  from b a s i c  the p r i c e  How  profit  effects  an  maximizing  from the change  to a more c o m p e t i t i v e regime?  These  issues  explaining the  regime  subject  Articles theory.  of  have  are  important  changes much  been  using  debate  the t h e o r y i n the  produced  However, v e r y  for several  that  o f hegemonic  international  both  few r i g o r o u s  reasons.  support  tests  The  stability  relations  and  problem  are  has  of  been  literature.  critical  of  this  o f the t h e o r y have been conducted  and n o t many a l t e r n a t i v e e x p l a n a t i o n s f o r regime changes have been p r o p o s e d . This  thesis  stability  provides  both  a  rigorous  t h e o r y as w e l l as a l t e r n a t i v e  2  empirical  test  factors useful  of  the  3  hegemonic  i n the e x p l a n a t i o n o f  regime changes.  The  problem  regulatory comparison profit  of  shifts  developing  a  model  i s important because  of prices  maximizing  across  markets  (neo-classical  to  test  much  has  not  economic)  of  for price the  been  changes  previous  work  formulated  assumptions.  due on  using  With  the  to the  basic prior  f o r m u l a t i o n s , r e s e a r c h e r s have not been c e r t a i n o f which v a r i a b l e s t o i n c l u d e in  their  2  models,  the expected s i g n s  o f the r e g r e s s i o n c o e f f i c i e n t s ,  See Chapter I I I f o r a r e v i e w o f the hegemonic  stability  literature.  See Haggard and Simmons (1987) f o r a d i s c u s s i o n o f a l t e r n a t e o f regime developments. 3  2  or the  theories  implicit  assumptions  of  their  models.  A  rigorous  formulation  b a s e d on p r o f i t maximizing assumptions can e l i m i n a t e  The  international  hegemonic  theory  industry.  The  air  and  the  transport price  model  international air  period  of s t a b i l i t y  transformed. in  that  and  of  i t can the  The be  ended i n the  industry  late  because  of  the  model  had  to  evolution a  long  regime was  test  of  the  period  formed f o l l o w i n g World War  thus p r o v i d e s  An  appropriate  1970s when the  t e s t e d b o t h i n the  regime s h i f t .  is  regime  a  issues.  industry  transport  r e l a t i v e s t a b i l i t y a f t e r the regime was  these  of  Two.  of This  dramatically  a good t e s t f o r the hegemonic model  explanation  o f the p e r i o d  of  stability  adequate model o f regime development s h o u l d  be  a b l e to e x p l a i n b o t h o f these phenomena.  The testing Data  international a i r transport the p r i c e model because o f the  were  allowing  In industry Airlines through  industry  c o l l e c t e d on  51  also  is  a  was  to  studied  the  i n t e r n a t i o n a l routes  methodological  because  operate i n v i r t u a l l y their  governments  or  of  industry  a v a i l a b i l i t y o f r e a s o n a b l y good over  the  f o r the c o n s t r u c t i o n o f a p a n e l d a t a s e t o f 612  addition  good  its  period  in  e v e r y c o u n t r y o f the w o r l d . p r i v a t e l y , shares  i n an  p e o p l e f l y on a i r l i n e s each y e a r , and m i l l i o n s more who  data.  1976-1981,  observations.  considerations, importance  for  the the 4  air  transport  world  economy.  Most people  airline. do not,  own,  M i l l i o n s of meet f r i e n d s ,  A i r l i n e s from 101 c o u n t r i e s r e p o r t e d d a t a to the I n t e r n a t i o n a l C i v i l A v i a t i o n O r g a n i z a t i o n i n 1985. Since d a t a are r e p o r t e d on a v o l u n t a r y b a s i s , the 101 c o u n t r i e s r e p r e s e n t e d o n l y a subset o f c o u n t r i e s w i t h a i r l i n e s (ICAO, 1985b, pp. 53-61). 4  3  relatives on  or b u s i n e s s  air freight  to  contacts  carry  who  their  have flown.  goods  Thousands o f b u s i n e s s e s  to markets.  In  short,  a i r travel  rely has  become u b i q u i t o u s .  B.  C o n t r i b u t i o n s o f the  This  Thesis  thesis contributes  to  the  advancement o f knowledge  i n a number of  d i f f e r e n t ways:  I t develops a r i g o r o u s method f o r t e s t i n g the e x p l a n a t o r y the hegemonic t h e o r y  It  p o s i t s and  factors  o f regime change.  examines c a r e f u l l y  useful  powers of  i n the  explanation  a  set of  of  the  economic  and  evolution  of  political regulatory  regimes i n i n t e r n a t i o n a l a v i a t i o n .  It  develops  a  model  to  test  price  changes  on  international air  markets from b a s i c p r o f i t maximizing assumptions.  Previous  models  have not been d e r i v e d from such a w e l l - d e v e l o p e d  theory.  It  p r e d i c t i o n of  the  variables  the  uses  sign  of  a  method the  that  allows  coefficient  econometric model. o f the e s t i m a t e d  of  This allows  results.  4  for  the  one  of  a priori the  key  the r e s e a r c h e r  in  to be more c o n f i d e n t  The  t h e s i s shows t h a t the c o e f f i c i e n t o f the passengers  the p r e d i c t i o n o f p r i c e has effect.  measuring unable  a demand e f f e c t and a c o s t should  be  P r e v i o u s r e s e a r c h e r s have i n t e r p r e t e d the c o e f f i c i e n t  as  economies  to  estimated  specific  of  explain  the  density low  (a negative  magnitude  data  the  assumptions  effect)  or  the  measures  r e q u i r e d when  i n t o route s p e c i f i c  o n l y made these assumptions  the  price  data.  and  wrong  have  sign  used  mainly  to  aggregating  Previous  of  been the  airline  r e s e a r c h e r s have  implicitly.  effects  from  the  change  i n t e r n a t i o n a l regime from a r e g u l a t e d regime. been  effects  coefficient.  specifies  It  effects;  Under normal o p e r a t i n g c o n d i t i o n s b o t h  positive.  It  two  variable in  measure  price  effects  to  a  competitive  P r e v i o u s models have in  the  U.S.  domestic  industry.  C.  L i m i t a t i o n s o f the T h e s i s  1.  Limitations Although  confined  the Discussion  of Air  Freight  the importance o f a i r f r e i g h t to the a i r l i n e s and to s o c i e t y i s  acknowledged, is  on  5  to  i t i s not d e a l t w i t h e x p l i c i t l y e x p l a i n i n g the  changing  in this  thesis.  r e g u l a t o r y regimes  The a n a l y s i s  o f passenger  air  A i r f r e i g h t i s n o t j u s t an i m p o r t a n t s o u r c e o f revenue to the a i r l i n e s , i t i s a l s o a f a s t e f f i c i e n t means f o r b u s i n e s s e s to market t h e i r products. A i r c a r r i e r s have a r o l e i n t r a n s p o r t i n g a number o f d i f f e r e n t types o f f r e i g h t , i n c l u d i n g emergency goods, p e r i s h a b l e s , and p r o d u c t s w i t h a h i g h v a l u e to weight r a t i o . 5  5  transport,  and  to  the  r e g u l a t i o n s on passenger  In  1983,  the  impact  of  the  for  overstated, airlines.  27  world's  scheduled  percent  somewhat,  of  the  I n terms o f t o t a l  that  airlines  total.  represents  international  scheduled  a  performed  value  of  However,  freight  the  freight  percent i n  "by-product"  (Doganis,  1985,  of pp.  billion  tonne-  27  percent  to  the  and m a i l  figure  scheduled accounted  (ICAO, 1984b, p.  1974.  the  operations  244-245).  because  that  the  great.  7  of this  impact  restrictive  of a i r freight  "by-product" on  view  regimes  have  generally  6  It  o f a i r f r e i g h t by  airlines  the i n t e r n a t i o n a l a i r system has  not been  A i r l i n e s have m a i n l y been i n t e r e s t e d  regulatory  of  Airlines  c a r r y f r e i g h t i n o r d e r to r e c o v e r p a r t o f t h e i r p a s s e n g e r - r e l a t e d c o s t s . is  air  F r e i g h t and m a i l  f o r scheduled a i r l i n e s  valuable  airlines  145  transport  o p e r a t i n g revenues,  T h i s f i g u r e d e c l i n e d s l i g h t l y from 14.6  Freight  international  (ICAO, 1984b, p. 19).  f o r o n l y 13 p e r c e n t o f t o t a l revenues 25).  of  a i r fares.  kilometres of scheduled a i r s e r v i c e s accounted  liberalization  been  i n c a r r y i n g passengers  designed  to  control  and the  passenger  air  For example, i n 1982, B r i t i s h Airways e s t i m a t e d t h a t 51 p e r c e n t o f f r e i g h t revenues on passenger a i r c r a f t went to cover f r e i g h t - r e l a t e d c o s t s , w h i l e the r e m a i n i n g 49 p e r c e n t were used t o cover c o s t s t h a t would have been i n c u r r e d whether or not f r e i g h t was t r a n s p o r t e d (Doganis, 1985, p. 244). 6  In a d d i t i o n to f r e i g h t c a r r i e d by passenger a i r l i n e s i n the cargo compartments o f a i r c r a f t , f r e i g h t may a l s o be t r a n s p o r t e d i n whole a i r p l a n e s b u i l t or r e c o n s t r u c t e d i n t o "freighters". Doganis (1985, pp. 235-236) r e p o r t e d t h a t the o p e r a t i o n o f these a i r c r a f t e x p e r i e n c e d a d e c l i n e i n the 1970s and 1980s. On the North A t l a n t i c , f o r example, the f r e i g h t e r s ' share o f the market d e c l i n e d from 62 p e r c e n t o f t o t a l f r e i g h t i n 1969 to 31 p e r c e n t i n 1983. The advent o f the wide-bodied a i r c r a f t , equipped w i t h l a r g e cargo compartments, was a major c o n t r i b u t i n g f a c t o r to the d e c l i n e i n the usage o f freighters. 7  6  traffic.  The  limitation  traffic,  therefore,  of  still  this  thesis  allows  for  to the the  r e g u l a t i o n o f passenger a i r  discussion of  the  major  issues  r e g a r d i n g the i n d u s t r y .  2.  Limitations A  of  the Econometric  limitation  restricted believe  to  the  that  prices  can  the  econometric  comparison  the  t h e i r e f f e c t on  of  worthiness  judged  to  to  producers'  Therefore,  low  price  Since  only  prices w i l l  of  governmental  compared  in  o v e r a l l b e n e f i t s of a pro-competitive be  first  econometric step  liberalization one  thesis  Policy  is  that  i t is  analysts generally  should  be  judged  by  a p o l i c y which r e s u l t s i n lower to  consumers'  outweigh  the  welfare,  consumer b e n e f i t s .  d e t r i m e n t a l to s o c i e t y , this  thesis,  the  no  as  a whole.  statements  on  the  i n t e r n a t i o n a l a i r p o l i c y to s o c i e t y may  proclaimed.  The the  may  be  this  policies  beneficial  may  Comparisons  prices.  Although  welfare  policy be  in  airline  be  disadvantages  work  of  society's welfare.  be  the  Model to Price  to make.  work  towards  in this  the  thesis,  assessment  of a i r r e g u l a t i o n s . Even though the  first  welfare  first  t h e s i s cannot,  answer to the q u e s t i o n o f the m e r i t s s e r v e as an important  The  of  t h e r e f o r e , can changes  arising  s t e p , however, i s an by  itself,  of " i n t e r n a t i o n a l  step i n determining  7  o n l y be  provide a  viewed from  as the  important definitive  d e r e g u l a t i o n " , i t can  the answer.  D.  Structure of Thesis  The  thesis  introduction  as  is  divided  well  as  a  into  chapter  i n d u s t r y s i n c e World War  Two.  literature  stability  testing also add  on  hegemonic  a modified  examines to  Two  the  a  the  parts.  the  Part  development  and  theory  used  in this  political  of  the  modified  contains  the  chapter  formulating  the  The  reviewing  the  procedure  for  thesis.  The  chapter  be  used  second c h a p t e r  hegemonic  theory  this  a i r transport  factors that w i l l  o f regime developments.  test  One of  c o n s i s t s o f one  theory  o f economic and  explanations  provides  on  P a r t Two  v e r s i o n o f the  set  four  i n Part  using  regime  developments i n the i n t e r n a t i o n a l a i r t r a n s p o r t i n d u s t r y s i n c e World War It  also  chapter of  a  uses  the  to a i d i n the  review  markets,  the  of  chapter  possibilities  the  and  political  explanation  models  formulation  the model, and one  economic  used o f the  of  the  for future  developments.  previously  to  model used  i n t e r p r e t a t i o n o f the  drawing some f i n a l  factors described  8  price  from  Two.  previous  P a r t Three c o n s i s t s differences  i n t h i s paper, the  results.  conclusions  research.  test  i n the  to  across  estimation  of  P a r t Four i s comprised of the  t h e s i s and  illustrating  II.  DEVELOPMENTS IN INTERNATIONAL AIR TRANSPORT  The purpose o f t h i s c h a p t e r i s t o h i g h l i g h t some o f the important and  developments i n i n t e r n a t i o n a l a i r t r a n s p o r t from  the p r e s e n t .  trends  the Second World War to  T h i s a n a l y s i s w i l l p r o v i d e the r e a d e r w i t h a g e n e r a l  indication  o f how the i n d u s t r y has changed over the p a s t f o r t y y e a r s .  The u n d e r s t a n d i n g  of  step  how  the i n d u s t r y has  development  changed  of theoretical  explanations  p r e s e n t e d i n the next p a r t o f t h i s  A.  I n d u s t r y Growth  1.  Total  and International  Figure scheduled figure  2.1  shows  illustrates line  Growth  the growth  indicates  a i r transport  the regime  since  i n tonne-kilometres,  i n total  The two graph 1950.  changed,  as  Levels  the growth  s c h e d u l e d t r a f f i c has accounted  1  experienced The top l i n e  tonne-kilometres,  while  i n tonne-kilometres lines  The f i g u r e  indicate  also  f o r approximately  shows  i n the  the bottom carried  the dramatic that  by the  on  growth  international  one-half of t o t a l  scheduled  i n terms o f t o n n e - k i l o m e t r e s .  Figures terms  f o r why  towards the  thesis.  the growth,  i n t e r n a t i o n a l routes only.  traffic,  first  a i r t r a n s p o r t i n d u s t r y s i n c e World War Two.  (dashed)  in  i s a necessary  of  2.2  and 2.3 show much  scheduled  the same p i c t u r e  passenger-kilometres  and  as F i g u r e  2.1, b u t i n  scheduled  passengers  Tonne-kilometres i s a measure o f the t o t a l passengers, f r e i g h t , and m a i l c a r r i e d by the a i r l i n e s . Note t h a t the d a t a f o r t h i s and o t h e r f i g u r e s i n the c h a p t e r i s p r i n t e d i n t a b l e form i n Appendix A. 1  9  FIGURE  2.1  S C H E D U L E D AIRLINE S E R V I C E S Total Tonne-Kilometres a n d International Tonne-Kilometres 1950 to 1985  180 SOURCES: IATA (18 e). W o r l d Air Transport Statistics, various issues. I C A O (18 b). C i v i l A v i a t i o n S t a t i s t i c * o l the W o r l d , various issues.  =  120NOTES: 1. Date for the years 1950-1969 e x c l u d e the U S S R .  100-  2. D a t a for 1986 are preliminary.  / /  •*  t  t  •• if'' *  >  Legend  .P."  O TOTAL  >-^\..o-.--''' 3  1950  1955  1960  1965  •  1970  Year  1975  1980  1985  INTERNATIONAL  FIGURE  2.2  S C H E D U L E D AIRLINE S E R V I C E S Total Passenger-Kilometres and International Passenger-Kilometres 1945 to 1985  1400 SOURCES: IATA (19 t). World Air Transport S u t l a t i c a . v s n o u * isauaa.  1200-  I C A O (19 b). C i v i l A v i a t i o n S t a t i a t i c a of t h « W o r l d , various iaauaa.  =  1000NOTES:  £  800-  1. Data for the years 1945-1969 e x c l u d e the U S S R .  600-  't  2. D a t a for 1985 are preliminary.  i /  400-  *  Legend  200-  O TOTAL •  0^ 1945  1950  1965  1960  1965  Year  1970  1975  1980  1985  INTERNATIONAL  FIGURE 2.3 SCHEDULED AIRLINE SERVICES Total Passengers and International Passengers 194S to 1985 900 SOURCES:  800-  IATA (19 a). W o r l d Air Transport Statiatics. varioua issues. I C A O (19 b). Civil A v i a t i o n S t a t i a t i c a o f th« World, varioua issuaa.  700-  c  o 3.  O) c  NOTES:  500  1. D a t a for the y e a r s 1946-1973 e x c l u d e the U S S R .  400  2. D a t a for 1985 are preliminary.  <D  CO  w  300 200 ^  >—^  100 T  T  1945  -  1950  r  I  1955  I  1960  J"  I  1965  Year  I  1970  I  1975  I  1980  I  1985  respectively. of  total  The major d i f f e r e n c e between the f i g u r e s  traffic  international  accounted  for  tonne-kilometres  by  i s i n the percentage  international  typically  accounted  traffic.  f o r about  Whereas one-half  of  t o t a l t o n n e - k i l o m e t r e s , i n t e r n a t i o n a l p a s s e n g e r - k i l o m e t r e s accounted f o r o n l y about  forty  passengers  percent  f o r about  variations  can  international the  of  total  one-fifth  be  to  one  e x p l a i n e d by  a i r transport  relatively  passenger-kilometres, quarter of  the  longer  (as compared  greater  importance  total  freight  international  passengers.  average  stage  These  lengths  in  a i r t r a n s p o r t ) and  by  and  to  to domestic of  and  mail  traffic  international a i r transport.  F i g u r e 2.4.presents a d i f f e r e n t view o f t r a f f i c three  figures.  Figure  passenger-kilometres) four  periods:  2.4  shows  growth r a t e s  1951-1959;  average  annual  again,  sharply,  during  the  the  2.  airline  the  may  early  rates  declined The  and,  and  somewhat  decline  attributed,  1980s,  and  (defined  total  1980-1985.  in traffic  i n part,  perhaps  i n the  also  to  be  traffic, and  then  experienced  world-wide  to the o v e r a l l  for  I t can  1970s,  growth,  the  as  traffic,  t h a t f o r b o t h t o t a l and i n t e r n a t i o n a l  1980s. be  1970-1979;  traffic  economic  maturation of  industry.  Regional Figure  i n the  1980s,  downturn o f the  growth  annual  for international  1960-1969;  c l e a r l y seen from t h i s f i g u r e , the  average  growth from the p r e v i o u s  Growth 2.5  world.  respectively,  It  p r o v i d e s a breakdown o f a i r t r a n s p o r t can  be  the l a r g e s t  seen and  that second  North  America  l a r g e s t markets  13  growth by  and  Europe  regions of have  f o r a i r transport  been, from  FIGURE  16  2*4  S C H E D U L E D AIRLINE SERVICES Growth In Total Passenger-Kilometers and International Passenger-Kilometers 1951 - 1 9 8 6 -i  SOURCES:  141210-  I A T A (19 a). World Air Transport Statiitica, various issues. I C A O (18 M . Civil Aviation Statistics of the World, various Issues.  NOTES: 1. D a t a f o r the y e a r s 1951-1969 e x c l u d e the U S S R . 2. D a t a f o r 1985 are preliminary.  Legend CZ2 T O T A L m  INTERNATIONAL  FIGURE 2.5 SCHEDULED AIRLINE SERVICES Regional Breakdown of Airline Iraffic 1951 to 1985 100-1  SOURCES: I C A O (19 b ) . CWII Aviation Statiatics of the World, varioua iaauea.  NOTES: 1. D a t a f o r t h e y e a r s 1951-1969 e x c l u d e the U S S R . 2. D a t a f o r 1985 are preliminary.  *  -S> J$> J N  3  ^  Year  »-*8> ^^ cj-^ N  N  the 1950s to the p r e s e n t . rates  in  these  two  developed  growth r a t e s i n o t h e r  Differential  However, d u r i n g  regions,  growth  compares  the  1951  and  1985.  The  Asia  and  the  Pacific  average  annual  the  growth.  only  Also  was  likely  regions  partly regions  3.  Scheduled  a  vs.  World War.  lagged  the the  behind  the  Asia.  in  Figure  different  2.6,  regions  which between  1960s, the M i d d l e E a s t , the  highest  o f N o r t h America and  trailed the  part,  maturation  Charter  air  and  traffic  the  1980s,  developed growth  regions  rates  were  o f the w o r l d . As  to  economic  of  the  recession,  airline  Europe, w h i l e i n in air lower  traffic  than  s t a t e d above, but  industry,  might  i n the  the this  also  be  developed  Growth  which may  published  time  However, i t was vehicles  international international examines  for  have c o n s i s t e n t l y had  in  large  traffic,  regular  popular  illustrated  1970s i n a l l r e g i o n s  the  have  growth  D u r i n g the 1970s, the lowest r a t e s o f growth were  that  in  world  the  o f the w o r l d .  Charter on  the  e x p l a i n by  also  developed r e g i o n s  note,  due,  are  growth r a t e s  L a t i n America  growth r a t e s o f  the  f i g u r e shows, t h a t s i n c e  i n the f u l l y  1980s,  of  several years,  such as the M i d d l e E a s t and  rates  growth r a t e s i n the w o r l d . achieved  regions  the l a s t  for  air  charter  defined  t a b l e , has  not u n t i l  traffic  traffic  only  Little prior  as  traffic  been  the  transporting  routes.  charter  be  i n existence  since  operate  the  Second  1960s, t h a t c h a r t e r s e r v i c e s became  discount data  are  to  the  from 1971  to  16  which does not  and  vacation  available  1970s. 1985.  travellers  on  the  Figure  2.7,  I t can  be  volumes  seen,  on of  therefore, from  the  FIGURE 2.6  25-r  SCHEDULED AIRLINE SERVICES Growth Rates In Regional Airline Tonne-Kilometers 1951 to 1985  SOURCES:  20-  I C A O (19 b). Civil Aviation Statiatica of the World, varioua iaauea.  NOTES: 1. D a t a f o r t h e y e a r s 1951-1969 e x c l u d e the U S S R . 2. D a t a f o r 1985 are preliminary.  Legend •i  NORTH AMERICA  EZ2 EUROPE m  ASIA & PACIFIC  m  LATIN AMERICA  O  MIDDLE E A S T  C2  AFRICA  FIGURE  2.7  C H A R T E R AIRLINE S E R V I C E S International Tonne-Kilometers and Percent of Total International Traffic 1971 to 1985  16  40 \ \ \  >  35  Ca  o \  CO  •  /  •  30 *5  C O  K=  15  S CO  <D  , /  /  •  O  %  '  * %  2 5  .  \ '.  L _  ..  .  CD  E  CO  ^  •  o I  c c  !  ;  NOTES:  c  1. O a t s t o r 1 9 8 6 a r » preliminary.  15 "55  \  :  c  CD  i2 CD  ICAO (18 b). Civil AwiallOA Suuatioa of tfca Wot Id. »a*»oua iauoa.  .1  CL  •+-'  IATA 119 el. WotttJ At* ItMtoort Statiatloa. varioua laauaa.  ;  :  [  ,o  ]  10  o  Legend O •  1971  1973  1975  1977  1979  Year  1981  1983  1985  TONN6-KILOM6TERS PCRCENT OF TOTAL  figure, steady  t h a t the volume o f i n t e r n a t i o n a l c h a r t e r during  relative  the 1970s and 1980s.  importance Charter  from  39 p e r c e n t  about  attributed,  has h e l d  reasonably  However, the f i g u r e a l s o shows t h a t the  of international charter  s i n c e 1971.  traffic  traffic  has g r e a t l y  declined  t r a f f i c ' s percentage o f t o t a l i n t e r n a t i o n a l t r a f f i c i n 1971 t o 13 p e r c e n t  i n large part, to increased  i n 1985.  low-priced  The drop  competition  fell  may be  from scheduled  operators.  B.  The U n i t e d  The  examination  important p a r t The  States' P o s i t i o n i n A i r  United  o f the p o s i t i o n  i n determining  States  has h e l d  Transport  o f the i n d u s t r y  the reasons  leader  f o r regime s h i f t s  can play  i n an i n d u s t r y .  a dominant p o s i t i o n i n a i r t r a n s p o r t  s i n c e the  Second World War, b u t i t s dominant p o s i t i o n d e c l i n e d i n r e c e n t y e a r s . 2.8 p r e s e n t s United  data  States'  period,  from  production  f o r the y e a r s  a i r transport producing  o f 532 b i l l i o n  39  1955 t o 1985.  industry billion  The f i g u r e  has grown  passenger-kilometres  stood  represents  a t 64 p e r c e n t  i n 1955, b u t o n l y  Figure  shows  t h a t the  steadily  over the  passenger-kilometres i n 1985.  i n d u s t r y d i d n o t grow as f a s t as the w o r l d i n d u s t r y . traffic  fairly  an  i n 1955  However,  t o the  the U.S.  The U.S. share o f w o r l d  39 p e r c e n t  i n 1985.  a s i g n i f i c a n t d e c l i n e i n the dominance o f the U n i t e d  States  2  This i n the  industry.  These f i g u r e s a r e somewhat m i s l e a d i n g because USSR d a t a were i n c l u d e d i n the 1985 w o r l d t r a f f i c f i g u r e , b u t n o t i n the 1955 t o t a l . However, i f the USSR f i g u r e s were e x c l u d e d from the 1985 t o t a l , the U.S. share o f w o r l d t r a f f i c was s t i l l o n l y 45 p e r c e n t . 2  19  FIGURE  2.8  Although following leader  the p o s i t i o n  the Second World  performed  aviation nations.  the U.S.  than  e i g h t times  countries.  clearly  d e c l i n e d i n the decades  i n 1985, remained  F i g u r e 2.9 p r e s e n t s  and p e r c e n t  of world  the u n d i s p u t e d  the breakdown o f  traffic,  o f the l e a d i n g  I t can be seen t h a t the U n i t e d S t a t e s performed  t h r e e times the t r a f f i c more  War,  i n the a i r t r a n s p o r t i n d u s t r y .  passenger-kilometres ten  o f the U.S.  In fact,  o f the second the t r a f f i c  l a r g e s t a v i a t i o n country,  o f the t h i r d  the USSR, and  and f o u r t h l a r g e s t  the U n i t e d S t a t e s performed  nearly  aviation  a l a r g e r volume o f t r a f f i c  than the o t h e r n i n e top c o u n t r i e s combined.  The however,  dominance  only.  case  o f 10 p e r c e n t , of international  performed  i s made o f i n t e r n a t i o n a l performed  18 p e r c e n t  i n 1985, compared t o the second h i g h e s t  by a i r l i n e s  passenger-kilometres,  c o u n t r i e s , combined, outperformed  o f the U n i t e d Kingdom. the bottom n i n e  I n the  o f the top t e n  the U.S. by a r a t i o o f two t o one.  IATA's P o s i t i o n i n A i r T r a n s p o r t  An  important  international the  i n the a i r t r a n s p o r t i n d u s t r y ,  As F i g u r e 2.10 shows, U.S. a i r l i n e s  i n t e r n a t i o n a l passenger-kilometres  total  C.  States  i s n o t as pronounced when an examination  passengers, of  o f the United  aspect  airline  i n the e x p l a n a t i o n  industry l i e s  industry's price-setting  o f regime  changes  i n the  i n the d e t e r m i n a t i o n o f the s t r e n g t h o f  I n t e r n a t i o n a l A i r T r a n s p o r t A s s o c i a t i o n (IATA).  F i g u r e 2.11 p r o v i d e s an i n d i c a t i o n o f the growth o f IATA s e r v i c e s , and o f the penetration increased  o f IATA  from  i n the i n d u s t r y .  6 tonne-kilometres  The f i g u r e  shows  that  IATA  i n 1955 t o 107 t o n n e - k i l o m e t r e s  21  traffic i n 1985.  FIGURE  2.9  S C H E D U L E D AIRLINE S E R V I C E S Total Passenger-Kilometers and Percent of World Traffic - Top Ten Countries 1986  FIGURE  2.10  S O f E D U L E D AIRLINE S E R V I C E S tnternatlonal Passenger-Kilometers and Percent of Total International Traffic - Top Ten Countries 1986  SOURCES: ICAO (1885b). Civil Aviation Statlatios 01 the World.  FIGURE  2.11  IATA AIRLINES' TRAFFIC IATA Tonne-Kllometera and IATA Percent of World Scheduled Services 1955 to 1985  1955  1960  1965  1970  Year  1975  1980  1985  But  during  about  85  the  percent  (disregarding the  same p e r i o d ,  world  to  64  IATA's  percent.  share The  3  the " d e c l i n e " i n 1970 due  total  f o r the f i r s t  IATA's p e n e t r a t i o n decreased  of t o t a l  major  traffic  decline  decreased  i n IATA  from  penetration  to the i n c l u s i o n o f USSR f i g u r e s i n  time) o c c u r r e d  from 76 p e r c e n t  between  1973  t o 64 p e r c e n t ,  and  1981,  before  when  levelling  again.  Figure carriers, and  2.12  and s c h e d u l e d  1960-1969,  However,  h i g h l i g h t s the  this  IATA  airlines,  carrier  situation  was  only.  This  2.13  examines  figure,  over the y e a r s  like  surveyed.  d e c l i n e d from 94 p e r c e n t  5  i n growth  as a whole.  growth  exceeded  reversed  out-paced growth by IATA c a r r i e r s .  Figure  differences  during  During total  rates  between  the p e r i o d s industry  IATA  1955-1959  growth  rates.  the 1970s when i n d u s t r y growth  4  IATA's  share  of i n t e r n a t i o n a l scheduled  Figure  2.11,  shows a d e c l i n e  i n IATA  traffic,  penetration  IATA's market p e n e t r a t i o n i n i n t e r n a t i o n a l t r a f f i c i n 1965 to 73 p e r c e n t  i n 1980, b e f o r e  r e c o v e r i n g to  The f i g u r e s a r e somewhat m i s l e a d i n g because S o v i e t data were o n l y i n c l u d e d i n t o t a l c a l c u l a t i o n s a f t e r 1969. However, i f S o v i e t t r a f f i c i s e x c l u d e d from the 1985 t o t a l , the IATA p e n e t r a t i o n i n t h a t y e a r was s t i l l o n l y 73 p e r c e n t . 3  One r e a s o n f o r the low IATA growth r a t e o f the 1970s was, t h a t towards the end o f the decade, a number o f important U.S. a i r l i n e s (such as Pan American and TWA) were f o r c e d to withdraw from IATA. Most o f these c a r r i e r s ( i n c l u d i n g Pan American and TWA) r e j o i n e d IATA i n the 1980s, b u t , as F i g u r e s 2.11 and 2.12 show, IATA was s t i l l n o t a b l e to r e c o v e r i t s market share. 4  Comparing F i g u r e s 2.13 and 2.11, i t can be seen t h a t IATA c a r r i e r s h i s t o r i c a l l y have had a h i g h e r percentage o f i n t e r n a t i o n a l t r a f f i c than o f t o t a l scheduled t r a f f i c . T h i s i s to be expected s i n c e a c t i v e membership i n IATA r e q u i r e s a c a r r i e r to be an i n t e r n a t i o n a l o p e r a t o r . 5  25  FIGURE 2 . 1 2 IATA and Total Scheduled Services Comparison of Tonne-Kilometer Growth Rates 1965 - 1985 SOURCES: IATA (19 a). World Air Transport Statistics, varioua Isauas. I C A O (19 b). Civil Aviation Statistics of tha World, various issuas.  NOTES: 1. D a t a for the years 1955-1969 e x c l u d e the U S S R . 2. D a t a for 1985 are preliminary.  Legend ZZ2 IATA m TOTAL  FIGURE  2.13  IATA AIRLINES' INTERNATIONAL T R A F F I C IATA International Tonne-Kilometers and IATA Percent of International Scheduled S e r v i c e s 196S to 1986  100  IATA (19 a). World Air Transport Slallaues. varloua iasuaa.  c o CO -J  CO 03  k_  •*->  CD  E o  to  ICAO lt« 01. Civil Aviation Statlatloa or tha WoclO. varloua laayaa.  CO  c o  '*-< CO  c l _  CD  NOTES: t. D a t a l o r t h a y e a r s 1986 • 19S9 e x c l u d e the USSR. 2. D a t a l o r 1986 are preliminary.  52 i  CD C  c  c CD  U k_  CD  CL  Legend O  TONNE-KILOMETERS  •  PERCENT OF TOTAL  about  80 p e r c e n t  i n the f o l l o w i n g  market share was d u r i n g  Figure since  2.14  the 1970s.  provides  an  The major p e r i o d  6  increased  i n d i c a t i o n of  the  during  growth  formed.  i n IATA  membership  The f i g u r e shows t h a t  from 64 c a r r i e r s i n 1950 t o 161 c a r r i e r s i n 1987.  However, growth i n membership IATA members,  of decline i n  7  1950, s h o r t l y a f t e r the A s s o c i a t i o n was  t o t a l membership  in  years.  has n o t been even among the v a r i o u s  e s p e c i a l l y during  the 1980s.  classes of  The major growth i n membership  the 1980s has been w i t h i n t e r n a t i o n a l c a r r i e r s t h a t do n o t p a r t i c i p a t e  IATA  tar i f f-coordination  ( i . e . "Trade A s s o c i a t i o n "  members)  and  with  domestic c a r r i e r s , which a l s o do n o t p a r t i c i p a t e i n t a r i f f - c o o r d i n a t i o n ( i . e . "Associate" late  1960s  IATA  members). and e a r l y  carriers  Tariff  c o o r d i n a t i o n membership  to mid-1970s  participated  in  a t about 90 the  a c t u a l l y peaked i n the  carriers.  Association's  In 1987,  only  81  tariff-coordination  conferences.  Figure 2.15  2.15  shows how  Communist airlines  provides IATA's  developed  of developing  a d i f f e r e n t assessment o f IATA's growth.  growth has countries, countries.  been  d i s t r i b u t e d among a i r l i n e s  airlines  of  Eastern  bloc  Figure o f non-  countries,  and  I t can be seen t h a t E a s t e r n b l o c c a r r i e r s  The l a r g e drop i n IATA's market s h a r e . i n 1979 can be e x p l a i n e d by the w i t h d r a w a l o f U.S. c a r r i e r s from the A s s o c i a t i o n (most n o t a b l e Pan American and TWA). L i k e w i s e , the g a i n i n market share, e x p e r i e n c e d by IATA i n 1981, can be m a i n l y e x p l a i n e d by the U.S. c a r r i e r s r e j o i n i n g IATA. 6  A l t h o u g h t h e major d e c l i n e i n IATA's market share was d u r i n g the 1970s, i t must be n o t e d t h a t the IATA market share f i g u r e s f o r the years a f t e r 1980 i n c l u d e a c t i v i t y by those members t h a t do n o t p a r t i c i p a t e i n IATA t a r i f f coordination. B e f o r e IATA r u l e s were a l t e r e d i n 1979, a l l a c t i v e IATA members had t o p a r t i c i p a t e i n IATA p r i c e - s e t t i n g . 7  28  FIGURE  2.14  IATA Membership Tariff Coordination, H a d e Association and Associate Memebers 1951 to 1987  180  SOURCES: I A T A (19 a). World Air Transport Statistics, various issues. IATA, IATA R e v i e w , various issues. IATA. A n n u a l R e p o r t , various issues. IATA. IATA B u l l e t i n , various issues.  S? «?> ^ v  ^  A  Year  N A  ^  *b  <3 / A °J 0,  A  A  ^  •$?  FIGURE  2.15  Active IATA Membership Airlines of Developed Non-Communist East Bloc and Developing Countries 1950 to 1985  SOURCES: IATA. IATA variout  Review, issues.  IATA. A n n u a l R e p o r t , various Issuea. IATA. IATA Bulletin. various Issues.  NOTES: 1. T h a a i r l i n e t o t a l t o r developing countries Includes, in the earlier yeers. oerrlers representing colonies. 2. A c t i v e IATA m e m b e r s h i p onoludos A s s o o l e t e members.  1950  1955  1960  1965  Year  1970  1975  1980  1985  members,  by  developing  airlines  of  countries  comprised  compared to 34 p e r c e n t 4 percent  developing  high  countries  growth  rate  is a reflection  the 1960s, and  62  in  IATA  membership  o f b o t h the  will  distribution  o f IATA membership has  c a r r i e r s of  IATA's  1985,  airlines  active  of  membership,  be  described  developing  and  later  c a r r i e r s of  developing  to o p e r a t e t h e i r own  in  created  countries  of  emergence o f T h i r d World c o u n t r i e s  o f the d e s i r e o f these c o u n t r i e s  As  often  the  thesis,  tensions have  p r i c i n g p o l i c i e s from c a r r i e r s o f developed  D.  of  of  carriers.  airlines.  as  percent  As  f o r a i r l i n e s o f non-Communist developed c o u n t r i e s ,  f o r the E a s t e r n b l o c  The  countries.  within  national  this the  in  shift  in  Association,  d i f f e r e n t views  on  optimal  countries.  Trends i n A i r C a r r i e r F l e e t s  Technological aircraft  may  international introduction productivity. turn,  can  put  developments r e s u l t i n g i n the  play  a  role  airline of  jet  in  the  industry.  aircraft  Productivity  institution Technological  in  the  late  improvements  downward p r e s s u r e s  i n t r o d u c t i o n o f new of  on p r i c e s i n an  changes  improvements,  1950s,  lower  regime  can  costs,  result and  industry.  types  such in  lower  of  in  the  as  the  increased costs,  Industries,  in  such  as i n t e r n a t i o n a l a i r t r a n s p o r t , w i t h a p r i c e f i x i n g a u t h o r i t y , must f i n d ways to  cope  with  institutions,  pressures  for  or e l s e f a c e  lower  prices  within  the  existing  price-fixing  the p o s s i b i l i t y  o f the  demise o f the  price-fixing  authority.  31  Figure  2.16  shows how  between the y e a r s the  figure.  1960  The  and  the  aircraft  1985.  first  was  fleet  of  IATA c a r r i e r s  Three developments can be the  demise  of  the  piston  they  had  been  tremendous r i s e 382  of  this  f i g u r e had bodied  jets  wide-bodied  completely  replaced.  The  o f narrow-bodied j e t a i r c r a f t  type risen  of  to 2,900.  during jets  airplane  the  in  i n the  The  IATA  i n the  aircraft.  fleet  1980s.  fleet  in  whereas 1970,  by  development  i n 1960,  there 1985  by  was  by the  1970,  increase  were the  but  There were o n l y  but  the  Piston  i n 1960,  1960s.  t h i r d development was  1970s and  the  IATA  second  changed  c l e a r l y seen from  a i r c r a f t were the dominant type o f a i r p l a n e i n the IATA f l e e t 1980,  has  less  this  i n widethan  f i g u r e was  100 over  1,200.  E.  Trends i n P r i c i n g and  The first  airline  industry, u n t i l  class airline  of other special  products fares.  8  Products  seats.  Since  1952, 1952,  offered travellers the  - economy s e a t s , budget The  trend, during  i n d u s t r y has  a single  i n t r o d u c e d a number  fares, excursion  the post-war p e r i o d ,  product-  f a r e s , and  toward  a  other  greater  The v a r i o u s s e a t c l a s s e s are d e f i n e d by not o n l y p r i c e but a l s o the r e s t r i c t i o n s p l a c e d around the use o f t i c k e t s and the q u a l i t y o f i n - p l a n e service. D i s c o u n t t i c k e t s (budget, e x c u r s i o n and s p e c i a l f a r e s ) g e n e r a l l y must be p u r c h a s e d on a r e t u r n t r i p b a s i s a number o f days i n advance o f the f l i g h t and are o n l y p a r t i a l l y r e f u n d a b l e (or are n o n - r e f u n d a b l e ) . These t i c k e t s can o f t e n be purchased a t as l i t t l e as 30 - 40 p e r c e n t o f economy fares. C a p a c i t y c o n t r o l l e d e x c u r s i o n f a r e s d i f f e r from r e g u l a r e x c u r s i o n f a r e s i n t h a t o n l y a r e s t r i c t e d number o f s e a t s a t the c a p a c i t y c o n t r o l l e d f a r e are s o l d f o r a g i v e n f l i g h t . Economy t i c k e t s ( i . e . , f u l l f a r e t i c k e t s ) and f i r s t c l a s s t i c k e t s do not have to be purchased i n advance and may be bought f o r one-way t r a n s i t as w e l l as r e t u r n t r i p use. These h i g h e r p r i c e d t i c k e t s ( e s p e c i a l l y f i r s t c l a s s t i c k e t s ) g e n e r a l l y e n t i t l e the passenger to h i g h e r q u a l i t y i n - f l i g h t s e r v i c e such as b e t t e r meals, l a r g e r s e a t s and g r e a t e r l e g room. 8  32  FIGURE  2.16  v a r i e t y o f p r o d u c t o f f e r i n g s i s important because the more p r o d u c t s t h a t are o f f e r e d , the g r e a t e r  Figure the  the d i f f i c u l t y  2.17 p r o v i d e s  period  1950  there  i s i n coordinating  an i l l u s t r a t i o n o f trends  t o 1986.  prices.  i n fare offerings  The f i g u r e shows the d i s t r i b u t i o n o f the v a r i o u s  f a r e s , charged by IATA c a r r i e r s on the N o r t h A t l a n t i c , d u r i n g can  be seen,  that  the  latter  supplanted twenty  part  by o t h e r  percent  of  fare  of  of seats  offerings.  the market.  the  financial  changing  The  within  that  largest  industry  fare  fares  seek  new  However, have  been  comprised  only  category  i n 1986  was  o f the market.  Industry  I f an i n d u s t r y  may  i n turn,  with c l o s e to f i f t y percent  p o s i t i o n o f an i n d u s t r y  o f regimes.  fares,  By 1986, economy  F i n a n c i a l P o s i t i o n o f the A i r l i n e  The  economy  It  i n 1952, they  i n the N o r t h A t l a n t i c market.  the 1960s,  c a p a c i t y - c o n t r o l l e d excursion,  F.  the p e r i o d .  s h o r t l y a f t e r economy f a r e s were i n t r o d u c e d  comprised the v a s t m a j o r i t y since  during  can be a c o n t r i b u t i n g f a c t o r t o i s not performing w e l l ,  rules,  regulations,  companies  o r procedures,  to  govern the i n d u s t r y .  Figure  2.18  shows  scheduled  airlines,  reasonably  steady  increase  The worst  appeared  t o be  1960  i n revenues  period  between  years  revenue  f o r the p e r i o d  profits.  consecutive  operating  and o p e r a t i n g  profit  changes f o r  - 1985.  figure  indicates  during  f o r the a i r l i n e  1980  of operating  and  34  the p e r i o d ,  industry,  1982, when  losses.  The  This  period  but f l u c t u a t i n g  i n terms  the i n d u s t r y  a  of profits,  suffered  coincided  three  w i t h the  FIGURE  100  2.17  Distribution of IATA Fare Classes Scheduled North Atlantic Services 1950 -1986 -I  SOURCES: IATA (19 a). W o r l d Air Transport Statistics, various issues.  CO CO  J2 CJ  CD CO  NOTES:  CD CJ  1. T o u r i s t c l a s s , w i t h d r a w n in I 9 6 0 , i s c l a s s i f i e d under 'Economy'.  c  2. IATA b e g a n t o r e p o r t 'Excursion' and 'Other' farea aeperately from 'Economy' fares in 1984.  CD T3  'o  C  3. 'Other' feres Include budget, standby, youth fsres, etc. 4. 'First Class' includes Concorde flights.  Year  FIGURE 2.18 SCHEDULED AIR CARRIERS Operating Revenues and Operating Profits 1960 to 1985 130-r  r5500 -5000  IATA (II >>. World Air transport Slatlatlea. various isauaa. ICAO (19 bl. Civil Aviation Ststlatloa ol th* World, varloua laauaa.  CO C  g bo us cn  CO CD 3 C CD > CD  NOTES: t. Oata for tha yoara 1860-1872 ancluda tha USSR and for tho yoara 1873-1886 Includo only tha international oparationa of tha USSR oarrlor.  or O)  c  CO k_  CD  Q.  o  --500 -1000 1960  1965  1970  1975  Year  1980  1985  l i b e r a l i z a t i o n of regulations  governing i n t e r n a t i o n a l a i r transport,  world-wide economic r e c e s s i o n . losses  and p o s t  i t s best  The  y e a r ever  i n d u s t r y was  able  to recover  ( i n terms o f t o t a l  operating  and w i t h  from these profits) in  1984.  G.  A i r Transport  Air regimes. was  safety  on  the  Figure  number over  factor  officials  which  believed  These  could  that  i n a s a f e manner, then new  result  regulations  regulations  2.19  presents  f o r the p e r i o d  thirty  year  statistics  1950  to 1985.  involving period,  on  could  constant,  has,  i n fact,  been a b l e  of  industry  not  only  safety  9  f o r scheduled a i r  The f i g u r e shows, t h a t whereas the  number  d i d n o t change s u b s t a n t i a l l y of  passenger  passenger-kilometre of service declined s i g n i f i c a n t l y . industry  change  c o u l d be brought to  affect  a i r safety  fatalities  the  in a  the a i r t r a n s p o r t  but a l s o economic a s p e c t s o f the i n d u s t r y .  of a i r accidents the  final  industry.  considerations,  services,  i s one  I f government  not operating  bear  Safety  to h o l d  the a b s o l u t e  fatalities  per  The i n t e r n a t i o n a l a i r number  of  accidents  w h i l e s u b s t a n t i a l l y i n c r e a s i n g the q u a n t i t y o f s e r v i c e o f f e r e d .  For example, t h e r e have been some d i s c u s s i o n s i n the U n i t e d States t h a t domestic d e r e g u l a t i o n o f the a i r t r a n s p o r t i n d u s t r y has compromised a i r s a f e t y i n that country. I f t h i s were found to be t r u e , t h e r e c o u l d be i n c r e a s e d p r e s s u r e on the government to " r e - r e g u l a t e " the i n d u s t r y . 9  37  FIGURE  2.19  S A F T E Y ON S C H E D U L E D AIR S E R V I C E S Aircraft Accidents Involving Passenger Fatalities and Fatalities per 100 Million Passenger-Kilometers 1960 to 1986  ICAO (11 bl. CIvH Aviation Statlattaa of tha World, varioua laauoa.  u> NOTES: 1. Data Iron 1880 to 1874 axefcjda tha USSR and China and from 1876 to 1888 o«cludo lha USSR  Legend  1960  1955  1960  1965  1970  Year  1975  1980  1985  O  FATAL  •  FATALITY  ACCIDENTS RATE  H.  Summary  This  section  developments.  has  Growth:  from  The  the  thesis  examined  summarized as  The  industry  previous  been lowest  relative the  the  These can be  Industry 1980s  of  a  (to the  rate  During  i n developed r e g i o n s .  importance  of  United  States'  Position:  The  country  in  the  declined past  Charter  i n the  fifteen  traffic  air  transport.  market  share  of  a l t h o u g h the U.S.  The  U.S.  dominance,  pronounced when o n l y i n t e r n a t i o n a l a i r t r a n s p o r t IATA's Position the  in Air  1970s.  non-tariff  Transport:  IATA's  post-War p e r i o d , but  changed  since  the  developing  Trends  in Air  Fleets:  piston  aircraft  and  IATA's share  membership  most o f the  coordinating  representing  and  and  1970s  years,  has  and  growth  declined  in  present.  i n the post-War p e r i o d ,  has  trends  i n d u s t r y as a whole) from the e a r l y 1970s to  declined  in  industry  follows:  growth  years.  number  has  members.  The  Association's  United  remains the however,  is  is  not  declined  significantly  composition  as  considered.  membership growth has  founding,  States dominant  of a i r t r a f f i c  increased  recent  the  of  with  the  in  the  been w i t h  organization  most  carriers  now  demise o f  the  countries. New  i n the  technologies  r e s u l t e d i n the  i n t r o d u c t i o n of  the  j e t i n the  late  1950s,  o f the wide-bodied j e t i n the l a t e 1960s.  Trends  in Pricing  undertaken  by  and the  Products:  Several  international  39  new  airline  pricing industry  initiatives following  were the  introduction  of  economy  fares  in  1952.  In  1985,  capacity-controlled  excursion  f a r e s formed the l a r g e s t c l a s s o f s e a t s on the N o r t h A t l a n t i c .  Financial  Position  revenue  growth  fluctuated early  of for  from y e a r  1980s,  but  by  aggregate o p e r a t i n g Air  Transport  War  period.  the Airline most  of  to y e a r . 1894  the  Industry: the The  post-War  The  period,  industry's  industry  had  industry  showed  but  steady  profits  have  worst y e a r s were i n  recovered  with  the  i t s highest  profits.  Safety:  Air  safety  40  improved  s u b s t a n t i a l l y i n the  post-  PART TWO: HEGEMONIC THEORY AND REGIME CHANGES INTERNATIONAL AIR TRANSPORT  41  I I I . HEGEMONIC STABILITY THEORY AND ITS CRITICS  A.  Introduction  How  and why  do i n t e r n a t i o n a l  r e g u l a t o r y regimes  form?  Why  i n t e r n a t i o n a l r e g u l a t o r y regimes c o n s t i t u t e d f o r some i n d u s t r i e s services)  but not f o r others  regimes erode over relations  time?  s c h o l a r s have  (e.g. f o r e s t  products)?  These a r e the type attempted  Why  of questions  t o address  using  are stable  (e.g. p o s t a l  do some s t a b l e  that  international  the t h e o r y  o f hegemonic  stability.  Krasner  (1982,  p.185)  "principles,  norms, r u l e s ,  expectations  converge  the  form  by  international  theory  Kindleberger  issue area".  convention,  procedures Regimes,  long.  Kindleberger  sought  (1973,  depression  t o the B r i t i s h  leadership  role  stability  t h e r e f o r e , r e f e r to  i n a given  c o u l d have reduced open  market  procedures  issue  area  arose  first  from  t o determine what  events  produced  pp.291-292)  inability  i n the w o r l d  as t h e  around which other  d e p r e s s i o n o f 1929; why the d e p r e s s i o n was so widespread; so  regime  which  (such  as  etc.).  o f hegemonic  (1973) who  international  o r g a n i z a t i o n and d e c i s i o n - m a k i n g  trade, i n t e r n a t i o n a l a v i a t i o n ,  The  an  and d e c i s i o n - m a k i n g  i n a given  of international  predominate,  defined  economy.  attributed  t h e work o f  and why i t l a s t e d  the s e v e r i t y  and the U.S. u n w i l l i n g n e s s Kindleberger  the w o r l d  o f the  t o take  a  b e l i e v e d t h a t the U.S.  the s e v e r i t y o f the d e p r e s s i o n by m a i n t a i n i n g a r e l a t i v e l y  f o r imports,  by  recycling  42  capital  to countries  with  trade  deficits,  and by c r e a t i n g l i q u i d i t y  i n the w o r l d monetary system.  S t a t e s , however, d e c l i n e d to e x e r c i s e a l e a d e r s h i p r o l e  and  The  United  chose i n s t e a d to  i s o l a t e and p r o t e c t i t s economy.  Kindleberger's to the  maintain theory  (1980).  an  c o n c l u s i o n was  that a leadership role  open t r a d i n g regime.  o f hegemonic s t a b i l i t y  His  by  must be  f i n d i n g s have been developed  international  s c h o l a r s such as  Keohane t h e o r i z e d t h a t a dominant power or hegemon was  maintaining  s t a b l e r e g u l a t o r y regime.  exercised  Keohane  into  Keohane  important  (1980, p.136) summarized  in the  t h e o r y as f o l l o w s :  According to t h i s theory, s t r o n g i n t e r n a t i o n a l economic regimes depend on hegemonic power. Fragmentation o f power between competing c o u n t r i e s leads to fragmentation of international economic regimes; c o n c e n t r a t i o n o f power c o n t r i b u t e s to s t a b i l i t y . H e g e m o n i c p o w e r s have the c a p a b i l i t y to m a i n t a i n international regimes they f a v o u r . They may use c o e r c i o n to e n f o r c e adherence to r u l e s ; o r t h e y may r e l y l a r g e l y on p o s i t i v e s a n c t i o n s - the p r . o v i s i o n o f b e n e f i t s to those who cooperate. Both hegemonic powers and the s m a l l e r s t a t e s may have i n c e n t i v e s to c o l l a b o r a t e i n m a i n t a i n i n g a regime - the hegemonic power g a i n s the a b i l i t y to shape and dominate i t s i n t e r n a t i o n a l environment, w h i l e p r o v i d i n g a s u f f i c i e n t f l o w o f b e n e f i t s to s m a l l and middle powers to persuade them to a c q u i e s c e .  Therefore,  according  p o s i t i v e or n e g a t i v e  In  the  presented.  next  to  Keohane  a  dominant  power  may  use  either  s a n c t i o n s to e n f o r c e the terms o f a regime.  section  Section  C  theory,  concentrating  regime  changes  in  (1980)  of  reviews on  the  this  chapter,  empirical two  international  studies  criticisms  tests  of  which  a i r transport.  43  the  tested  of  the  theory  hegemonic the  Section  theory D  are  stability against  outlines  the  framework  used i n t h i s paper f o r t e s t i n g a m o d i f i e d v e r s i o n o f the hegemonic  stability  theory.  Section  l e a d e r s h i p which may Finally,  B.  C r i t i c i s m s o f Hegemonic  regime  usefulness changes  relations the  has  of  theory,  this  of  factors  other  than  chapter.  S t a b i l i t y Theory  the  Most there  number  stability  subject  theory  o f much  i n the  debate  i n the  o f the debate has r e s u l t e d  from e m p i r i c a l  this  question.  international the  hegemonic  asked,  proponents o f the  regime.  He  regime,  the  reasoned t h a t then  regime.  stability  the  Third,  theory.  "When  theory  Next, McKeown q u e s t i o n e d  hegemonic  maintaining  McKeown  theoretical  tests  hegemonic  McKeown argued t h a t  been  international  (1983), f o r example, c i t e d a number o f c o n c e p t u a l d i f f i c u l t i e s w i t h First,  also  of  McKeown  theory.  have  explanation  criticisms.  stability  but  a  i n the e x p l a n a t i o n o f regime developments.  hegemonic  been  literature.  presents  relevant  s e c t i o n F summarizes  The  of  be  E  is a  have  the r o l e  not  state  adequately  McKeown  power  would  analyzed  Proponents  of  the  the  theory  hegemon.  McKeown s t a t e d t h a t actual  f o r a hegemon.  state"  as b e i n g  might  be  able  characterized multilateral  to by  use  this  a series  agreement.  have  power i n described  i n describing a  "access t o the markets o f the hegemonic  economic power base. power  of  in  economic power might be a more important  McKeown c i t e d  an important  difficulty  notion  economic power as b e i n g the p r i m a r y c h a r a c t e r i s t i c  i n an  were opposed to  have  potential  factor  answered  o f secondary powers  i f secondary powers  dominant  hegemonic?"  base  of b i l a t e r a l  more  He  s t a t e d t h a t a hegemon  effectively  agreements,  rather  i f the  than by a  F i n a l l y , McKeown q u e s t i o n e d the hegemonic  44  regime i s single  stability  theory's  requirement  that  f r e e - r i d e r problem and regime.  McKeown  overcome  the  McKeown, the for  stated  existence  that  the  decline  of  a  stability  provided  small and  arguments  group  supply  of  the  power to  were  public  supported  Snidal a  by  have i n c e n t i v e s  concluded  "special  case"  overcome  to m a i n t a i n a  non-dominant  considered  a hegemonic power w i l l  only  Empirical Tests  single  good r e q u i r e d  i t s h o u l d not be  of  a  a hegemonic s t a t e might be  regime.  l e a d to the e x i s t e n c e  exist  public  a  secondary powers may  collapse  C.  the  that  of  (1985)  must  problem  a s t a b l e regime, but  showed t h a t so  supply  free-rider  McKeown's  there  good.  regime  whether  or  developments.  a necessary  hegemonic  larger  and  system  condition  condition.  (1985).  Snidal  to p r o v i d e a s t a b l e regime, not  that  necessarily the  explanation  theory  o f how  lead of  because an  to  the  hegemonic  w o r l d power  can  o f Hegemonic S t a b i l i t y Theory  not  world  Krasner and  (defined  leadership  can,  (1976) used  the  the mid-1970s.  as  a  system  in fact, theory  to  be  used  H i s h y p o t h e s i s was  i n which  a  i t s capabilities  open t r a d i n g  to  create  an  system would i n c r e a s e  O l s o n (1971, pp. 22-36) argued s u p p l y a p u b l i c good, a l t h o u g h the suboptimal. 1  45  t h e o r y to to  analyze  single  r e l a t i v e l y more advanced than i t s t r a d i n g p a r t n e r s ) ,  s t a t e would use  to  o f a s t a b l e regime.  t r a d i n g system between 1820 a  could  According  1  A number o f authors have attempted to t e s t hegemonic s t a b i l i t y determine  stable  states  a sufficient  Snidal  the  the  the  open t r a d i n g system.  that small supply of  world  t h a t under  state  aggregate n a t i o n a l  predict  i s much dominant This  income  groups have i n c e n t i v e s t h i s good w i l l l i k e l y  is and  to be  growth  rates  in  the  dominant  state.  It  would,  as  well,  increase  p o l i t i c a l power o f the dominant s t a t e , as the s t a t e ' s t r a d i n g p a r t n e r s  the  became  more dependent on the hegemon's markets.  K r a s n e r found t h a t w h i l e the a  liberal  during  trading  other  existence  regime  during  certain  He  concluded  that  times.  o f a hegemon was time  the  periods,  structure  associated with  this  of  the  was  not  true  international  t r a d i n g system d i d not move " i n l o c k s t e p " w i t h changes i n the d i s t r i b u t i o n  of  power among s t a t e s .  He  as  war  triggered  or  famine)  that  further stated  that  changes  in  i t was the  external  nature  of  events  the  (such  international  t r a d i n g system.  Keohane stability  (1980)  theory.  offered  He  stated,  a hegemonic power l e a d s regime. they  regime.  The  the  use  regime  to  i t s benefit.  o f the  capabilities or  theory  t r a d i n g regime and  and  He  stated,  Other  of  the  hegemonic  the e x i s t e n c e  n e c e s s a r i l y a strong of maintaining  p o s i t i v e sanctions  countries  that  on  three  of  liberal  a regime t h a t  to  maintain  a regime i s t h a t i t achieve b e n e f i t s  i n t e r n a t i o n a l regimes - the  the petroleum regime  i n order  to  conclude  can e x p l a i n regime changes, i t must do pattern  theory,  of  the may  flowing  regime.  regime, the  general  to the  regime; not  coercion  version  advantage to the hegemon o f m a i n t a i n i n g  Keohane t e s t e d the  1977.  different  that according  to a s t r o n g  They may  from the stability  theory  somewhat  Hegemonic powers have the  favour.  shape  a  increasing  weakness  46  of  monetary  - between the y e a r s that  hegemonic  the f o l l o w i n g : a l l three  stability  account f o r  regimes  1967  during  the the  period; the  e x p l a i n why the o i l regime e x p e r i e n c e d  trading  accounting  regime  the least  f o r how  the d e c l i n e  weakening o f the three  Keohane  changes;  i n U.S.  and, p r o v i d e  leadership  changes and a plausible  contributed  t o the  regimes.  examined  regime b a s i s .  serious  the most s e r i o u s  the d e c l i n e  i n U.S.  power a t t r i b u t e s on a regime by  He found t h a t d e c l i n i n g U.S. i n f l u e n c e a c c o u n t e d w e l l f o r the  weakening o f the p e t r o l e u m regime, b u t n o t as w e l l f o r the weakening o f the other  two regimes.  clearly  useful  He c o n c l u d e d  as  a  first  that  step  hegemonic  i n explaining  stability regime  employed w i t h c a u t i o n when used as a p o w e r f u l theory  Cowhey changes  and Long  i n the post-World  comparison, capacity"  Cowhey  t o account the decline  between  1950  and  On  the other  i n U.S.  1980.  also  automobile  attempted  leadership  Cowhey  there  stability  regime.  t o use a  theory  be  As  theory  using  a basis f o r of  "surplus  The a u t h o r s p r e s e n t e d  i n the w o r l d  and Long  should  stated  automobile  that,  data  industry  i f the hegemonic  s h o u l d be a t i g h t l i n k a g e between the d e c l i n e i n  and regime changes. hand,  Two  changes,  although  to e x p l a i n events.  the hegemonic  f o r changes i n the regime.  theory held,  U.S. l e a d e r s h i p  tested War  and Long  showing  stability  (1983)  theory,  Cowhey  The authors d i d n o t f i n d such a l i n k a g e .  and Long  found  that  the e x i s t e n c e  of  surplus  c a p a c i t y was a good p r e d i c t o r o f regime changes.  Aggarawal s t a b i l i t y theory, War  Two  textile  (1985)  first  specified  a  framework  f o r using  and then a p p l i e d t h i s framework t o a n a l y z i n g regime.  Aggarawal's  47  framework  distinguished  hegemonic  the post-World regimes  from  meta-regimes. procedures other  He d e f i n e d  designed to regulate  hand,  was  defined  development o f r e g i m e s .  Aggarawal's and  scope  rules  an i n t e r n a t i o n a l regime as a system o f r u l e s and  o f the regime  actions.  A  meta-regime,  t h e p r i n c i p l e s a n d norms  on the  underlying  the  2  framework  o f regimes.  as  national  also  differentiated  Strength  between  the s t r e n g t h , n a t u r e  r e f e r r e d t o the s t r i n g e n c y  are enforced.  Nature,  promoted  by the r u l e s  o f the regime,  Finally,  scope r e f e r r e d t o the range o f i s s u e s  referred  such as l i b e r a l i s m  w i t h which the  t o the o b j e c t i v e s or protectionism.  o r p r o d u c t s r e g u l a t e d by the  regime.  According a  general  consensus  meta-regime. must e x i s t  t o Aggarawal's framework,  3  among  countries  However, f o r hegemonic  a meta-regime w i l l e x i s t i f there i s  about  the norms  and p r i n c i p l e s o f the  s t a b i l i t y theory  t o be supported, there  a s i n g l e major power a s s o c i a t e d w i t h a s t r o n g regime, w i t h i n the  meta-regime.  The n a t u r e o f the regime ( l i b e r a l o r p r o t e c t i o n i s t ) w i l l  depend  on the d e s i r e s o f t h a t major power.  Aggarawal used h i s framework the post-war i n t e r n a t i o n a l t e x t i l e  i n an attempt t o e x p l a i n regime changes i n industry.  Aggarawal found, t h a t g i v e n h i s  As an example o f a meta-regime, Aggarawal (1985, p. 19) c i t e d the b e l i e f , among most c o u n t r i e s , i n the p r i n c i p l e o f " l i b e r a l t r a d e " . Whereas t h i s meta-regime has p e r s i s t e d s i n c e World War Two, t h e r e have been numerous changes i n the r u l e s and p r o c e d u r e s o f i n t e r n a t i o n a l t r a d e , as embodied i n the regime governed by the G e n e r a l Agreement on Trade and T a r i f f s (GATT). 2  F o r example, i f t h e r e i s a g e n e r a l consensus among c o u n t r i e s t h a t a l i b e r a l i z e d t r a d i n g system i s d e s i r a b l e , t h e n a meta-regime can be formed embodying the norms and p r i n c i p l e s o f l i b e r a l i z e d t r a d e . 3  48  framework, Erosion  hegemonic  o f U.S.  stability  power c o n t r i b u t e d  theory  a regime more p r o t e c t i o n i s t  of  the p r o t e c t i o n i s t - m i n d e d Europeans.  regime  i n the  (1987) and Busza (1987).  1.  Jonsson  his  regime  o f the t e x t i l e  changes.  regime,  stability  international  authority  theory, s p e c i f i c a l l y ,  a i r transport  industry  and  to t e s t  - Jonsson  These papers are a n a l y z e d i n more depth below:  (1987)  Jonsson's s t u d y was the  the  i n n a t u r e , r e p r e s e n t i n g the growing  a u t h o r s have used hegemonic developments  explain  to a weakening  to  Two  could  international  an attempt to e x p l a i n regime f o r m a t i o n and change i n  airline  industry.  More s p e c i f i c a l l y ,  Jonsson s t a t e d  that  paper would pursue the f o l l o w i n g two q u e s t i o n s (p.11): What regimes can be i d e n t i f i e d i n the i n t e r n a t i o n a l a v i a t i o n i s s u e area? How  can regime f o r m a t i o n and t r a n s f o r m a t i o n be a c c o u n t e d f o r ?  B e f o r e a d d r e s s i n g these q u e s t i o n s J o n s s o n d e f i n e d what he c o n s i d e r e d to be a change  i n regimes (from K r a s n e r , 1982,  pp.187-189):  A regime change i s s a i d to i n v o l v e a l t e r a t i o n o f p r i n c i p l e s and norms. Changes i n r u l e s and d e c i s i o n - m a k i n g p r o c e d u r e s , on the o t h e r hand, are r e f e r r e d t o as changes w i t h i n regimes; i n c o h e r e n c e among t h e r e g i m e ' s p r i n c i p l e s , norms, r u l e s and p r o c e d u r e s or i n c o n s i s t e n c y between the regime and a c t u a l b e h a v i o u r i m p l i e s the weakening o f a regime.  Jonsson formation  or  international  i d e n t i f i e d what he c o n s i d e r e d two change airline  and  one  unsuccessful  industry.  The 49  first  s u c c e s s f u l attempts a t regime  attempt  a t regime  regime,  termed  the  change  i n the  "unrestricted  sovereignty" until  regime,  1944.  national  The  its  a i r space.  national  a p p r o v a l was Finally,  was  This  air  following  space.  second  The  making  regime,  formed  regime after  i n the  Chicago i n 1944 body  -  the  regulate  Agreement,  World  multilateral transport.  was  of  and  regime  exchange  of  state  i n t o the  rule  practiced  Jonsson  II.  the  landing  According  the to  and  creation  o f an  Aviation  issues. support first  As  that  the  government  foreign carriers. this  regime  rights.  4  (p.34),  the  international  -  in  regulatory mainly  International  of  was  "Chicago-Bermuda"  (ICAO)  Chicago,  freedoms  place  agreement s i g n e d  Organization  following two  took  intergovernmental  well,  over  regime's norm,  Jonsson  An  lasted  control  d i l u t e d by  Chicago Convention.  Civil  wide  under  was  under t h i s regime was  the  was  l a n d i n g s by  f o r o v e r f l i g h t and  War  safety  received  War  provided  to  Transit for  the  international  air  5  Jonsson first  form  International  which  major  procedure  p r o v i d e d f o r the  technical  incorporated  i d e n t i f i e d by  p r i n c i p l e of state sovereignty regulation,  World  unrestricted  f o r a l l o v e r f l i g h t s and  decision  first  power to determine what a i r t r a n s p o r t  b i l a t e r a l government n e g o t i a t i o n s  The  the  i d e n t i f i e d by  p r i n c i p l e was  ultimate  required  the  formed  regime  t h a t each s t a t e had in  was  (p.34) i d e n t i f i e d two that  nations  had  norms o f the  some  claim  on  Chicago-Bermuda regime. traffic  originating  in  The their  Jonsson's (1987) d e s c r i p t i o n o f the d e c i s i o n - m a k i n g procedure p r i o r to World War I I was not e n t i r e l y c o r r e c t . O v e r f l i g h t and l a n d i n g r i g h t s were determined through airline-government negotiations as w e l l as through b i l a t e r a l government n e g o t i a t i o n s . See, f o r example, T a n e j a (1980, pp. 3-4). 4  See Appendix B f o r a d e s c r i p t i o n o f the transportation. 5  50  freedoms o f  international air  country.  T h i s norm was  norm was signed  one by  fares,  a  necessary  United  sanctioned  on  o f a i r freedoms.  at  IATA  United  Kingdom  conferences  basis.  The  as  the  Bermuda  procedures  in  1946.  means  agreement to be  regime.  Bermuda  for establishing also  (p.39)  deregulation  stated  that  the  launched United  by  survived.  the  provided  the  governments  States'  United  effort  and  the norms o f n a t i o n a l c l a i m s  Only r u l e s and  on t r a f f i c  d e c i s i o n making procedures  to  used  five  technological developments  explain  the  competing  explanations in aircraft  or  for  s u c c e s s f u l and theories. regime  The  changes.  unsuccessful  another  international  such as  procedures.  regime  theory  According  a i r n a v i g a t i o n technology  in  resulted in  were m o d i f i e d ,  first  was  and m u l t i l a t e r a l i s m ,  r e s u l t i n g from changes i n the IATA t a r i f f - c o o r d i n a t i n g  order  States  i n a change to  J o n s s o n b e l i e v e d t h a t the Chicago-Bermuda p r i n c i p l e o f  regulation,  Jonsson  agreement  The  f o l l o w e d by  changes w i t h i n the Chicago-Bermuda regime r a t h e r than  In  second  the o p e r a t i o n o f i n t e r n a t i o n a l a i r s e r v i c e s .  international  Jonsson  those  The  u n s u c c e s s f u l attempt a t regime change, as d e s c r i b e d by Jonsson,  effort  1978.  the  and  decision-making  i n o r d e r to f a c i l i t a t e  the  States  multilateral  r u l e s and  The  by the concept  o f m u l t i l a t e r a l i s m , embodied i n the Bermuda b i l a t e r a l the  agreement  expressed  to  would be  6  changes,  focussed  on  this  theory,  the  primary  I n 197 8, IATA i n s t i t u t e d a number o f changes. These i n c l u d e d a d i v i s i o n o f t h e membership i n t o two groups - c a r r i e r s which wished to p a r t i c i p a t e i n t a r i f f c o o r d i n a t i o n and c a r r i e r s which wanted to p a r t i c i p a t e o n l y i n IATA's trade a s s o c i a t i o n a c t i v i t i e s . B e f o r e 1978, a l l IATA a c t i v e members had to p a r t i c i p a t e i n t a r i f f c o o r d i n a t i o n . As w e l l , IATA m o d i f i e d i t s u n a n i m i t y r u l e , a l l o w i n g f o r the a d o p t i o n o f f a r e s by sub-groups w i t h i n t r a f f i c conferences. B e f o r e 1978, f a r e s r e q u i r e d the unanimous consent o f a l l c a r r i e r s i n a t r a f f i c conference. 6  51  causes o f regime changes. in  propeller  contributed  J o n s s o n (p.40) found t h a t n e i t h e r the breakthrough  technology of  the  to  in  technological  a  change  factors  second  t h e o r y used  According to t h i s change  explanation  but  could  1970s. from oil  add  the  be  either  a  a  theory of  concluded  that  necessary  nor  a  change.  by  Jonsson  was  formation a f t e r  understanding of  introduction  p r i c e - induced  carriers  o f wide-bodied  recession,  - contributed  carriers.  The  to  and  the  that  the  the  this  First  surplus  capacity.  t h e o r y was  and  attempted  United States  The  third  t h e o r y used  from  government,  by  o f hegemonic s t a b i l i t y . power l e v e l s  jets,  from  service  introduction  through reforms to the r e g u l a t o r y  overall  to  (p.41)  1960s  Second  regime  useful i n  World Wars,  change  i n the  A c c o r d i n g t o J o n s s o n (p.43), excess c a p a c i t y i n the 1970s - r e s u l t i n g  the  theory  appear  Jonsson d i d not b e l i e v e  o f regime to  Jonsson  o f the  t h e o r y , excess c a p a c i t y i n an i n d u s t r y can c o n t r i b u t e to a  i n regimes.  the  the j e t r e v o l u t i o n  regimes.  d i d not  s u f f i c i e n t c o n d i t i o n f o r regime  The  1930s, nor  of  s t a g n a n t demand due increases low  i n turn,  fares sought  by  to the  non-scheduled  by  the  even  scheduled  lower  prices  system.  Jonsson  to  explain  I n Jonsson's  i n the w o r l d determine  regime  changes  general version  was  the  o f the theory,  the n a t u r e o f a regime.  In h i s  i n d u s t r y - s p e c i f i c v e r s i o n o f the model, the d i s t r i b u t i o n o f power w i t h i n the i n t e r n a t i o n a l a i r t r a n s p o r t i n d u s t r y , determines the type o f regime.  Jonsson explaining  (1987,  pp.44-45) found  the regime  formed  that  the  g e n e r a l model was  f o l l o w i n g the F i r s t World War,  52  helpful  b u t was  in  not good  at War  predicting I,  the  there  formation  was  not  a  o f the  Chicago-Bermuda regime.  dominant  military  t r a n s p o r t regime formed a f t e r World War influence.  The  countries  to  bilateral  an  equal  power.  r e g u l a t o r y system promoted  status with  U.S.S.R.  -  did  not  international  air  I r e f l e c t e d the absence o f a dominant the  the more p o w e r f u l  hand, the power s t r u c t u r e f o l l o w i n g World War the  The  F o l l o w i n g World  participate  at  I I was  a l l in  power o f the weak  states.  On  the  other  b i p o l a r , b u t one power-  the  establishment  of  the  Chicago-Bermuda regime.  The  industry-specific  helpful,  according  Bermuda  regime.  international Following  to Jonsson, Jonsson  War  but  access  Commonwealth the  a c q u i r e the n e c e s s a r y  The (p. 4 9 ) ,  less  change  leader  i n international  Newfoundland, Atlantic crossings.  major  was  of  was  the  sources  more  Chicago-  of  power  in  a e r o n a u t i c a l know-how. dominant  in  aircraft  c o u n t e r v a i l i n g powers i n the form o f  territories. Kingdom  two  States  theory  formation  p o s i t i o n and  United  The  7  i n the  structural  successful i n  i n the  structural  United  States  was  Bermuda 1 agreement  forced  to  i n order  to  l a n d i n g r i g h t s i n Commonwealth l a n d s .  regime  7  the  United  industry-specific was  cited  the U n i t e d Kingdom had  with  the  i n e x p l a i n i n g the  (pp.46-47)  II,  technology,  compromise  of  a i r t r a n s p o r t - geographic  World  to  variation  1970s.  The  aviation  for  model,  the  explanation  United i n the  example,  however,  was  53  of  States 1970s.  then  the  still The  an  according  to  failed  was  the  Jonsson  attempt  at  overwhelming  s t r u c t u r a l model s h o u l d  important  stop  on  trans-  have  predicted  that  the  U.S.  would  have  been  successful  at  changing  the  regime.  The  fourth  model  s i t u a t i o n a l model.  used  by  Jonsson  to  explain  T h i s model l o o k s a t c h o i c e s  regimes a r e formed or changed,  and p r e d i c t s  stated  choice  that  f o l l o w i n g World War  could  choose  freedom  commerce, o r they c o u l d contribute  choose  to p r o t e c t i o n  of  For example,  state  a i r which  The  J o n s s o n (pp.50-  a i r transport  would  regime.  contribute  to a i r  s o v e r e i g n t y o v e r a i r space which would  against warfare.  model.  a  I, n a t i o n s were f a c e d w i t h an important  the  f r e s h e x p e r i e n c e s o f the World War,  was  f a c i n g n a t i o n s a t the times  i n d e t e r m i n i n g the n a t u r e o f the i n t e r n a t i o n a l  States  changes  the n a t u r e o f the regime t h a t i s  formed by the c h o i c e s a v a i l a b l e to the n a t i o n s . 51)  regime  Jonsson b e l i e v e d  that  given  the  the c h o i c e o f s t a t e s o v e r e i g n t y c o u l d be  predicted  from t h i s  choices  facing nations  World War  and i n the 1970s were more complex,  f o l l o w i n g the Second  and the e x p l a n a t i o n s o f regime  outcomes were, based on the use o f the s i t u a t i o n a l model, n o t as h e l p f u l .  The model. process of  f i n a l model used by J o n s s o n t o e x p l a i n regime changes was This  model  was  d e s i g n e d to  o f d e c i s i o n making.  the p r o c e s s model.  changes  J o n s s o n (pp.60-61) l i s t e d  First,  two  the n a t u r e o f o r g a n i z a t i o n s p e r f o r m i n g the b a r g a i n i n g  states  can a l s o a f f e c t that  on  the  components  b a r g a i n i n g and c o a l i t i o n f o r m a t i o n among groups  Second,  explained  based  major  states  further  across  regime  within  form c o a l i t i o n s  and  explain  a process  i s an  important d e t e r m i n a n t  the type o f regime produced.  effective  international  54  regimes  of  regimes.  and t r y i n g Jonsson  to  (p.70)  are a s s o c i a t e d with  the  e x i s t e n c e o f t r a n s n a t i o n a l networks  o f o r g a n i z a t i o n s and w i t h  a strong  i n f o r m a l network o f c o n t a c t s between o r g a n i z a t i o n s and i n d i v i d u a l s .  Jonsson of  used  the two post-war  regime  change  t o extend  proponents  theory  i n an attempt  regimes and the f a i l e d  i n the 1970s.  regime, J o n s s o n was  the p r o c e s s  With  respect  t o e x p l a i n the f o r m a t i o n  attempt  by the U n i t e d S t a t e s a t  t o the f o r m a t i o n  o f the f i r s t  (pp.86-87) found t h a t the common c o n c e r n o f the p o l i c y - m a k e r s s o v e r e i g n t y over n a t i o n a l  of a liberal  international  a i r space.  regime t o form  No attempt  was made by  coalitions  i n o r d e r to  mount a f i g h t f o r freedom o f the a i r .  Jonsson,  u s i n g the p r o c e s s model, a n a l y z e d i n d e t a i l ,  coalition  formation  surrounding  t h e Chicago  Conference  l e a d i n g t o the e s t a b l i s h m e n t o f the post-World  the b a r g a i n i n g and  Conference  and the Bermuda  War I I regime.  No  agreement was reached on the economic r e g u l a t i o n o f a i r t r a n s p o r t a t Chicago, l a r g e l y because o f the i n a b i l i t y o f the U.S. and U.K. d e l e g a t i o n s t o agree on a system o f c a p a c i t y r e g u l a t i o n . reach  a compromise  made by b o t h  agreement  The U n i t e d S t a t e s and B r i t a i n were a b l e to  i n Bermuda because  of bargaining  concessions  sides.  F i n a l l y , J o n s s o n used the p r o c e s s model t o a n a l y z e the f a i l e d attempt by the U n i t e d S t a t e s a t regime change i n the 1970s. success  by  coalition  the United of carriers,  States  largely  governments,  o p p o s i t i o n t o U.S. d e r e g u l a t o r y  t o the a b i l i t y and sympathetic  initiatives.  55  He a t t r i b u t e d  the l a c k o f  o f IATA U.S.  t o form  a  officials in  In c o n c l u s i o n , models  J o n s s o n (p.153) found the  inadequate  considered  the  in  the  explanation  of  regime  t h e o r y o f hegemonic s t a b i l i t y  b e t t e r , a l t h o u g h a l s o inadequate a t times. the b e s t  2.  o f the models  Busza The  the  Busza  work  More  has  airline  focussed  on  Association  wanted  transport  The  changes. the  capacity  Jonsson  (p.153)  s i t u a t i o n a l model to  p r o c e s s model was  found to  be be  considered.  second work t h a t  Transport  and  surplus  (1987)  international  Busza's  t e c h n o l o g y and  to  industry the  in  Busza  a  the  the  sought  recently  masters  i n the  regulation  why  incorporated  specifically,  is  changes  the  determine  regime  been completed  role  of  post-World  answers  regime changes i n  thesis  by  of  International  the  Busza  international  International  the  on  War Air  to  the  II  air  (1987).  transport.  international  Transport following  Air  air  Association. two  questions  (p.li):  Why  do  states  cooperate  to  support  an  international cartel (i.e.  IATA)? Why  Busza in  do  (p.iv)  providing  theory  which  may  carriers.  postulated  answers  to  claimed  that  consumer w e l f a r e states  s t a t e s cease to support a c a r t e l ?  and  support Finally,  three  these  cartels the  questions.  states  global  competing  may  third  help  The  support  industrial to  theories  the  growth.  cartels The  s u r v i v a l and  theory p o s t u l a t e d  56  first  by  that  might be  helpful  was  Busza's  economic  in  order  to  promote  second t h e o r y was success  Busza was  of  that  their  air  that states  may  support  a c a r t e l due t o the a c t i v i t i e s o f a hegemon, which promotes t h i s  o f arrangement ( i . e . the hegemonic  stability  theory).  Busza (p.x) c o n t i n u e d  t h a t the hegemon, o r dominant power, w i l l o n l y promote an i n t e r n a t i o n a l if  the o r d e r i s i n i t s b e s t i n t e r e s t s .  the r e s o u r c e s  The theories,  was  regime  the f o r m a t i o n  1944-1946.  Busza  negotiating  positions  Conference. transport  change  The  (p.4)  British  industry, with  allocations,  while  route  negotiated  rights  that  Busza  the  British  favoured  a central  the Americans  rate - regulation,  while  pricing.  The well-known r e s u l t  a  major and  using  favoured  a  between  regulated  less  at  the Chicago  to c o n t r o l capacity  regulated  States  the  international a i r  governments.  the U n i t e d  the p e r i o d  d i f f e r e n c e s between  the Americans  tightly  the competing  regime d u r i n g  a u t h o r i t y empowered  bilaterally  favoured  the  the economic o r d e r .  analyzed,  o f the Chicago-Bermuda described  of  order  As w e l l , the dominant power must have  to b e a r the c o s t s i n v o l v e d i n m a i n t a i n i n g  first  type  industry,  The  British  supported  o f the Chicago Conference was  with also  market-based  the f a i l u r e to  r e a c h agreement on an economic r e g u l a t o r y regime f o r a i r t r a n s p o r t .  The b a s i s o f the economic r e g u l a t o r y system was where the U n i t e d  S t a t e s and U n i t e d Kingdom  war  bilateral.  The  the  United  the  States  United  capacity  to a u t h o r i z e  Kingdom  (including  flexibility determine  of  Bermuda 1 b i l a t e r a l  accepting fifth  Bermuda  capacity  levels  the two  IATA m u l t i l a t e r a l some  flexibility  i n allowing on  to conclude  between  freedom t r a f f i c ) . 1  met  routes  57  e s t a b l i s h e d a t Bermuda, their f i r s t  countries required  rate-making i n r e t u r n f o r i n the  Busza, however, the  carriers  specified  post-  of  i n the  determination  of  down-played the each  country  agreement.  to She  maintained market  t h a t c o u n t r i e s o p e r a t i n g under Bermuda agreements were  shares  Therefore, for  of at least  airlines  forty  percent  of t r a f f i c  o n l y had the f l e x i b i l i t y  on major r o u t e s  to provide  capacity  the c a r r i a g e o f a maximum o f s i x t y p e r c e n t o f t r a f f i c  by these  guaranteed (p.22).  sufficient  on r o u t e s  covered  agreements.  I n h e r a n a l y s i s o f the a d o p t i o n (pp. 39-40)  concluded  that  o f the Chicago-Bermuda  t h e outcome  hegemonic  stability  theory.  Busza  post-war  aviation  industry,  benefits  from  felt  t h e U.S.  the Chicago-Bermuda  could that,  regime,  Busza  best  be e x p l a i n e d  by the  given  i t s dominance  o f the  d i d not r e c e i v e  regime.  maximum  Restrictions  on  economic capacity  d e t e r m i n a t i o n and the IATA m u l t i l a t e r a l t a r i f f s t r u c t u r e s e r v e d t o remove the competitive  edge, then  enjoyed  by U.S. c a r r i e r s .  The r e d u c t i o n i n economic  b e n e f i t s was the p r i c e t h a t the U n i t e d S t a t e s was w i l l i n g t o pay t o e s t a b l i s h the regime i n support o f i t s security transport participate  industry  of  interests;  i t sallies.  i n the regime because  Other  the s t r e n g t h e n i n g o f the a i r countries  i t was i n t h e i r  were  willing  c a r r i e r s ' best  interests,  g i v e n t h e i r h i g h c o s t s o f o p e r a t i o n s , t o have a h i g h l y r e g u l a t e d regime, as  the Chicago-Bermuda regime.  to  such  Under a f r e e market regime, the i n e f f i c i e n t  c a r r i e r s would n o t have been a b l e t o e f f e c t i v e l y compete a g a i n s t the low-cost U.S.  carriers.  Busza found  the two o t h e r t h e o r i e s t o be l e s s h e l p f u l i n the e x p l a n a t i o n  o f the Chicago-Bermuda regime. appropriate activities.  because  cartels  The promotion  The w e l f a r e m a x i m i z a t i o n  generally are hardly of carriers'  58  interests  t h e o r y would n o t be  social theory  welfare  maximizing  was a l s o n o t too  helpful,  because  economic  i n t e r e s t s o f i t s c a r r i e r s when i t s i g n e d the Bermuda 1  After  i t could not  completing  e x p l a i n why  the U n i t e d  the a n a l y s i s o f the f o r m a t i o n  States  sacrificed agreement.  o f the post-war  regime,  Busza then t u r n e d to a n a l y z i n g the maintenance o f the regime from 1947 mid-1960s. other United  Kingdom  and  between  Bermuda  1  post-Bermuda routes.  According  r a t h e r than  practice,  the post-Bermuda  required  Busza  the  The  1 bilaterals  pre-determination  (pp.44-45)  the  one d i f f e r e n c e  of  was  that  the  capacities  pre-determination  of  on  capacity  a c h i e v i n g o n e - h a l f o f the c a p a c i t y on major  a minimum o f f o r t y p e r c e n t  o f c a p a c i t y , as was types  the case  of capacity clauses i n  t h e r e f o r e , was not g r e a t .  explanation would have  felt  o f regime  t h a t the hegemonic  stability  theory provided  the b e s t  structure.  (p.63) b e l i e v e d t h a t U.S.  carriers  Busza  f a r e d b e t t e r i n an u n r e g u l a t e d  willing  to  carriers  i n order  vital  many o f  bilaterals.  The d i f f e r e n c e between the two  Busza a g a i n  this  to  Bermuda-type  i n each c o u n t r y  w i t h Bermuda 1.  do  and  Most  f o l l o w e d the l e a d o f the U n i t e d S t a t e s and the  signed  1 bilaterals  clauses resulted routes,  to the  Busza (p.43) c a l l e d t h i s p e r i o d "the heyday o f the c a r t e l " .  c o u n t r i e s i n the w o r l d  the  accept  because interest,  less  than  to maintain  maintaining and  maximal  performances  the post-war the s e c u r i t y  security  environment but t h a t the U.S.  regime.  59  was  i t s international  The U.S.  of i t s a l l i e s  maintenance  r e g u l a t e d a i r t r a n s p o r t system.  from  best  was  was  was still  achieved  w i l l i n g to i t s most through  a  The t h i r d  period  Busza examined was  the time between the mid-1960s and  1977, a p e r i o d d u r i n g which the IATA m u l t i l a t e r a l t a r i f f  system was weakened.  Busza  contributed  (pp.73-85)  described  five  developments  that  t o the  weakening o f the IATA t a r i f f system:  An  increase  i n the number  coordination The  of  discounting  of  wide-bodied  overcapacity  and  jets  increase  i n the  relaxation  of  charter operators  Busza (p.111) f e l t ,  regime. U.S. U.S.,  was Busza  downgraded therefore,  a  tariff  1970s, to  creating  incidents  of  the o v e r c a p a c i t y s i t u a t i o n ; number  of scheduled  charter  again,  d i d not  and,  regulations,  permitting  t h a t the importance a t t a c h e d  factor  (p.107) argued security  c a r r i e r s that  low-priced  to compete, i n a g r e a t e r way, w i t h IATA c a r r i e r s .  decisive  acted  making  the growth r a t e i n passenger  p a r t i c i p a t e i n IATA t a r i f f c o o r d i n a t i o n ;  interests  i n the  contributing  o f the 1970s, r e d u c i n g  demand and e x a c e r b a t i n g  The  carriers,  o f IATA f a r e s ;  The f u e l c r i s i s  An  scheduled  difficult;  introduction  problems  of  that  interests  to a l t e r  i n accounting  t o U.S.  f o r the weakening  security o f the  as European s t a t e s became s t r o n g e r ,  the  i n favour  The  o f economic  the system so t h a t  i n t e r e s t s o f U.S. c a r r i e r s , by implementing p o l i c i e s (such as the r e l a x a t i o n o f c h a r t e r r e g u l a t i o n s ) .  60  interests.  i t f a v o u r e d the economic to l i b e r a l i z e  the regime  The It  was  next  p e r i o d examined by  during  the  time  international  air  competition  lower  and  pro - competitive bilateral  Busza was  t h a t the  transport  United  policy  between the y e a r s  States in  an  launched effort  p r i c e s to consumers on U.S.  policy  agreements;  consisted of the  passing of pro-competitive  threat  of  the  and  1981.  i t s pro-competitive to  achieve  greater  i n t e r n a t i o n a l routes.  signing of  anti-trust  l e g i s l a t i o n governing  1977  liberal  actions  The  "free-market"  against  IATA;  the  international a i r transport;  and the i n t r o d u c t i o n o f a c o m p e t i t i v e c h a r t e r p o l i c y .  The and was  U.S.  pro-competitive  approach was  not emulated by  openly opposed by a good number o f s t a t e s .  Developing  vehement i n o p p o s i t i o n and they sought s t r e n g t h e n e d the  auspices  organized  of  the  International C i v i l  o p p o s i t i o n to  the  Busza policy  was  industry. its  attempt,  c o u n t r i e s were  economic r e g u l a t i o n under  policy,  IATA,  e s p e c i a l l y with  too,  respect  action.  that by  the  the  rationale  United  The U n i t e d S t a t e s thought  (p.171) l i k e  Jonsson  successful i n achieving  failure such  an  argued  country  for  States,  the to  U.S.  gain  pro-competitive dominance  in  the  t h a t i n c r e a s e d c o m p e t i t i o n would b e n e f i t  carriers.  Busza not  (p.170)  other  Aviation Organization.  pro-competitive  to the t h r e a t e n e d a n t i - t r u s t  any  by  the  U.S.  to  as Japan, France,  f a i l u r e to a c h i e v e  a  (1987) b e l i e v e d t h a t change  sign l i b e r a l  i n regimes. bilaterals  the U n i t e d Kingdom and  i t s way.  the U n i t e d  Busza with  Italy,  States  was  (p.172) c i t e d  the  major  aviation  as evidence  powers  o f the  U.S.  Busza b e l i e v e d t h a t a c o n t r i b u t i n g f a c t o r to the  61  United  States'  failure  However, the U.S. in  power, had  reluctance  In  the  i t s power  i n favour  to  act  against  (p.174) f e l t  diminished.  wishes,  Busza  the  downgrading  of  to  advantage i t was  of  loss The  (p. 174)  U.S.  o f the economic i n t e r e s t s o f i t s c a r r i e r s was  not  change, because  its allies'  that  the l a u n c h i n g o f the p r o - c o m p e t i t i v e full  had  l o s s o f power.  for  take  leverage  to a c t a g a i n s t the wishes o f i t s a l l i e s .  seen as a de facto  Busza  and  c o u l d have f o r c e d a regime change, d e s p i t e the  U.S.  c o u l d be  summary,  interests  that  i t been w i l l i n g  of  continued,  still  was  policy.  i t s economic  But  security the  reason  the U n i t e d S t a t e s chose  interests,  by  forcing  concerned about a d d i t i o n a l s e c u r i t y  a  regime  interests  (i.e.,  the U n i t e d S t a t e s d i d not want to a l i e n a t e i t s a l l i e s ) .  The During policy  final  this  time,  away  considered  period  that  Busza  examined  the U n i t e d  States  changed i t s i n t e r n a t i o n a l  from  a  countries  strictly on  a  on  what b e n e f i t s would  well,  during  this  w i t h i n Europe, a l t h o u g h  Busza policy not  flow  period,  attributed  therefore,  to  with adopt  by  the an  basis  period  (p.182).  a  United  there  was  a movement to l i b e r a l i z e  1987.  policy  United  others,  the  each  that States  depending  approach.  As  a i r transport  a c t u a l l y changed.  abandonment o f the U n i t e d  results  from  to  a i r transport  The  not w i t h  States  1981  to  to  l i t t l e was  the  case  the  approach  some c o u n t r i e s but  to a number o f f a c t o r s ,  satisfied  pro-competitive  case  signed l i b e r a l b i l a t e r a l s with  was  States'  i n c l u d i n g the f o l l o w i n g : of  alternative  the  pro-competitive  strategy  62  (p.205).  pro-competitive  First, policy  the U.S. and  Second,  the  was  decided, United  States  was  not sufficiently  p o l i c y met w i t h success; countries taking  powerful  i . e . , the U n i t e d  measures  to discriminate  Third,  the U.S.,  policy  stressing  Fourth,  a restructuring  greater  against under  o f IATA,  coordination,  against  (p.208).  Finally,  IATA  industry  which  had n a t i o n a l  a i r c a r r i e r s that  multilateral  acknowledgement fourth  States  o f defeat  point),  adopted a  governments  (p.209).  c a r r i e r s to r e f r a i n f o r U.S.  from  action  concerned  due t o f r i c t i o n w i t h  countries  U.S.  equipment  (p.210).  the i n t e r n a t i o n a l regime,  coordination,  economic  from  may have been  bought  to r e s t o r e  (the f i r s t  U.S  foreign  States  l o s i n g business  tariff  foreign countries  c a r r i e r s i n the marketplace  permitted  the U n i t e d  i t s aerospace  pro-competitive  c o u l d n o t persuade p o w e r f u l  d e c r e a s e d the urgency  about  movement by the U n i t e d  with  that  in tariff  U.S.  the  the Reagan a d m i n i s t r a t i o n ,  cooperation  participation  (the  States  that  t o s i g n l i b e r a l b i l a t e r a l s nor c o u l d i t stop  (pp.205-207).  with  t o ensure  reflected,  and second p o i n t s ) , interests  (the f i f t h  complete  therefore,  a partial point),  The  an  victory and U.S.  s e c u r i t y i n t e r e s t s (the t h i r d p o i n t ) .  Busza its  (p.203) found the European movement towards the l i b e r a l i z a t i o n o f  markets  competitive interested carriers, sixth  simpler  to e x p l a i n  policy.  She  than  (p.203)  in liberalization  were  the U.S. movement found those  that  away  from  t h e European  countries  with  its  states  promost  efficient air  o r w i t h c a r r i e r s t h a t c o u l d b e n e f i t from the c a r r i a g e o f f i f t h and  freedom  liberalization  traffic. as b e i n g  support o f t h e i r  Busza, no more  therefore,  than  carriers.  63  states  saw  pursuing  the push  f o r European  regulatory  changes i n  In theory  conclusion, to  be  postulated  Busza  most that  (1987,  useful states  in  pp.213-215) found  explaining  support  regime  regimes  maximize s o c i e t y ' s w e l f a r e  D.  - was  would  sections (e.g. ,  that How  seem the  evident  theory  their  that  carriers  was  - t h a t s t a t e s support regimes to  the l e a s t u s e f u l .  theory  strong  does  from  to  country  shortcomings  and  theory,  i n c o n t r a d i c t i o n to, constituent  to  may  A  the  parts  power  is  be  tests.  tested  8  i n order  theory.  and  be broken down as  dominant  to  in  by  This  be  One  previous  a way  hegemon?)  can  two  to  and  has  alleviate  the  results  i s to  to f i n d e v i d e n c e  testing this  questions  the  a n a l y t i c a l shortcomings  a c h i e v e more c o n s i s t e n t  i n d i v i d u a l l y , a g a i n s t key  theory  have  empirical  more p r e c i s e l y what needs to be  into  cited  a  analytical  theory  studies  has  inconsistently in  or  the  o f hegemonic s t a b i l i t y  performed  The  favour  The  stability  R e f o r m u l a t i o n o f Hegemonic S t a b i l i t y Theory  It  of,  hegemonic  changes.  that  somewhat l e s s u s e f u l , w h i l e the t h i r d t h e o r y  the  be  done by  modified  state  i n support  dividing  version  of  the the  r e l a t e d to the c o n s t i t u e n t  parts.  e s t a b l i s h and  stable  follows:  required  to  maintain  a  regime;  For example, o f the two t e s t s conducted on the i n t e r n a t i o n a l a i r l i n e i n d u s t r y , one author (Jonsson, 1987) found the t h e o r y to be o n l y moderately u s e f u l w h i l e the o t h e r author (Busza, 1987) found the t h e o r y to be most u s e f u l i n the e x p l a n a t i o n o f regime changes. 8  64  The dominant power must have it  favours,  resources  that  i s , the  the c a p a b i l i t i e s  dominant  power  t o m a i n t a i n a regime  must  have  the  economic  r e q u i r e d to absorb the c o s t s o f a regime;  The dominant power must want to form and m a i n t a i n the regime. implies from  that  the  expected  the  dominant  regime costs  that  power must  are  large  of maintaining  expect  enough  to  to  the regime.  A  This  receive  benefits  compensate  f o r the  dominant  power  that  d i d not r e c e i v e s u f f i c i e n t b e n e f i t s from a regime would be expected to withdraw support from the regime;  Smaller  powers must e i t h e r w i l l i n g l y  be c o e r c e d i n t o c o o p e r a t i n g must  be  positive  and/or the dominant countries  to  smaller  c o u n t r y must have  This  implies that  countries  the a b i l i t y  t o cooperate  to f o r c e  in  9  i f i t decides  As w e l l , the s m a l l e r  the regime  smaller  weaken i f the dominant c o u n t r y l o s e s i t s that  the  costs  of  maintaining  regime can no l o n g e r be j u s t i f i e d by the b e n e f i t s a c c r u i n g regime.  there  and,  A regime, once formed, may or  i n the regime.  incentives  t o cooperate;  dominance,  p a r t i c i p a t e i n the regime or  countries  i f they d e c i d e t h a t  may  no  the i n c e n t i v e s  the  from the  longer p a r t i c i p a t e for participation  Note t h a t the s u b o r d i n a t e c o u n t r i e s c o u l d attempt t o s h i f t a d d i t i o n a l c o s t s onto the dominant country, once a regime i s formed, and t h i s c o u l d r e s u l t i n the dominant c o u n t r y d e c i d i n g t h a t a regime i s no l o n g e r worth maintaining. 9  65  have d i m i n i s h e d enforce  The  or  i f the  dominant c o u n t r y  l o s e s the  capability  to  the r u l e s o f the regime.  questions  that  can  be  asked  to  determine  c o n d i t i o n s c i t e d above h o l d a t a g i v e n time may  be  whether  s t a t e d as  or  t h e r e a dominant power c a p a b l e o f f o r m i n g a regime?;  If  so,  there  incentives  for  the  dominant  the  follows:  Was  were  not  power  to  form  a  Were t h e r e c o s t s to the dominant power i n f o r m i n g and m a i n t a i n i n g  a  regime?;  regime?;  What  and  incentives  (inducements)  or  e n l i s t s m a l l e r c o u n t r i e s i n t o the  A p o s i t i v e answer to the f i r s t international  leader  exists.  a  regime  t h e r e are c o s t s  (question  identifiable  countries  will so  countries  to  2) .  i s r e q u i r e d to e s t a b l i s h t h a t  an  identifiable  The  hegemonic  ( q u e s t i o n 3).  cooperate  there  must  (question  measures  Finally,  the  dominant power a c t s  4) .  some means If  suitable  66  of  in  i n c e n t i v e s f o r the hegemon to stability  theory  assumes  the t h e o r y p r e d i c t s t h a t  enlisting  answers  that  the hegemon, so these c o s t s  ( i f r e l u c t a n t l y ) i n adhering be  were  regime?  i n c u r r e d i n forming the regime by  s h o u l d be  regime,  used  I t i s assumed t h a t  i t s s e l f - i n t e r e s t so t h e r e must be form  question  coercive  can  to the be  the  rules  support found  to  of  small of  the  these  a l l four  questions,  then  the f o r m a t i o n o r maintenance o f a regime may  the m o d i f i e d hegemonic s t a b i l i t y  F i g u r e 3.1 be  tested  transport.  The  approximately). U.S.  should  theory.  p r o v i d e s an example o f how  against  regime  regime  formation examined  the m o d i f i e d hegemonic t h e o r y  and  is  maintenance  the  U.S.  incur costs  i s not  U.S.  should  flag be  i n maintaining  altruistic,  carriers  of  on  these  the  smaller  c o n d i t i o n s can  should  empirical  indicated or  that world  maintenance  of  into  three  (e.g. h i g h e r  air carriers).  prices for  But,  assuming  a l s o r e c e i v e b e n e f i t s from  As  well,  benefits  or  measures  to  enlist  countries  into  coercive  a d d i t i o n a l U.S.  a l l be  the  the  regime  (e.g.  then  the  the  IATA p r i c i n g  routes f o r f o r e i g n f l a g  identified,  there  questions  for  carriers).  raised  above  supported.  t o the E x p l a n a t i o n o f Regime Development  testing  of  the  modified  l e a d e r s h i p , alone, international  f a c t o r s c o u l d a l s o be c o n s i d e r e d . divided  regime  routes).  Other F a c t o r s R e l e v a n t  The  (1946-1977,  international  can be answered, and the hegemonic t h e o r y  E.  regime  air  i n s t a l l a t i o n s i n Europe; and monopoly p r o f i t s  certain  inefficient flag carriers; If  the U.S.  to defense  identifiable  participation  international  can  I f i t i s assumed t h a t the U n i t e d S t a t e s i s the hegemon, the  regime (e.g., access for  in  post-Bermuda  consumers and/or fewer o p p o r t u n i t i e s f o r U.S. the  be e x p l a i n e d by  categories:  hegemonic  stability  cannot always e x p l a i n the  regimes.  Other  political  and  theory  emergence economic  For the purpose o f t h i s paper, f a c t o r s domestic  overriding state interests.  67  affairs;  structural  factors;  are and,  Figure The  Post-Berauda  Regiae  Hegeaonic  3.1  i n the Context  Stability  of Modified  Theory  Post -Bermuda  COSTS Uni t e d cn 'co  (The  States  (Reduction i n opportunities f o r A i r C a r r i e r s and h i g h e r p r i c e s f o r consumers)  H e g e m o n ) 4-  Regime  Multilateral Tariff Coordination (IATA) government approval Bilateral Regulation and Capac i t i e s  subject  of  Routes  BENEFITS (Defence bases, excess p r o f i t s f o r U.S. c a r r i e r s on c e r t a i n routes) incentives and coercive measures (IATA pricing; U.S. r o u t e s )  Other  Countries  to  Bermuda 1 o r p r e - d e t e r m i n e d capacity restrictions  1.  Domestic The  pay  Affairs  hegemonic s t a b i l i t y  theory  indicated  t h a t a hegemon w i l l  choose t o  the c o s t s o f s u p p l y i n g a regime as l o n g as i t b e l i e v e s i t i s r e c e i v i n g o r  will  r e c e i v e s u f f i c i e n t b e n e f i t s (economic o r o t h e r w i s e ) as compensation.  well,  other  from  participation.  constitutes thought would  c o u n t r i e s may p a r t i c i p a t e A  a benefit.  o f as a benefit a hegemon  another  country  problem  i n a regime  arises,  Monopoly p r i c i n g  i f they  however,  through  receive benefits  i n determining  IATA,  to supply  a regime  choose t o p a r t i c i p a t e  what  f o r example, can be  t o a i r l i n e s b u t as a c o s t t o consumers.  choose  As  When, then,  i n c o r p o r a t i n g IATA p r i c i n g ,  i n such  a regime?  or  I t i s evident that  t h i s would happen o n l y when a government p e r c e i v e s b e n e f i t s t o a i r c a r r i e r s as the it  being  important  b e n e f i t s to achieve  c o s t s t o consumers). determines  whose  Therefore,  interests  (i.e.,  important  a country's  enough  political  a r e t o be more important,  t o outweigh  process,  i n that  c a n be a f a c t o r i n  the e s t a b l i s h m e n t o r maintenance o f a regime.  There process  a r e a number  around  o f groups  the c h o i c e  which may  of a public  b e n e f i t s on d i f f e r e n t s e c t o r s o f s o c i e t y .  policy  participate which w i l l  i n the convey  political c o s t s and  The g o a l s and r o l e s o f a number o f  important p a r t i c i p a n t s i n the p o l i c y - m a k i n g p r o c e s s a r e d i s c u s s e d below:  a)  Politicians Downs (1957, p.137),  i n one o f the f i r s t  economic t h e o r y t o e x p l a i n p o l i t i c a l politicians;  i . e . , to o b t a i n votes.  attempts  t o develop  a positive  p r o c e s s e s , o u t l i n e d the p r i m a r y A c c o r d i n g t o Downs:  69  goal of  [ P o l i t i c i a n s ] do not seek to g a i n o f f i c e i n o r d e r t o c a r r y out p r e c o n c e i v e d p o l i c i e s or t o s e r v e any p a r t i c u l a r i n t e r e s t groups; r a t h e r they f o r m u l a t e p o l i c i e s and s e r v e i n t e r e s t groups i n o r d e r to g a i n o f f i c e .  Obtaining primary  goal  process? or  are  and of  maintaining  political  politicians.  What  policies  most  politicians  is their  The  likely  to  role  in  keep  them  in  power.  in  to  policies  contributions legislation  with  should  r o l e and  with  be  i s to  formulate  (1971) are a b l e t o use  t h e i r power to  Governments  exchange  f o r promises  of  favourable  votes,  campaign  ( O p p o s i t i o n p a r t i e s promise f a v o u r a b l e Governments  seek l a r g e v o t i n g b l o c k s legislation  v o t e s from group members ( S t i g l e r ,  form the government  t o g a i n power.  elected.)  favourable  policy-making  i n an attempt  i n d u s t r y groups  they  The  the  of opposition  power.  or p o s i t i v e p u b l i c i t y .  entrepreneurial them  maintain  the  as  role  i s to f o r m u l a t e a l t e r n a t i v e p o l i c i e s  order  regulatory  b)  role  o f government p o l i t i c i a n s  Governments, a c c o r d i n g to S t i g l e r  provide  t h e r e f o r e , i s seen  T h i s depends on whether o r not the p o l i t i c i a n s i n opposition.  coerce  power,  1971,  even  (e.g. farmers)  i n the  p.13).  may  anticipation  undertake  an  i n o r d e r to of obtaining  1 0  Bureaucrats The  goals  positions  and  roles  i n governments.  the r e g u l a t o r and  of Two  bureaucrats types  the departmental  depend,  of bureaucrats  bureaucrat.  A more g e n e r a l i n t e r e s t group model was 70  in  The  large part, will  on  their  be d i s t i n g u i s h e d -  regulator i s a p o l i t i c a l  f o r m u l a t e d by Becker  (1983).  appointee, time  o f t e n nominated f o r a p o s i t i o n on  period.  Hilton  The  (1972)  regulated  goals  stated  industry,  the  regulators  the  case,  of  that  once  would i n c l u d e  i f few  specific  to  hand, then  adopt p o l i c i e s  i f politicians outsiders  appointed  to  many  depend  terms have  appeasing policy  on  regulators  his  or  seek  expired,  the  the  regulated  d i r e c t i v e s are  a  her  position  major  to  in  the  objectives  industry.  handed  ambitions.  As  the  of  i s often regulatory  then the r e g u l a t o r s would have a r e a s o n a b l y f r e e  favourable  to  the  wish to change the  with the  regulator  since  their  agency from the p o l i t i c i a n s , rein  the  a regulatory board f o r a f i x e d  d i f f e r e n t views  regulatory  regulated  industry.  d i r e c t i o n of  (e.g.,  commission  the  new  the  regulatory  pro-deregulation  and  On  policy  other  agency,  views)  can  be  d i r e c t i v e s can  be  issued.  The  role  Generally,  of  the  regulatory  agency  varies  from  i n the  industry.  This  r e g u l a t o r y h e a r i n g s a t which i n t e r e s t e d p a r t i e s p r e s e n t the  outcome  regulator,  of  bureaucrats the  but  pursue  their  a  are not  bureaucracy own  hearings  includes  should  acting  but  bureaucrat,  career  unlike  technocrat  be  as  to a r r i v e a t a r e g u l a t o r y  departmental  appointee,  the  therefore,  i n t e r e s t s i n order  The  to  industry.  the agency engaged i n economic r e g u l a t i o n must c o n t r o l the p r i c e s ,  output or r a t e o f r e t u r n o f f i r m s  feel  industry  involves  b r i e f s as to how  decided.  an  conducting  The  role  a r b i t e r between  promoting  purposes  by  their  defining  71  of  the  competing  outcome.  the  regulator,  (public  i s not  servant).  a  political  Departmental  n e c e s s a r i l y i n t e r e s t e d i n plumbing f o r p o s i t i o n s in  they  positions issues  and  within then  by  it.  outside  Bureaucrats  promoting  these  issues to p o l i t i c i a n s , enhance their  their  position  areas  bureaucrats fisheries, group  t o o t h e r b u r e a u c r a t s and t o the p u b l i c . and power  of influence  (discretion)  i n departments labour)  have  by p u r s u i n g  with  specific  policies  and t h e i r client  and a r e sympathetic  to t h e i r  concerns.  designed  budget.  groups  considerable contact with  members  of their  preferred  goals  policies  (i.e.,  favourable  groups (Blake and W a l t e r s , 1987, p . 2 2 1 ) .  c)  Interest  Groups and their  Interest governmental own i n t e r e s t s seen  groups  of their  client  departments i n  departments), the  t o the needs  of their  client  1 2  Lobbyists  or pressure  groups,  and t h e i r  a c t o r s which seek t o use the p o l i t i c a l ( p e c u n i a r y and n o n - p e c u n i a r y ) .  as s e l f - i n t e r e s t  agriculture,  One would expect, t h e r e f o r e ,  t o expand and enhance t h e i r  would be those  t o expand Generally,  (e.g.,  t h a t as the b u r e a u c r a t s i n these departments a d m i n i s t e r t h e i r pursuit  Bureaucrats  1 1  groups,  lobbyists,  system  a r e non-  t o promote  their  These groups can, t h e r e f o r e , be  which a c t i n a r a t i o n a l  way i n an attempt t o  o b t a i n f a v o u r a b l e p o l i c i e s from the government.  Downs (1957) c l a i m e d t h a t i n t e r e s t groups a r e a n e c e s s a r y f e a t u r e o f the democratic p o l i t i c a l  system because o f i m p e r f e c t i n f o r m a t i o n .  had p e r f e c t knowledge o f the p r e f e r e n c e s o f the e l e c t o r s , be designed, w i t h c e r t a i n t y ,  t o a p p e a l t o the m a j o r i t y .  If politicians  then p o l i c i e s c o u l d As w e l l ,  i f electors  K e g l e y and W i t t k o p f (1987, p.481) d e f i n e d the g o a l s o f a b u r e a u c r a t i c department as f o l l o w s : " . . . t o pursue i t s own purposes, to promote i t s own power, and t o enhance i t s own p o s i t i o n i n the government h i e r a r c h y " . 1 1  An important secondary r o l e f o r the b u r e a u c r a t i s t o a r b i t r a t e among v a r i o u s c l i e n t groups when the views o f these groups c o n f l i c t . 1 2  72  had  perfect  knowledge  o f the p o l i c i e s  of p o l i t i c a l  decisions  c o u l d be made, w i t h  utility.  But, i n the r e a l world, knowledge i s n o t p e r f e c t .  not  certainty,  parties,  i n an e f f o r t  s u r e o f the p r e f e r e n c e s o f the e l e c t o r s  the p o l i c i e s  o f the p o l i t i c i a n s .  intermediaries, politicians p. 140)  t o promote  that  their  their  views  t o maximize  and e l e c t o r s  There  exists  views  t o the p u b l i c  then  voting  expected  P o l i t i c i a n s are  are not c e r t a i n of  room f o r i n t e r e s t  groups, as  and t o c o n v i n c e the  a r e a c c e p t e d by the p u b l i c .  As Downs  (1957,  stated:  On one h a n d [the i n t e r e s t groups] attempt to convince the government t h a t the p o l i c i e s they s t a n d f o r - which a r e o f d i r e c t b e n e f i t t o themselves - a r e b o t h good f o r and d e s i r e d by a l a r g e p o r t i o n o f the e l e c t o r a t e . On the o t h e r hand, they t r y t o c o n v i n c e the e l e c t o r a t e t h a t these p o l i c i e s a r e , i n f a c t , d e s i r a b l e .  Democratic  forms  r e p r e s e n t i n g producer 1957, on  pp.148-149).  the outcome  does  o f government  groups  than t o l o b b y i s t s  larger  the producer  c o n s t i t u e n c y than  overcoming  the f r e e - r i d e r  effective  lobbying e f f o r t .  1 3  policy  affecting  lobbyists 1 3  (Downs,  Rent  control  See:  Olson  producer  problem 1 4  h i s or her industry,  would be more l i k e l y  groups,  The r e s u l t  i s an obvious  would  73  also  have  to c o l l e c t  i s that producers  counter  (1971).  t o commit  than  resources to  Consumer groups, r e p r e s e n t i n g  i n an attempt  (1957). 1 4  to  f o r consumer g r o u p s  lobby the government f o r a f a v o u r a b l e p o l i c y . a  favourable  S i n c e a g i v e n producer tends t o have more a t s t a k e r i d i n g  of a regulatory  a consumer,  a r e more  example  more  trouble  r e s o u r c e s f o r an t e n d t o be more  n o t d i s c u s s e d by Downs  successful  lobbyists  than  do  consumers,  and  therefore  are  more  likely  to  a c h i e v e f a v o u r a b l e government p o l i c i e s .  d)  Voters The  In  a  last  group  democratic  political  of participants  society,  parties  and  which w i l l  v o t e r s have  their  the  be  d i s c u s s e d i s the v o t e r s .  important  candidates.  The  role  major  goal  of  choosing  of  among  voters  is  to  s e l e c t a government which can p r o v i d e them w i t h the g r e a t e s t b e n e f i t s ( i n the form  of p o l i c i e s )  and  to  the  decisions  (Downs, 1957,  costs on  involved  limited  and  in  3.1  participants cases,  the  provides  i n the  goals  behaviour. participants  The  a  brief  summary  listed  of  process.  are  policy-making  policy-making  illustrated from  process,  i n Figure 3.2.  15  or  perhaps  base just  as  the  major  goals  I t s h o u l d be  and  noted  their on  the  only  the  process.  The  changes i n governmental p o l i c i e s  top  (i.e.,  to promote f a v o u r a b l e government p o l i c i e s .  roles  maximizing  executed  participants  by  interact  from  Stanbury  74  the in a  o f the f i g u r e ,  (1986, p.139), potential  i n t e r e s t groups) h i r e The  l o b b y i s t s appeal  is  gainers  lobbyists  directly  The p r o c e s s model i s i l l u s t r a t e d f o r a p a r l i a m e n t a r y democracy, s i m i l a r models c o u l d be d e r i v e d f o r o t h e r forms o f governments. 1 5  of  policies.  adapted  From the  major  roles  that i n a l l  are c o n s i s t e n t w i t h u t i l i t y  complex p r o c e s s i n o r d e r t o produce p u b l i c  The  information, voters  information,  o f the p a r t i c i p a n t s  i n the  to bounded r a t i o n a l i t y  politicians.  policy-making  roles  However, due  obtaining  selective  p e r c e i v e d p e r s o n a l i t i e s o f the  Table  p.138).  to  but  Table Participants  3.1  In the Policy-Making Process: Goals and Roles  Participant  Major Goals  Major Roles  Government Politicians  Maintenance of power  Formulation of p o l i c i e s  Opposition Politicians  Gain power  Formulation of p o l i c y alternatives to those offered by the government  Regulators  Appeasement of regulated industry and/or f u l f i l l m e n t of independent objectives  Regulate firms i n the industry under the general p o l i c y guidance of the government  Departmental Bureaucrats  Expansion of t h e i r departments  Undertake administrative role under general d i r e c t i o n of the government  Interest Groups  Adoption of p o l i c i e s by the government favourable to the group members  Lobby the government, regulators and bureaucracy on behalf of group interests and disseminate information to voters i n order to sway public opinion i n support of t h e i r cause  Voters (General Public)  Elect a party which has p o l i c i e s that maximize t h e i r individual u t i l i t i e s  Voting  75  Figure  3.2  P u b l i c C h o i c e Model o f P o l i c y - M a k i n g  Large A b s o l u t e P o t e n t i a l Gainers ( l o s e r s ) from Changes i n Government P o l i c y ( I . e . , I n t e r e s t Groups]  Money, I n f o r m a t i o n money. I n f o r m a t i o n  Persuasive  policies  luppoft  ( i or In k i n d ) "  POL ITICAL PARTIES operating i n constituencies)  p e r s u a s i v e I n f o r m a t i o n and promises of p o l i c i e s  p o l i c i e s which c o n f e r b e n e f i t s and c o s t s  Greater . L i k e l i h o o d of Favourable Rul trigs and Initiatives  promises of b e n e f i c i a l  Communications  majori t y party  GOVERNMENT ( w i t h c o n t r o l over l e g i s l a t u r e and executive)  Policy Advice and Initiatives  regulatory rulings which c o n f e r b e n e f i t s and c o s t s  Source:  Adapted from U.T. Stonbury (1986. p.139).  DEPARTMENTAL BUREAUCRATS REGULATORS  Policy Directives  Information and Job Promises  the  voters  by  offering  lobbyists' position. the  The  them  persuasive  information  as  also being  b e n e f i c i a l to the  i n an attempt to a l t e r v o t e r b e h a v i o u r .  The  contributions  with p o l i t i c a l  s e l e c t i v e information  of b e n e f i c i a l p o l i c i e s ; regulators  for  bureaucratic  the  and  policy  support  The The  and  information  greater  parties  by  l o b b y i s t s a l s o exchange campaign  favourable  part  and  to  influence  information  information  which  will  voters  majority  government, which  government patronage  p a r t i e s f o r promises  regulatory  also system  governments) who,  party with impose issues  from  likely  the  and  rulings  and  and  help  costs  and  benefits  i n turn,  issue  the  to  the on  and  lobbyists  greatest  forms  and  amount  the  of  government.  bureaucracy,  members  of  i t s regulators  to r e p l a c e  regulatory  V o t e r s weigh  campaign c o n t r i b u t i o n s .  from  directives  regulators  them  democracy  advice  to h i r e new  promising a t t r a c t i v e  politicians  bring  i n a parliamentary  policy  by  to support t h e i r causes.  Support i s i n the form o f v o t e s and  policies  to  voters,  and j o b promises w i t h b u r e a u c r a t s  l i k e l i h o o d of  attempt  providing  options  the  benefits.  the  initiatives.  Political policies  the  of  l o b b y i s t s attempt to p o r t r a y p o l i c i e s f a v o u r a b l e  i n t e r e s t groups they r e p r e s e n t ,  and  supportive  institutes  society.  The  (and  the  appointees  r u l i n g s which a l s o  from  uses  previous  impose  costs  s t r u c t u r a l f a c t o r s may  also  and b e n e f i t s on members o f s o c i e t y .  2.  Structural  Factors  In  to domestic p o l i t i c a l  affect  addition the  functioning  o f regimes.  The  77  affairs, specific  s t r u c t u r a l f a c t o r s depend,  to  some  extent,  institution  on the i n s t i t u t i o n s  that  i s of  great  comprising  importance  the regime.  to  the explanation  maintenance and change i n the i n t e r n a t i o n a l a i r l i n e The  discussion  structural similar  i n this  factors  s e c t i o n o f the c h a p t e r w i l l  which  discussions  influence  could  also  Four f a c t o r s a r e i d e n t i f i e d and d i s c u s s e d  a)  Number of A  cartel  levels  industry focus,  the maintenance  be w r i t t e n  One  o f regime  i s the c a r t e l .  therefore,  of a  f o r other  type o f  cartel,  regime  on the  although  arrangements.  below:  Producers may  encounter  or p r o f i t s ,  i f new  c a r t e l has two o p t i o n s  problems  i n the maintenance  producers  with respect  are able  to enter  t o the new p r o d u c e r s :  of prices,  output  the i n d u s t r y .  The  i t c a n exclude the  new p r o d u c e r s from the c a r t e l arrangement and attempt t o compete w i t h them o r to d r i v e them out o f b u s i n e s s ; cartel  arrangement.  strategy,  o r i t can a l l o w  Competing  with  the new p r o d u c e r s t o e n t e r the  the new  producers  because the new p r o d u c e r s a r e o f t e n a b l e  producers.  However, i n v i t i n g  c a n be  a  to under-price  high-risk the c a r t e l  the new p r o d u c e r s i n t o the c a r t e l a l s o  creates  problems.  Scherer industry output  (1980,  can l e a d  levels.  to greater First,  l i k e l y to ignore price  p.199) p r o v i d e d  paribus.  as  Firms  reasons  why  of sellers  increase,  the p r i c e and output d e c i s i o n s o f o t h e r  sellers  i n an  p r i c e s or  firms  a r e more  c a r t e l members.  The  o f an i n d i v i d u a l f i r m i n an i n d u s t r y becomes l e s s  the number become  more  problems f o r c a r t e l s i n c o o r d i n a t i n g  as the number  and output d e c i s i o n s  significant,  three  less  of firms likely  i n that  to recognize  78  industry  increases,  or to punish  ceterus  a firm  that  deviates Second, there  from  as the number  will  increases,  set  pricing there  output  o r output  difficult  to achieve.  b)  New  Technology  The  introduction  cartel's  ability  technology members could  result  technology changes  have,  to m a i n t a i n  f o r a time,  i s adopted  i n prices  technology  that  charged  technology prices  cartel  into  or levels  a c o s t advantage  i n obtaining pricing  p u r s u i n g an  have  different  t e n d t o want t o  on the t o t a l members,  an  will  i n d u s t r y may  o f output.  over  l e v e l of  members,  be more  affect  some  cartel  o t h e r members.  agreements.  o r output  levels.  the c a r t e l p r i c e  may  also  be  T h i s would or to o f f e r  adopted  create  This  Even i f the with  the i n c e n t i v e f o r  goods above quota  by a second  a  I f the new  by a l l members, the c a r t e l may be slow t o respond  f u n c t i o n i n g o f the c a r t e l more d i f f i c u l t . new t e c h n o l o g y ,  the f i r m s w i l l  agreement by  that  as the number o f s e l l e r s  cost structures w i l l  so t h a t  quota.  the p o s s i b i l i t y  s i m u l t a n e o u s l y by the c a r t e l  in difficulties  members t o undercut  New  t o be  the f i r m ' s output  w i t h i n the c a r t e l ,  Finally,  likelihood  o f new  i s n o t adopted  will  firm,  strategy.  or p r i c e s ,  the p r i c e  o r from  i n c r e a s e s , so does  Firms w i t h d i f f e r e n t  outputs  o r on  standards  one maverick  i s a higher  structures. different  price  of sellers  be a t l e a s t  independent  cost  the c a r t e l  levels.  i n d u s t r y , making the  I f the second  i n d u s t r y , u s i n g the  i s a b l e t o compete more e f f e c t i v e l y w i t h the c a r t e l members,  then the c a r t e l p r i c i n g  o r output p o l i c y  79  i s l i k e l y t o break  down.  c)  Economic Changes  Downturns there  Downturns i n the g e n e r a l  state  i n the economy may  o f the economy  create  problems  i s no easy e x i t from the i n d u s t r y .  cartel  members  t o break  ranks  a  cartel.  o f oversupply,  especially i f  would p r o v i d e  incentives f o r  This  and undercut  c a n undermine  the c a r t e l p r i c e ,  i n order to  m a i n t a i n output l e v e l s .  d)  Height A  of Entry  change  (and Exit)  i n the h e i g h t  a f f e c t the s t a b i l i t y  Barriers  16  of barriers  t o the e n t r y  into  o f a c a r t e l (Posner, 1969, p.1569).  an i n d u s t r y  may  The h e i g h t o f these  b a r r i e r s may be changed due t o economic f a c t o r s , such as a new t e c h n o l o g y , o r to p o l i t i c a l f a c t o r s , such as changes i n r e g u l a t i o n s barriers  a r e lowered,  difficulty  then  new  i n the c o o r d i n a t i o n  firms  may  of prices  enter  regarding  the i n d u s t r y  entry.  I f the  creating  more  (due t o the l a r g e r number o f f i r m s ) .  T a b l e 3.2 p r o v i d e s a summary o f the s t r u c t u r a l f a c t o r s which may a f f e c t the  3.  stability  Overriding  o f a c a r t e l and how each f a c t o r c a n i n f l u e n c e  State  cartel  Interests  I n a d d i t i o n t o the domestic p o l i t i c a l and the economic f a c t o r s above,  there  establishment national  may  be  overriding  o r maintenance  or state  stability.  interest  state  of a  would  interests  regime.  be  national  An  that  example  defense,  can o f an  discussed  affect  the  overriding  e.g. c o u n t r i e s  may  The b a r r i e r s a r e important determinants o f the c o n t e s t a b i l i t y o f the industry. 1 6  80  Table  3.2  Structural Factors Influencing The M a i n t e n a n c e o f a C a r t e l  Factor  Increases Cartel S t a b i l i t y  Decreases Cartel S t a b i l i t y  Number of Firms i n Industry  Reduction of firms  Increase i n firms  Cost-Saving Technology  No new technology  Introduction of technology  Economic (or Business) Cycle  Stable or growing economy (or industry)  Economic downturn (or industry downturn)  Height of Entry Barriers  Raised  Lowered  81  choose t o form  or m a i n t a i n  a regime, notwithstanding  o r d e r t o ensure  the defense  of t h e i r borders.  Another example o f an o v e r r i d i n g of  (a) n a t i o n a l  seen  f i t to  international  flag  carrier(s).  establish, airline,  (1980, pp.21-22) c i t e d carrier.  First,  status,  for  o f t e n wish  (e.g. s e r v i c e  F.  or  the  developing  these p o l i t i c a l  at  least  airline  for p o l i t i c a l , A distinct  has one  Gidwitz  1 7  international  was  a source  she  stated that  r a t h e r than national flag  of  economic carrier  routes.  Summary  In  this  chapter  the  theory  o f hegemonic  stability  c r i t i c i s m s and e m p i r i c a l t e s t s o f the t h e o r y reviewed. tests  of  supporting the  i n the w o r l d  rationale.  Second,  in  the maintenance  f o r o p e r a t i n g an  countries.  colonies).  interests,  privately,  international  routes  be  country  economic  reasons  t h a t an  to former  i s r e q u i r e d to operate  of  political  to operate  every  publicly  regardless  claimed  especially  countries reasons  she  i n t e r e s t may  Virtually  either  two  state  economic  theory  thought  the  theory  the t h e o r y and  produced  parts.  to  Questions  the were  theory then  by  the  found t h a t the  results  o t h e r s c o n t r a d i c t i n g the t h e o r y .  modify  s t a t e d and  I t was  inconsistent  i n a more r i g o r o u s manner than has  beneficial  constituent  have  was  -  some  tests  In o r d e r to t e s t  been done p r e v i o u s l y , i t was dividing  formulated  to  i t into check  a  number  of  f o r agreement  w i t h the t h e o r y on each o f the c o n s t i t u e n t p a r t s .  E x c e p t i o n s would be Denmark, Sweden and Norway, which j o i n t l y and e l e v e n A f r i c a n c o u n t r i e s which j o i n t l y operate A i r A f r i q u e . 1 7  SAS  82  operate  Additional relevant  to  chapter. affairs,  factors,  aside  the  explanation  These  factors  of  to  internal  government  policies.  a f f e c t the  functioning  regime  were  s t r u c t u r a l f a c t o r s and  referred  from hegemonic  developments,  grouped  into  three  which may  were  Structural  factors factors  which  may  discussed  international cartel.  i n t e r e s t s r e f e r r e d to n a t i o n a l p r i o r i t i e s chosen by  -  the  those  Finally,  be  in  the  domestic  Domestic  affect were  also  outlined  categories  overriding state interests.  political  o f an  stability,  affairs  choice  of  which  could  overriding  state  governments r e g a r d l e s s  of  economic consequences.  I n the  next c h a p t e r ,  air  transport  and  maintenance o f  elements  of  regimes are  the  the  snapshots o f f o u r p o s t - W o r l d War presented  and  the  events  Two  surrounding  regimes used to t e s t hegemonic s t a b i l i t y  other  factors  p r o v i d e d by hegemonic s t a b i l i t y  are  theory.  83  employed  to  add  to  the  international the  adoption  theory.  The  explanations  IV.  APPLYING HEGEMONIC STABILITY THEORY TO REGIME CHANGES IN INTERNATIONAL AIR TRANSPORT  A.  Introduction  How  well  does  the t h e o r y  o f hegemonic  developments i n i n t e r n a t i o n a l a i r t r a n s p o r t ? in air  the p r e v i o u s transport  chapter, regime  add s i g n i f i c a n t l y  was  q u e s t i o n s t h a t a r e addressed  The  structure  formed, i n this  hegemonic  formation  o f the 1946 Bermuda  manner, 1965  test  stability  the t h e o r y  respectively.  1  o r changed?  against  described o f why the  These  a r e the  events  Section  t e s t s the t o the  C, D and E, i n a  similar  l e a d i n g t o the e s t a b l i s h m e n t  o f the  Sections  Section  the events  B  leading  regime.  Finally,  t o the u n d e r s t a n d i n g  i s as f o l l o w s :  post-Bermuda regime, the 1981 l i b e r a l  regime,  f o r regime  chapter.  theory  against  account  Do the o t h e r f a c t o r s ,  maintained  o f the chapter  modified  stability  regime, and the 1986 p o s t - l i b e r a l F provides  conclusions  as t o the  e f f e c t i v e n e s s o f the m o d i f i e d hegemonic s t a b i l i t y t h e o r y i n e x p l a i n i n g regime developments  i n international  a i r transport,  and uses  the r e s u l t s  o f the  a n a l y s i s t o a s s e s s the f u t u r e p r o s p e c t s o f i n t e r n a t i o n a l a i r r e g u l a t i o n .  The exact y e a r s s t u d i e d ( i . e . , 1946, 1965, 1981 and 1986) were chosen to r e f l e c t "snap-shots" o f the d i f f e r e n t post-World War Two a i r t r a n s p o r t regimes. , 1  84  B.  The  In  1946  Bermuda Regime  this  s e c t i o n o f the c h a p t e r ,  the Bermuda regime o f 1946 development o f the  the events  are reviewed,  usefulness of  are  i n t r o d u c e d to a i d i n the a n a l y s i s . related  Important  f o l l o w e d by  attempts  t o e x p l a i n the  regime u s i n g the m o d i f i e d t h e o r y o f hegemonic  The  and  l e a d i n g to the f o r m a t i o n of  the  theory  environmental  characteristics  of  i s assessed  and the  and  A  other explanatory  "snap-shot"  industry regime  the  stability.  factors  included:  factors  o f the Bermuda regime  is  shown  almost  i n Table  universal  4.1.  price-  s e t t i n g by IATA, s u b j e c t to governmental a p p r o v a l ; a t e c h n i c a l r o l e f o r ICAO; and,  the  factors  bilateral  important  s t r o n g U.S. world. its  extremely  government  airlines  How  the  routes  development  of  and  capacities.  international  c h a r a c t e r i s t i c s o f the 1946  small  size  ownership  of  t r a n s p o r t over  (compared  to  airlines,  except  and  why  d i d the  o u t l i n e how  t o e x p l a i n why  1946  i n most o f the r e s t  industry);  i t resulted.  85  and  o f the  for  the  and  U.S.;  the  a l a r g e extent the  the  dominance  dominance o f  of of  the  U.S.  next  sub-  business.  r e g u l a t o r y regime come about?  i t came about,  included a  a i r transport industry included  today's  charter a c t i v i t i e s ;  Environmental  aviation  i n the i n d u s t r y , w i t h t h r e e - q u a r t e r s o f the t o t a l  section w i l l attempt  to  of  economy, b u t weak post-war economies  Important  scheduled  regulation  The  f o l l o w i n g sub-sections w i l l  Table  4.1  S n a p - s h o t o f t h e 1946 Bermuda Regime a n d R e l a t e d Environmental and I n d u s t r y F a c t o r s  Characteristic or Factor  1.  Regime  1946 Bermuda Regime  Characteristics  a) R o l e o f IATA i n Setting Prices  P r i c e s s e t by IATA ( s u b j e c t t o government a p p r o v a l ) on v i r t u a l l y a l l major r o u t e s .  b) Membership i n IATA  V i r t u a l l y a l l major i n t e r n a t i o n a l scheduled carriers. Membership was 60 a i r l i n e s (1945) w i t h about o n e - t h i r d o f a c t i v e members r e p r e senting developing countries or colonies.  c) Role o f ICAO  Involvement i n economic matters envisioned although only t e c h n i c a l r o l e assigned.  d) B i l a t e r a l Clauses  Primary o b j e c t i v e o f the provision of capacity was t o meet t r a f f i c demand between c o u n t r y of n a t i o n a l i t y of a i r c a r r i e r and c o u n t r y o f ultimate destination. Capacity l e v e l s subject o n l y t o ex post facto reviews (known as Bermuda b i l a t e r a l c l a u s e )  Capacity  e) R e g u l a t i o n by Regional Organizations  86  No r e g i o n a l o r g a n i z a t i o n s .  Table 4.1  Environmental  (Continued)  Factors  a) The World Economy  The United States had a strong economy but the economies of Europe and Japan were devastated following the War.  b) Third World Development  Many developing countries part of c o l o n i a l empires.  c) U.S.  L i b e r a l , Democratic administration working to h a l t expansion of communism through the creation of an open trading environment among U.S. a l l i e s .  Industry  Government  Factors  a) Maturity of A i r l i n e Industry  Infant industry, recovering from v i r t u a l cessation of a c t i v i t y during the War.  b) State of Technology  Piston a i r c r a f t ; many converted from m i l i t a r y usage to c i v i l i a n use.  c) Government Ownership  Government ownership of most national a i r l i n e s , except U.S.  d) Role of Charter Operators  L i t t l e charter a c t i v i t y .  e) Size of Industry  The industry performed 19 b i l l i o n passengerkilometres (1947 data).  f) Product Offerings  Only f i r s t class seats were offered.  87  Table 4.1  (Continued)  g) " I l l e g a l " Discounting  G i f t s and promotions used to entice passengers. Resolutions against i l l e g a l discounting not yet passed by IATA.  h) U.S. Dominance of A i r Transport  U.S. a i r l i n e s performed over three-quarters of the world's a i r services, as measured i n passenger-kilometres (1949 data).  88  1.  Developments  a)  The  Leading  Regulation  to the Formation  of Air  Transport  before  As most a v i a t i o n s c h o l a r s and f l i g h t s had in  their  commercial  Brothers'  flight  slowly  (Chuang, 1972,  I t was  1946  Bermuda Regime  World War  the Wright b r o t h e r s i n the  p.16).  a f t e r s u f f i c i e n t experience  f l y i n g of a i r c r a f t ,  the  laymen, a l i k e ,  a v i a t i o n grew v e r y  first  World War,  s t a r t with  of  Two  are aware, i n 1903. years  I t was  heavier-than-air However, i n t e r e s t  following  o n l y f o l l o w i n g the  had been g a i n e d  accepted.  was  that  This  national  sovereignty  representatives  t h a t time, the d e l e g a t e s by  (Goedhuis,  1955,  War  the  had  recognized  principle  p.211).  affirmed.  the  over  of nineteen  of  principle  of  T h i s p r i n c i p l e was  a i r space.  states before  at  of  the  passage  Paris  although  most  f o l l o w i n g World  has  air  War  other  and  i n order  agreements  pre-World  aircraft  remained the u n d e r l y i n g  principle  were II  to p e r m i t signed  agreements  89  by  bilateral  international flights governments  were  of  day.  over a i r space i m p l i e d t h a t t h e r e must be  agreements  Bilateral  r i g h t s were  foreign  over  At  r e a f f i r m e d a t the Havana C o n v e n t i o n o f 1928  i n t e r n a t i o n a l a i r t r a n s p o r t meta-regime, to t h i s  place.  i n Paris.  was  the  or m u l t i l a t e r a l  been  of d i s t r u s t f o r  sovereignty  Chicago Conference o f 1944,  sovereignty  had  space  and  national  for  Convention  the  National  war  of  principle  principle  the  a post-war m e n t a l i t y  full  The  that national sovereignty  freedom  However,  I, i n an e r a c h a r a c t e r i z e d by  nations,  and  I t h a t the major u n d e r l y i n g p r i n c i p l e  "meta-regime" o f i n t e r n a t i o n a l a i r t r a n s p o r t was  superceded  First  i n the manufacture  the  debated by  Wright  t h a t commercial a v i a t i o n developed.  a l s o f o l l o w i n g World War  of  the  signed  as  to  e a r l y as  following  the  take 1913, Paris  Convention II  o f 1919 (Haanappel,  bilaterals  were  airline  and a  routes  operated  According to S t o f f e l  I n some c a s e s , the pre-World  n o t n e g o t i a t e d between  country. by  1984, p.25).  This  was  the c o u n t r y ' s  two  especially "chosen"  War  c o u n t r i e s b u t between an  true with  airline,  U.S.  international  Pan American  Airways.  2  (1959, p.120):  Arrangements were made w i t h l o c a l governments who were anxious to have the t r a n s p o r t s e r v i c e p r o v i d e d by Pan American. As they h a d no n a t i o n a l c a r r i e r s o f t h e i r own c a p a b l e o f c o n d u c t i n g i n t e r n a t i o n a l o p e r a t i o n s , they d i d not fear competition. In e x c h a n g e f o r s u c h r i g h t s Pan A m e r i c a n , i n many c o u n t r i e s , participated i n t h e e s t a b l i s h m e n t and development o f l o c a l airlines.  Before  t h e Second  World  War,  there  was  authority to f i x international a i r t a r i f f s . u n i l a t e r a l l y by c a r r i e r s o r through routes. areas  There was, however, other  Association airlines,  than or  was  conditions  " O l d IATA". concerned  of carriage,  accounts between c a r r i e r s , time  with  agreements by a i r l i n e s  called  O l d IATA, matters  procedures  1972,  p.20).  members  from  operating similar authority i n  the I n t e r n a t i o n a l A i r T r a f f i c formed such  as  i n 1919 by  s i x European  schedules,  timetables,  and documents  and f l i g h t l i a b i l i t y  twenty-four  o r g a n i z a t i o n with  organization with  f o r the s e t t l e m e n t o f  (Chuang, 1972, p.20).  i t s o p e r a t i o n s were d i s r u p t e d by World War  twenty-nine  formal  T a r i f f s were e s t a b l i s h e d e i t h e r  an a i r c a r r i e r  price - fixing,  no  By the  I I , O l d IATA had grown t o  c o u n t r i e s and f o u r c o n t i n e n t s  (Chuang,  The o p e r a t i o n s o f O l d IATA remained dormant d u r i n g the war, and  the o r g a n i z a t i o n was o f f i c i a l l y disbanded  i n 1945 (Brancker,  1977, p.10).  Chuang (1972, p.19) c l a i m e d t h a t Pan American's n e g o t i a t i o n s were conducted, presumably, w i t h the t a c i t consent o f the U.S. S t a t e Department. 2  90  b)  The  Chicago  Conference  D u r i n g the  of  1944  Second World War,  ongoing f i g h t i n g made f l y i n g  commercial a v i a t i o n v i r t u a l l y  extremely hazardous  as w e l l , the war  e f f o r t r e q u i r e d r e s o u r c e s to be  than  aircraft.  civilian,  appeared  that  Chicago  to  discuss  the  regulatory  Chicago  Conference  was  convened  November  1,  countries. as  hostilities  However,  1944,  and  O'Connor  were  was  towards  going  to  (1971, p.19)  the  end,  end  a  by  listed  of  and,  for  was  post-War Franklin  war,  aims o f  the  when i t  called  for  aviation. D.  representatives  the  the w o r l d  the  conference  President  attended  of  The  expended on m i l i t a r y , r a t h e r  framework by  i n parts  ceased.  The  Roosevelt of  on  fifty-four  Chicago Conference  follows: the  founding  of  a  permanent  international  organization  for  civil  aviation; the e s t a b l i s h m e n t o f i n t e r i m b o d i e s to cope w i t h immediate post-War problems; the r e g u l a t i o n o f s a f e t y and the  The three  The  was  of  the  and,  i n 1947,  f o r the  with  the  authority  issues.  successful  Chicago  establishment  safety  aspects;  and,  r e g u l a t i o n o f economic a s p e c t s o f i n t e r n a t i o n a l a i r  conference  aims.  navigational  reaching  Convention  Provisional  to  in  recommend  (ICAO,  International  formation of  ICAO.  The  not  91  given  agreement  1980f) Civil  on  the  provided  Aviation  first  for  standards  any  for  the  Organization  conference a l s o provided  international  ICAO, however, was  an  transport.  technical  direct authority  over  ICAO and the  economic not  r e g u l a t i o n o f a i r t r a n s p o r t , so the f o u r t h aim o f the c o n f e r e n c e  achieved.  The of  was  major r e a s o n  f o r the  a i r t r a n s p o r t has  and  been a t t r i b u t e d  the U n i t e d Kingdom, the  to an a c c e p t a b l e  governments,  ICAO,  should  have  1971,  p. 20).  The  Country  A  States, was  or  not  against  "operators  to  tariff  o f the U n i t e d  was  result  matters  i n favour  of broad  exchanges  (i.e.,  With  setting  whereby  organization,  economic  between  A) .  the  an  to  B  of and  was  levels  such  as  (O'Connor, of  route  airlines C  tariffs,  international  airlines,  c o u l d agree to t a r i f f  right  Countries  respect  by  the  to agree  from b i l a t e r a l n e g o t i a t i o n s ,  on  rights  States  p o s i t i o n o f the U n i t e d S t a t e s  intergovernmental  passengers  system  conference",  O'Connor, 1971,  The  a  should  freedom  i n Country  opposed  The  3  any  States  transport  while  inability  c o n s u l t a t i v e powers  fifth  ending  to the  major a v i a t i o n powers o f the time,  rights that  United  including  beginning  and  only  rights,  to  two  regulatory formula.  t h a t the g r a n t i n g o f r o u t e between  l a c k o f a consensus on the economic r e g u l a t i o n  of  on  routes  the  United  a i r authority,  themselves,  though  (Haanappel, 1984,  an  p.13;  p.22).  B r i t i s h p o s i t i o n d i f f e r e d from the p o s i t i o n o f the U n i t e d S t a t e s i n  t h a t the B r i t i s h wanted the c r e a t i o n o f an i n t e r n a t i o n a l r e g u l a t o r y a u t h o r i t y with  real  powers.  The  distributing  frequencies  rates,  routes  while  a u t h o r i t y would be and  would be  responsible  capacity levels agreed  to on  among a i r l i n e s ,  a bilateral  p.22).  3  See,  f o r example, O'Connor (1971, p.31). 92  f o r determining  basis  and  for  (Chuang,  and  fixing 1972,  The  positions  of  the  r e c o n c i l e d a t Chicago. rights  which  Freedoms"  This  with  Freedoms" five  and  the  United  States  could  not  There were, however, two agreements c o n c e r n i n g  left  open  for signing.  The  first,  known  as  agreement  close  to 100  received  wide  signatories.  a c c e p t a n c e and The  but  d i d not  receive  This wide  is still  second agreement was  agreement, which p r o v i d e d f o r a m u l t i l a t e r a l  freedoms o f a i r t r a n s p o r t .  States,  route  the  "Two  agreement was  acceptance.  the  "Five  exchange o f the  first  promoted by the U n i t e d  Although  4  i n force,  still  open f o r  s i g n a t u r e s today, the F i v e Freedoms agreement i s v i r t u a l l y a dead i s s u e .  c)  be  agreement, p r o v i d e d f o r a m u l t i l a t e r a l exchange o f n o n - t r a f f i c a i r  freedoms. today,  were  British  The Formation  of  5  IATA  A number o f a i r l i n e o f f i c i a l s  a t t e n d e d the c o n f e r e n c e i n Chicago.  When  i t became apparent t h a t the c o n f e r e n c e would not conclude an agreement on the economic  regulation  representatives representatives committee  to  of  international  decided  to  a p p o i n t e d Mr.  draft  airline  organization  Havana,  i n 1945,  the  and  hold  their  own  meeting.  the  airline  The  airline  J.C. Cooper o f Pan American Airways t o head a  articles  (Chuang,  a i r transport,  of  1972,  fifty-seven  association p.26).  carriers  A  for a  new  and world-wide  second meeting was  agreed  held  t o the f o r m a t i o n  in  o f the  The U n i t e d S t a t e s s i g n e d t h i s agreement, b u t denounced i t two years l a t e r , a f t e r i t was apparent the agreement would n o t be w i d e l y accepted. A l t h o u g h the agreement c a l l e d f o r a multilateral exchange freedoms, i t was apparent t h a t the U.S. b e l i e v e d t h a t the agreement would a p p l y o n l y a f t e r r o u t e r i g h t s were f i r s t n e g o t i a t e d i n a bilateral b a s i s (O'Connor, 1971, p.45). 4  As o f 1980 the agreement 1, B o o k l e t 4, p . 5 ) .  5  Vol.  had  93  twelve  signatories  (Rosenfield,  1984,  I n t e r n a t i o n a l A i r T r a n s p o r t A s s o c i a t i o n (IATA, 1985d, p . 3 ) . of  associations authorized  conferences  as  regulations"  The  be  (quoted  machinery was  d)  may  the  establishment  required in  and  permitted  Brancker,  established i n  of  1977,  "member under  p.122)  IATA's a r t i c l e s  6  traffic  and  rate  a p p l i c a b l e laws  and  formal  and  conference  1946.  Bermuda 1 Agreement  Following  the  Chicago  Conference,  both  the  United  States  and  United  Kingdom n e g o t i a t e d b i l a t e r a l agreements w i t h a number o f s t a t e s , based on r e g u l a t o r y systems they each f a v o u r e d Haanappel,  1984,  between the  two  p.17).  However,  major a v i a t i o n  (The  Economist,  i t remained  August 3,  clear  c o u n t r i e s would be  that  was  held  i n Bermuda,  i n 1946,  between  p.165;  a i r agreement  r e q u i r e d i n order  the development o f the post-War a i r t r a n s p o r t i n d u s t r y . meeting  an  1946,  the  the  to  spur  With t h i s i n mind, a  United  Kingdom  and  the  "Bermuda 1"  (or  United States.  The just  meeting  was  s u c c e s s f u l and  "Bermuda") ( U n i t e d S t a t e s , 1946)  an  agreement  was  reached.  a compromise between the p o s i t i o n s o f the accepted agreed only  two  u l t i m a t e governmental c o n t r o l over  known as The  countries.  tariffs  while  to a l l o w the c a r r i e r s to determine c a p a c i t i e s and  to  ex  post  facto  review.  Major  agreement  features  of  the  The  represented  United  States  the U n i t e d Kingdom  frequencies, subject Bermuda  1  agreement  i n c l u d e d the f o l l o w i n g : The  right  operate  6  of  each  country  a given route  to  designate  more  than  ( A r t i c l e 2);  T h i s o r g a n i z a t i o n had no f o r m a l c o n n e c t i o n to O l d IATA. 94  one  carrier  to  The  a p p r o v a l by  fixing  the U.S.  conference  initially  C i v i l A e r o n a u t i c s Board  machinery  provided  f o r one  II) .  y e a r b u t was  additional  time  1955.  U n i t e d Kingdom, w i t h o u t  The  periods  (Annex  until  i t was  o f IATA's  This  approval  was  extended  for  subsequently  g i v e n permanent  the same s t i f f  tariff-  approval  anti-trust  in  rules  as the U n i t e d S t a t e s , d i d not have t o p r o v i d e s i m i l a r a p p r o v a l ; A requirement  t h a t a l l t a r i f f s be f i l e d by a i r l i n e s f o r a p p r o v a l by  b o t h governments (Annex I I ) ; A  requirement  attention profits, A  list  that  paid  to  tariffs  be  fixed  at  "relevant factors",  reasonable such  as  of  the  III).  cities  from  routes  allowable  f o r the  operating costs,  carriers  U.K.  carriers  were a l l o w e d  flights  Great  Britain,  none  west  further  beyond r i g h t s to L a t i n America o n l y out o f New allowed  cities  with  and c o m p e t i t o r s ' r a t e s (Annex I I ) ;  (Annex  were  levels,  beyond  rights  i n Europe and A s i a .  from Other  to and from B r i t i s h  colonies;  A  t o how  specification  (Final Act). to bear  a  have  fair  a  routes.  as  London  of  each  into  than  U.S.  Prestwick  were  and  equal  carriers.  Finally,  provision  of  to unduly  the primary  capacity  t r a n s p o r t demand.  opportunity  C a r r i e r s were not  to  to  operate  affect  the  the  traffic  c o u n t r y o f n a t i o n a l i t y o f the c a r r i e r s and  95  carriers  on  determined  countries Carriers the  was must  specified  s e r v i c e s o f other  o b j e c t i v e f o r c a r r i e r s must be  meet  and  to s e v e r a l  t o be  A i r t r a n s p o r t c a p a c i t y between the two to  U.S.  r o u t e s were s p e c i f i e d f o r s e r v i c e  capacity levels  close relationship  seven  Chicago,  York.  and  country  demand  between  the the  the c o u n t r y o f u l t i m a t e  destination.  F i f t h freedom t r a f f i c must be s u b s i d i a r y t o t h i r d  f o u r t h freedom t r a f f i c ; The  allowance  capacity two  and,  t h a t i f e i t h e r government were d i s s a t i s f i e d w i t h  p r o v i d e d by  the  c o u n t r i e s undertake  (Final Act).  and  airlines  of  the  c o n s u l t a t i o n s to  T h i s i s the ex post  facto  other  country,  r e s o l v e the  that  the the  differences  review p r o c e s s , now  widely  found i n Bermuda 1-type agreements.  After  concluding  Bermuda  Kingdom announced t h a t i t was  1,  both  the  United  States  and  the  United  t h e i r i n t e n t i o n t o use Bermuda 1 as a b a s i s f o r  the s i g n i n g o f agreements w i t h o t h e r c o u n t r i e s .  2.  Analysis  of  Stability In  the  Formation  of  the  Regime  Using  the  Modified  Hegemonic  Theory  this  section  of  the  chapter  an  attempt  i s made  to  analyze  a d o p t i o n o f the Bermuda regime u s i n g the m o d i f i e d hegemonic s t a b i l i t y As  the  that  a  reader w i l l  recall,  regime  be  forming the  rest  follows  the of  may  formed  regime and the  i f there  willing  world.  (see T a b l e  the m o d i f i e d hegemonic s t a b i l i t y  The  t o bear major  exists  a  theory  l e a d i n g country  the  theory. predicts  capable  of  the c o s t s o f s u p p l y i n g the regime to  features of  the  Bermuda regime were  as  4.1):  b i l a t e r a l n e g o t i a t i o n of route  rights;  m u l t i l a t e r a l p r i c e - s e t t i n g by IATA, s u b j e c t to government a p p r o v a l ; and, Bermuda primarily  1 capacity clauses requiring to  meet  third  and  96  airlines  f o u r t h freedom  to p r o v i d e c a p a c i t y traffic  but  allowing  airlines  to p r o v i d e c a p a c i t y f o r subsidiary  C a p a c i t y l e v e l s were not pre-determined facto  In  order  hegemonic  the f o l l o w i n g q u e s t i o n s must be  traffic.  b u t s u b j e c t o n l y to ex p o s t  stability  theory  so,  were  there  to be  supported,  addressed:  t h e r e a dominant power capable o f forming  If  freedom  review.  f o r the m o d i f i e d  Was  fifth  i n c e n t i v e s f o r the  the regime?  dominant power  to  form  the  regime? What would be the c o s t s to the hegemon i n m a i n t a i n i n g the regime? What  i n c e n t i v e s or  c o e r c i v e measures were used  to  enlist  smaller  c o u n t r i e s i n t o the regime? These q u e s t i o n s are addressed,  a)  Was  there  i n t u r n , below:  a dominant power capable  of forming  the  regime?  W r i t e r s on hegemonic s t a b i l i t y t h e o r y have i d e n t i f i e d the U n i t e d S t a t e s , at  the  end  Europe  and  relatively  o f World War Japan,  the  unscathed.  I I , as b e i n g United The  States  U.S.  i n f r a s t r u c t u r e i n p l a c e , to support  The  United  industry.  See, (1985) . 7  States  As Thornton  had  had  emerged the  from  strong  o f hegemony. the  resources  international  especially  (1970, p.24)  f o r example:  a power capable  Second  7  Unlike  World  War  and  the  necessary,  regimes.  capabilities  in  the  airline  (1983) and  Russett  stated:  Keohane (1980),  97  Cowhey and  Long  [ T ] h e U.S. [ a i r c r a f t ] f a c t o r i e s were the o n l y ones capable o f immediate c o n v e r s i o n t o commercial b u s i n e s s . Britain's industry was geared t o p u r e l y m i l i t a r y types and France's was o f course t o t a l l y non-existent. I t was o b v i o u s t h a t none o f the A x i s c o u n t r i e s would be p e r m i t t e d t o r e t a i n a c a p a b i l i t y f o r a i r c r a f t production. Thus, the U n i t e d S t a t e s had an almost u n c o n d i t i o n a l monopoly on t r a n s p o r t a i r c r a f t p r o d u c t i o n . . .  The  U.S,  therefore,  was  the u n d i s p u t e d  a i r c r a f t s u i t a b l e f o r commercial uses. experience  operating  Were there  long distance routes,  transport It  incentives  for the United  as the U n i t e d  S t a t e s had assumed  i n Europe, A f r i c a and A s i a .  States  to form an international  appears t h a t t h e r e were i n c e n t i v e s f o r the U n i t e d  categories: general  general  security States  monetary unified  security  i n c e n t i v e s and economic  had i n u n d e r t a k i n g  regime.  These i n c e n t i v e s c a n be d i v i d e d i n t o two  i n c e n t i v e s would  The U n i t e d  Western community,  the development  facilitate  The  be  similar  the M a r s h a l l States  wanted  as a b u t t r e s s  incentives  o f an  t r a v e l and b u s i n e s s  United  international  air  S t a t e s t o form an  incentives.  t o the i n c e n t i v e s Plan  o r i n forming  t o ensure  against  States  international  The  t h a t the a stable  a prosperous,  communism.  and  A healthy a i r  t r a n s p o r t i n d u s t r y c o u l d a c t as a u n i f y i n g f o r c e f o r the non-communist since  of  regime?  i n t e r n a t i o n a l a i r t r a n s p o r t regime.  United  i n the p r o d u c t i o n  As w e l l , U.S. p i l o t s had c o n s i d e r a b l e  r e s p o n s i b i l i t y f o r supporting A l l i e d troops  b)  leader  a i r transport  system  world, would  l i n k s between the U.S. and i t s a l l i e s .  also  had  a i r transport  regime.  c a n be i d e n t i f i e d .  First,  98  economic At least  incentives three  t o promote  short-term  as d e s c r i b e d above,  an  economic  the U.S. was the  leading  manufacturer o f t r a n s p o r t  transport as  i n d u s t r y would  Stoffel  (1959,  rights  following  route  rights  t h e War.  and  reasonably  travellers.  c)  U.S. c a r r i e r s  A regime  be b e n e f i c i a l  p e r c e n t a g e o f post-War  A healthy  required  facilitating t o U.S.  carriers.  liberal  a i r transport  regime  would  Finally,  be b e n e f i c i a l  Hegemonic s t a b i l i t y  t h e o r y g e n e r a l l y assumes t h a t  i n supporting  a regime.  States  in maintaining  large  A stable t o U.S.  the regime?  the hegemon must bear  The Bermuda a i r t r a n s p o r t regime  most c e r t a i n l y  resulted  i n higher  limitations  on f i f t h  freedom  o p e r a t i o n s o f U.S. c a r r i e r s . c o s t s than t h e i r c o m p e t i t o r s ,  capacities  The IATA  international  would have been a v a i l a b l e under a more l i b e r a l  regime.  restricted,  9  major  into  t h e Bermuda  so t h a t r e d u c t i o n s i n t h e o p e r a t i n g freedom o f  What  countries  than  I n the post-War y e a r s , U.S. c a r r i e r s had lower  d)  or  pricing  t o some e x t e n t , the  c a r r i e r s l i k e l y r e s u l t e d i n l o s t o p p o r t u n i t i e s f o r them.  incentives  likely  a i r prices  As w e l l ,  U.S.  The  a  8  d i d impose c o s t s on b o t h U.S. t r a v e l l e r s and U.S. c a r r i e r s .  1  route  o f these  i n t e r n a t i o n a l a i r t r a v e l l e r s were Americans.  to the United  arrangement  Second,  additional  the n e g o t i a t i o n  What were the costs  some c o s t s  international a i r  i n c r e a s e the market f o r t h e U.S. a i r c r a f t .  p.126) o u t l i n e d ,  would  aircraft.  coercive  measures  were  used  to enlist  smaller  the regime?  stumbling  block  Bermuda regime was the agreement  8  See: K i t t r i e  9  See: Goedhuis  f o r the U n i t e d  States  i n implementing the  o f the U n i t e d Kingdom.  The U.K. f a v o u r e d a  (1963, p . 4 ) . (1955, p.221). 99  restrictive being  regulatory  able  to  arrangement. reasonably  complete The  10  regime  U.S.,  because  with  i t was  U.S.  carriers  t h e r e f o r e , had  l i b e r a l regime  (at least,  concerned  to  with  under  "convince"  regards  about U.K. a  carriers  more  the U.K.  to c a p a c i t y  liberal  to accept  a  determination)  such as Bermuda.  The  United  offering major  States  was  i n c e n t i v e s and,  to  the  make a v a i l a b l e i t s s u r p l u s 7,  1944,  effectively included  to  p.471).  British  transport  U.S.  the  was  T h i s would a l l o w  agreement  to  the  aircraft  w i t h American c a r r i e r s .  the  obtain  perhaps, through the use  incentive offered  October  able  agreement  promise  for their  British  restrict  fifth  freedom  U.S.  post-War a i r l i n e  The  the  concerned  severe  British  U.S.  Britain's  the  ongoing  balance  loan  airlines  use  to  signature  See:  the (The  U.S.  would  A  would  Economist,  to compete more  capacity  British to  use  This a l l e v i a t e d  the  completely  the  used to o b t a i n B r i t i s h  and  dominate  negotiations  o f payments British  crisis.  was  used  on Bermuda 1 (Thornton,  over  agreement to the  a U.S.  There was as  a  1970,  loan  the  quote by C h u r c h i l l  bargaining  alleviate  chip  to  pp.35-36; Haanappel,  i n O'Connor (1971, p.38). 100  to  Bermuda  some d i s c u s s i o n  p.27).  1 0  by  industry.  potential blackmail  regime  the  that  U.K.  Other i n c e n t i v e s o f f e r e d to the  fear  British  that  carriers  the Bermuda 1 b i l a t e r a l .  the  the  of diplomatic blackmail.  IATA t a r i f f c o o r d i n a t i o n as per of  of  a  that  obtain 1984,  3.  Results The  from  the Analysis  circumstances  stability  theory:  Using  of  the  the Modified  Bermuda  Hegemonic  regime  Stability  f i t well  Theory  with  hegemonic  A hegemon e x i s t e d ; t h e r e were b e n e f i t s to the hegemon i n  the f o r m a t i o n o f the regime; the f o r m a t i o n o f the regime imposed c o s t s on hegemon; and, implement  t h e r e were i n c e n t i v e s , and,  the  regime.  Figure  4.1  perhaps, c o e r c i v e measures used to  provides  an  regime under the m o d i f i e d hegemonic s t a b i l i t y  These  are,  however,  question  hegemonic s t a b i l i t y t h e o r y .  In a more g e n e r a l sense, to  sacrifice  consumer  interests  establishment useful in  consumer  of  why  the  e x p l a i n i n g the  cartel.  and  of  the  a  security  Whereas  in  the  the  cartel? and  It  airline  modified  formed, these  regime  Bermuda  analysis  using  d i d the  U.S.  passengers?  (as w e l l as o t h e r c o u n t r i e s ) agree  form  a regime was  nature  the  theory.  answered  d i d the U.S.  subsumed by  i n e x p l a i n i n g why  of  IATA a g a i n s t the i n t e r e s t s o f a i r  interests  were  not  illustration  Perhaps the major q u e s t i o n i s , "Why  agree to c a r t e l p r i c i n g through  the  chosen  is  evident  interests  hegemonic  that  in  the  theory  was  o t h e r f a c t o r s are u s e f u l  (i.e.,  pro-airline  or  pro-  of  Bermuda  consumer) .  4.  Other  Factors  in  the  Explanation  of  the  Adoption  the  1946  Regime  a)  Domestic It  various The  is  Affairs the  purpose  of  this  s e c t i o n to  countries that p a r t i c i p a t e d  i n the  analyze  formation  policy  by  the  o f the Bermuda regime.  g r e a t e s t a t t e n t i o n w i l l be p a i d to the p o l i c y - m a k i n g  101  choices  process  o f the  U.S.  Figure The of  Berauda  the Modified  Regiae  4.1 i n the Context  Hegeaonic  Stability  Theory  COSTS Reduction in opportunities for a i r carriers due t o r e s t r i c t i o n s on f i f t h f r e e d o m rights and h i g h e r p r i c e s t o t r a v e l l e r s b e c a u s e o f IATA t a r i f f coordination; United  BENEFITS  ( T h e Megeraon)«JIncent ives and  o f f e r of transport  Caere i ve Measures  aircraft I i m itat ions on f i f t h f reedom traffic fflu 11 i l a t e r a l price-fixing threat  of  refusing U.K.  Other Countries  U.S,  to the  General s e c u r i t y b e n e f i t s and s h o r t t e r m economic b e n e f i t s i n the form of a market f o r U.S. a i r c r a f t m a n u f a c t u r e r s , additional r o u t e r i g h t s f o r c a r r i e r s , and a p a r t i a l l y l i b e r a l regime f o r t r a v e l l e r s  Regime  Multilateral  Tariff  Coordination  (IATA)  Bilateral of  States  loan  Bermuda  Routes  Bermuda Clauses  1  Regulation and  Capacities  Capacity  because  of  the  importance  However, b e f o r e briefly  the U.S.  discuss  the  of  the  U.S.  policy-making  policy-making  as  the  process  leading aviation  i s examined,  processes  of  this  other  country.  paper  will  countries  that  p a r t i c i p a t e d i n the n e g o t i a t i o n s over the Bermuda regime.  There countries own  is  little  that  the  policy  positions  of  the  other  r e f l e c t e d anymore than a d e s i r e t o maximize the p o t e n t i a l o f t h e i r  air carriers.  Zealand,  evidence  (Exceptions  as d i s c u s s e d below.)  countries  reflected  the  are  That  dominance  the  positions  of  Australia  and  i s , the p o l i c y - m a k i n g p r o c e s s e s of  the  air carriers  the  existence  as  New  o f these  interest  groups.  Three examples are p r o v i d e d below:  i)  The  Policy  The  of  the  United  Kingdom  regulatory  agency  capacities  on  multilateral (O'Connor, costs  which  exchange  the  p.27). British  with  regulated  regime would be  share" of  traffic.  The Two  liberal  would  of  concerned  ii)  supported  international  1971,  than  U.K.  Policies  have  real  routes.  The  route  Why  was  carrier,  rights this? BOAC,  protecting i t s carrier  of  the b e s t way  the Netherlands  including  an  U.K.  U.S.  to  was  involving  international  control  fifth  carriers  a g a i n s t U.S.  an  prices  especially  f o l l o w i n g the  and  against  freedom  had  lower  war.  The  competition.  a  traffic  operating U.K. A  was  tightly  o f e n s u r i n g BOAC r e c e i v e d i t s " f a i r  and Sweden.  European c o u n t r i e s , the N e t h e r l a n d s regime,  powers  of  and  exchange o f f i f t h  103  Sweden, s u p p o r t e d  freedom r i g h t s .  a  fairly  Both Sweden  and  the N e t h e r l a n d s  the  Chicago  liberal  Conference.  regime?  ability.  supported  the U.S. Why  These were  did  ( r a t h e r than the B r i t i s h ) p o s i t i o n a t these  countries  small countries with  advocate  little  a  reasonably  traffic  generating  T h e i r a i r l i n e s would have to r e l y on f i f t h freedom t r a f f i c  generally,  on  carrying t r a f f i c  prosper.  A  liberal  beneficial  originating  exchange  of  i n other  traffic  "pro-consumer", t h e r e i s no evidence  c o u n t r i e s ) i n order  rights,  to the c a r r i e r s o f these c o u n t r i e s .  (or more  therefore,  Although  to  would  be  this policy i s also  t h a t consumer i n t e r e s t s p l a y e d a r o l e i n  the f o r m a t i o n o f the p o l i c y .  Hi)  The  Policies  of Australia  A u s t r a l i a and New carrier this  to  policy  must The  airlines,  be  two  viewed  may  i n competition  service.  be  international  light  with  of  the  an i n t e r n a t i o n a l l y - o w n e d  routes.  market  The  The  formation  position  of  policy  would  have  there  i s no  evidence  that  the  of two  their  required  o f the A u s t r a l i a n s and  a c o s t - e f f e c t i v e method o f a c h i e v i n g  however,  these  i s o l a t e d so t h a t l a u n c h i n g  foreign carriers,  of resources.  viewed as  Again,  in  on  c o u n t r i e s were s m a l l and  tremendous e x p e n d i t u r e Zealand  Zealand.  Zealand proposed, a t Chicago,  t r a n s p o r t passengers  countries. own  and New  a New  international  formation  of  a  monopoly c a r r i e r would, a t a l l , be a pro-consumer p o l i c y .  In summary, the p o s i t i o n s o f the c o u n t r i e s , o t h e r than negotiations It  would  formation public  not of  over  the Bermuda regime,  appear the  choice  that  regime.  theory.  consumer This Under  can be  interests  i s , i n fact, the  i n the  viewed as b e i n g  "pro-carrier".  played  a  what  p u b l i c choice  104  the U.S.,  much  of  i s to be model  role  expected,  (see  Figure  i n the given 3.2),  governments develop p o l i c i e s to s a t i s f y s p e c i a l i n t e r e s t groups i n a c o u n t r y . The  major  Since  very  World War  iv)  group  Policy  also  of  fifth  real  routes  air  transportation  United  above,  authority. an  would  be  the  airlines.  international flights  following  expect consumer i n t e r e s t s to be  strong.  States.  the  U.S.  favoured  traffic)  within  somewhat i n f o r m a l l y ,  power to  As w e l l ,  a wide  a  bilateral  a carrier  the U.S.  exchange o f  framework.  organization  was  strictly  intergovernmental o r g a n i z a t i o n  route The  U.S.  t h a t would have  opposed to  i n the  rights  providing  determination  of  and c a p a c i t i e s .  Why  did  the  was  i n favour  the  British  carriers. freedom  take these p o s i t i o n s ?  of a l i b e r a l  U.S.  to  the  "fill-up"  t h a t e x i s t e d a t the  reasons f o r the U.S. Would not  U.S.  c a r r i e r s had  for  the  U.S.  outlined,  Pan  plan;  that  i . e . , i t would b e n e f i t  low-cost  e s p e c i a l l y concerned w i t h a c q u i r i n g  traffic  was  airlines  vital  on  the  long-haul,  American was  support  one  U.S. fifth  multi-  support o f m u l t i l a t e r a l p r i c e - s e t t i n g are  really  U.S.  time.  because o f lower o p e r a t i n g to  the  r i g h t s f o r the same r e a s o n t h a t  a system o f m u l t i l a t e r a l p r i c e - s e t t i n g negate the  decision  the U.S.  I t seems l i k e l y  exchange o f r o u t e  c a r r i e r s would be  r i g h t s , since  The clear.  U.S.  were opposed  stop r o u t e s  First,  the  freedom  supported,  price-fixing any  would not  discussed  (including  in  p e o p l e a c t u a l l y t r a v e l l e d on  I I , one  The As  few  interested  a  costs?  system  of  s u p p o r t e d the o f the  105  airlines  Two  reasons are  less  advantage advanced  multilateral price-setting.  idea.  (As  Chuang (1972,  instrumental  i n the  p.26)  formation  of  IATA.)  compete  U.S.  carriers  against  organization  which  second r e a s o n was  were  concerned  subsidized, established t h a t the CAB  the  prospects  nationally-owned  carriers,  minimum  direct  carriers  statutory  (Bebchick,  control  1958,  authors  have  willingness carriers for  with  foreign  cited of  the  this  over  i n IATA t r a f f i c  rates  p.11).  The  be  most  tariff  having  so  that  welcome.  charged  CAB  by  could,  such  legislative States  to  conferences.  1 2  as  through  U.S.  quirk  as  the  approve  the  Koffler  (1966,  an The  CAB  international  however,  IATA.  to  coordination i n  indirectly  i f the r a t e s were s e t by U.S.  carriers  United  would  of  T h i s had t o do w i t h the f a c t t h a t the  e s t a b l i s h c o n t r o l over these r a t e s , conjunction  rates  supported m u l t i l a t e r a l  o r d e r to s t r e n g t h e n i t s p o s i t i o n . lacked  with  carriers in A  11  reason  number  behind  participation  of  of the U.S.  pp.228-229) s t a t e d ,  example:  I t i s q u i t e p o s s i b l e t h a t IATA would never have come t o f r u i t i o n had Congress g i v e n the CAB the same ratemaking a u t h o r i t y over f o r e i g n a i r commerce as i t had over domestic a i r commerce. N o t w i t h s t a n d i n g the express m a n i f e s t a t i o n o f c o n g r e s s i o n a l i n t e n t to the c o n t r a r y , i t i s c l e a r t h a t one o f the prime o b j e c t i v e s o f the CAB a t the Bermuda Conference was to o b t a i n a g r e a t e r measure of c o n t r o l over ratemaking i n i n t e r n a t i o n a l a v i a t i o n . . . By g i v i n g i t s b l e s s i n g to IATA, o f which the U n i t e d S t a t e s i n t e r n a t i o n a l c a r r i e r s were members, and by v i r t u e o f i t s ratemaking machinery, the CAB was a c t i n g to ensure and p e r p e t u a t e i t s own c o n t r o l over i n t e r n a t i o n a l a i r f a r e s .  T h i s was because a meeting among would contravene U.S. a n t i - t r u s t laws. 1 1  1 2  See:  Koffler  (1966);  Jones  (1949). 106  carriers,  (1960);  without  Bebchick  CAB  (1958);  approval,  and,  Gazdik  Finally,  the  question  multilateralism  must be  of  that  the  U.S.,  negotiating example, rights,  a  it  could  bilateral,  allow  basis,  carriers  to  i t s bargaining  U.S.  U.S.  preferred  bilateralism  superior than  route  carriers  a  g a i n these r i g h t s  not  for  in bilateral  its  including  rights  countries.  would  for  multilateral,  rights,  beyond  foreign  gains  have  from But  to  i t s own  the by  cede  to  summary, the  i n t e r e s t s o f the U.S. prominently international  into  bargaining position c a r r i e r s and U.S.  a i r transport  c h o i c e model would p r e d i c t , time,  and  the  problem  governments ( i . e . ,  the  decisions policy.  CAB.  U.S.  U.S.  The  an  freedom and  U.S. on  rights U.S.  rights  formulation  for  of  what the  their  the  enter its  public  s m a l l number o f a i r t r a v e l l e r s a t articulating  to  carriers.  Consumer i n t e r e s t s d i d not  in  a  could  appeared to r e f l e c t  the  by  As  fifths  obtain  T h i s would, i n f a c t , be  encounter  i n overcoming the  the  regarding  g i v e n the  consumers  of  basis.  beyond  airlines.  negotiations  airlines  negotiating  i t s c a r r i e r s w i t h o u t h a v i n g to cede s i m i l a r r i g h t s to f o r e i g n  In  to  I t i s obvious, from the market s t r e n g t h  1 3  of  often  strength  the  rather  from the  the  why  achieve  exchange  foreign  beyond r i g h t s  bilateral  use  a  to  addressed.  multilateral  would  carriers  foreign  on  as  views  that to  f r e e - r i d e r problem).  I t s h o u l d be n o t e d t h a t a l t h o u g h the U.S. was instrumental i n s u p p o r t i n g a m u l t i l a t e r a l exchange o f r o u t e r i g h t s a t the Chicago Conference ( i . e . , the " F i v e Freedoms" agreement), the U.S. s u p p o r t e d t h i s o n l y i n the context of b i l a t e r a l i s m . In o t h e r words, a b i l a t e r a l agreement f i r s t had to be s i g n e d a l l o c a t i n g r o u t e s between the c o u n t r i e s , b e f o r e the m u l t i l a t e r a l agreement came i n t o f o r c e . For a d i s c u s s i o n o f t h i s p o i n t , see O'Connor (1971, p.45). 1 3  107  b)  Structural  Factors  A number o f  structural  f a c t o r s were d e s c r i b e d  a d v e r s e l y a f f e c t the f u n c t i o n i n g o f a c a r t e l and change. These f a c t o r s i n c l u d e d (Table 3.2): an  i n d u s t r y ; the  i n t r o d u c t i o n o f new  i n the economy; and The  and  not  with  Overriding The  the  formation  State  third  3,  factor  that  discussed  riding  of  the  a new  i)  The  vast  cartel,  The  majority  s o v e r e i g n t y and  so  o f the 1946  as  possibly  are  not  in  particularly  Bermuda regime.  i n f l u e n c i n g the  borders  i n the  or  I t was  or  discussed,  in  i n having  an  t h a t they have an o v e r r i d i n g  i n economic growth.  formation  formation  overriding interest  i n much the same way  their  relevant  answer must be yes.  downturns  f u n c t i o n i n g o f a c a r t e l already  s t a t e s appeared to have an  i n defending  interest  industry;  overriding state interests.  international flag carrier, interest  i n t o an  Interests  maintenance o f a regime was Chapter  t h e r e f o r e r e s u l t i n a regime  changes i n the h e i g h t o f e n t r y b a r r i e r s i n t o an i n d u s t r y .  h e l p f u l i n the e x p l a n a t i o n o f the a d o p t i o n  c)  3 which c o u l d  changes i n the number o f f i r m s i n  technology  f a c t o r s are m a i n l y concerned w i t h  place  i n Chapter  o f the  1946  Was  this  Bermuda regime?  overThe  argument can be made as f o l l o w s : of  governments  feel  that  for  reasons  of  prestige,  symbolism, t h e i r c o u n t r i e s r e q u i r e an i n t e r n a t i o n a l f l a g  carrier; ii)  Some f l a g c a r r i e r s have h i g h e r c o s t s than o t h e r s ;  iii)  The  governments w i t h  their iv)  high  cost  carriers  must  seek ways o f s u b s i d i z i n g  carriers;  Government t r e a s u r i e s , however, are not u n l i m i t e d ;  108  v)  An  inexpensive  carriers  i s by  subsidies  having  governments  the  ticket  prices,  thus  provide  d i r e c t payments to i t s f l a g  the  the  ravaged  not  governments  out  post-World  o f most c a r r i e r s vis  of  the  the the  to  a  inefficient  This but  of  allows  through  the  the  higher  obligation  to  U.S.  economies, carriers,  support.  The  and  the  i t i s not cartel  provide  d i r e c t subsidies  to t h e i r  carriers.  relative  surprising  r e l i e v e d the  (or  at  least  a  Summary  regime  were  against  the  described, events.  a stable  w i l l i n g to pay to be  purse  government  I n t h i s s e c t i o n , the events l e a d i n g to the  that  their  cartel.  public  Two  considerable  obligation  subsidize  carrier.  War  a vis  p o r t i o n o f the r e q u i r e d s u b s i d i e s )  5.  of  relieving  IATA c a r t e l r e c e i v e d  to  c a r r i e r s form  paid  inefficiency that  for  be  Given  to  way  and The  the  modified  modified  regime would be  hegemonic  theory  formed  formation  of  i f there  to be  stability  hegemonic  1946  Bermuda  theory  stability  tested  predicted  e x i s t e d a hegemon c a p a b l e  the c o s t o f e s t a b l i s h i n g the regime.  supported, the f o l l o w i n g had  o f the  In order  for this  and  theory  established:  There must have been a hegemon; There must have been i n c e n t i v e s f o r the hegemon to form the There must have been i n c e n t i v e s or c o e r c i v e measures used to smaller There  countries should  to j o i n the regime;  have  e s t a b l i s h i n g the  been  identifiable  regime.  109  regime; enlist  and, costs,  to  the  hegemon,  in  These p o i n t s hegemonic  stability,  domestic a f f a i r s an  explanation  that  the  and  carriers,  nature  of  the  section  of  analyzed.  shown i n T a b l e  to as  to those o f  the  1946  i n the  intergovernmental  clauses  the  regime t h a t was processes  to the f o r m a t i o n  the  chapter,  However, b e f o r e  examine well  as  of  the  formed. of  notably  I t was  governments  seen  by  air  national  o f the IATA c a r t e l .  the  major  events  the  c h a r a c t e r i s t i c s of  related industry  1965  affecting  and  the  and  1965  discussed, 1965  the are  i t would  regime.  environmental  Post-Bermuda regime were,  of  organizations in  scheduled routes. t e c h n i c a l and had  economic  d i f f e r e n c e between the  i n use.  these events are  Bermuda regime i n most r e s p e c t s .  regulation  involvement  regulatory  most  of  i n t e r e s t s - proved u s e f u l i n p r o v i d i n g  policy-making  eminent r o l e i n p r i c e - s e t t i n g on  their  -  theory  These  factors,  are  4.2.  regulations  only  factors  s t r u c t u r e o f i n t e r n a t i o n a l a i r t r a n s p o r t between 1946  characteristics,  part  Other  modified  o v e r r i d i n g i n t e r e s t s o f governments i n m a i n t a i n i n g  helpful first  The  of  the  Post-Bermuda Regime  this  reviewed and be  supported.  overriding state  l i k e l y contributed  regulatory  a l l e s t a b l i s h e d and  therefore,  f o r the  the  The 1965  In  and  dominance  carriers  C.  were, i n f a c t ,  Whereas the  been  two  ICAO c o n t i n u e d  s a f e t y matters.  matters  regimes was  Bermuda regime c a l l e d  similar  IATA s t i l l had  formed between  regulatory  i n fact,  was  i n the  1946  Two and  minor.  f o r the  use  to p l a y a regional 1965, The  bilateral  a pre-  but major  capacity  o f Bermuda 1  c a p a c i t y c l a u s e s , which l e f t c a r r i e r s to e s t a b l i s h c a p a c i t y l e v e l s s u b j e c t  110  to  Table  4.2  S n a p - s h o t o f t h e 1965 P o s t - B e r m u d a R e g i m e a n d R e l a t e d E n v i r o n m e n t a l and I n d u s t r y F a c t o r s  1965 Bermuda Regime  Characteristic or Factor 2.  Regime a)  Characteristics  Role of IATA i n Setting Prices  Prices set by IATA o n v i r t u a l l y a l l major routes, although there i s some " i l l e g a l " discounting.  b) Membership i n IATA  V i r t u a l l y a l l major international scheduled c a r r i e r s , except some Eastern bloc. Membership was 97 a i r l i n e s with about one-half of active members representing developing countries and colonies.  c) Role of ICAO  Involvement i n technical and safety matters only.  d) B i l a t e r a l Capacity Clauses  Widespread use of b i l a t e r a l s which required the predetermination of capacity levels or memoranda of understanding which required equal d i v i s i o n of c a p a c i t i e s . U.S., however, generally adhered to 1946 regime.  e) Regulation by Regional Organizations  European C i v i l A v i a t i o n Conference was founded i n 1954 to promote development of a i r transport i n Europe and the Arab C i v i l Aviation Council was founded i n 1965 to promote a i r transport i n the Arab world. There was l i t t l e or no involvement by these organizations i n economic regulatory matters.  111  Table 4.2  Environmental  (Continued)  Factors  a) The W o r l d Economy  Strong growth and low unemployment i n most o f the w o r l d .  b) T h i r d World Development  Emergence o f newly independent countries, mainly i n Africa, and A s i a .  c) U . S . Government  Democratic administration, concerned with U . S . involvement i n Southeast A s i a .  Industry  Factors  a) M a t u r i t y o f A i r l i n e Industry  Industry experienced growth rates.  high  b)  State of Technology  Jets, introduced widely during the 1960s, supplanted the smaller and slower piston aircraft.  c)  Government Ownership  Government ownership o f most n a t i o n a l a i r l i n e s , except U . S .  d) R o l e o f C h a r t e r Operators  Beginning o f large-scale growth o f charters, starting with affinity charters.  e)  Size of  Industry  The i n d u s t r y p e r f o r m e d 199 b i l l i o n passenger-kilometres ( c o m p a r e d t o 19 b i l l i o n i n 1947).  f)  Product  Offerings  B o t h f i r s t c l a s s a n d economy c l a s s e s were o f f e r e d , along w i t h some e x c u r s i o n o r discount fares on major routes.  112  Table 4.2  (Continued)  g) " I l l e g a l " Discounting  Incidents of i l l e g a l discounting, e s p e c i a l l y on routes with over-capacity due to introduction of j e t s .  h) U.S. Dominance of A i r Transport  U.S. a i r l i n e s ' share of world a i r services ( i n passenger-kilometres) stood at about 50 percent.  113  ex  post  facto  widespread required service of  use a  Bermuda  of  the  Post-Bermuda  pre-determination  pre-determination  could  capacity  capacity  reviews,  take p l a c e , between  bilaterals  1 bilaterals.  of  on  therefore, U.S.,  a  be  seen  as  characterized  clauses.  in a  route.  however,  was  levels  resulting  carriers  The  capacity  capacity  generally  the  can,  of  regime  for  the  fairly The  agreements  carriers even  the  before  distribution  pre-determination  more  generally  These  by  restrictive  maintained  of  than  the  i t s support  f o r the Bermuda 1-type agreements.  A notable  e n v i r o n m e n t a l development d u r i n g  de-colonization  o f much o f A s i a and  g e n e r a l l y wanted t h e i r own by  a  large  growth  Africa.  airlines  Other developments i n c l u d e d :  the  and  e a r l y 1960s  of discount  of j e t s  strong  continued  although  i n the  with  growth o f the  dominance only  half,  of  newly independent  so the p e r i o d was (see  Figure  2.15,  (see  Figure  2.17)  for  the  countries  example).  than  in  the  three  industry  quarters,  of  (see  1950s,  introduction  2.16); the growth o f c h a r t e r  U.S.  the  characterized  i n d u s t r y as a whole (see F i g u r e  the  rather  1946-1965 was  i n t r o d u c t i o n o f economy f a r e s i n the  i n the l a t e 1950s (see F i g u r e  the c o n t i n u e d the  fares  The  national carriers,  i n T h i r d World  the p e r i o d  transport; 2.4);  Figure  total  and, 2.8),  passenger-  kilometres.  Why  were  there  t r a n s p o r t between 1946 hegemonic t h e o r y  and  so  few and  other  changes 1965,  in  despite  the  114  of  international air  these s i g n i f i c a n t developments?  f a c t o r s w i l l be  p e r i o d to a r r i v e a t an answer to t h i s  regulation  used to a n a l y z e the events o f  question.  The the  2.  Developments Before  Leading  to the Formation  an a n a l y s i s  i s undertaken  of the 1965 Post-Bermuda  o f the reasons why  there  Regime  were so few  r e g u l a t o r y changes between 1946 and 1965, a review w i l l be conducted o f some of  the important  respect  developments d u r i n g  t o the b i l a t e r a l  the p e r i o d .  First,  developments  r e g u l a t i o n o f a i r transport are discussed.  with  This i s  f o l l o w e d by a review o f developments r e l a t i n g t o IATA and m u l t i l a t e r a l p r i c e setting.  Finally  there  i s a d i s c u s s i o n o f non-IATA  a i r t r a n s p o r t d u r i n g the  post-Bermuda p e r i o d .  a)  Bilateral  i)  The Failure  Regulation to Reach  Agreement  on Multilateral  Intergovernmental  Price-  Setting Following  the  failure  to  achieve  agreement  on  the  multilateral  r e g u l a t i o n o f a i r t r a n s p o r t a t Chicago i n 1944, and the d e c i s i o n by the U.S. and  U.K.  to s i g n a b i l a t e r a l  regulatory  agreement  i n Bermuda i n 1946,  were two a d d i t i o n a l attempts t o conclude a m u l t i l a t e r a l agreement. attempt, proposed i n 1946, c o n s i s t e d o f a d r a f t m u l t i l a t e r a l first  five  unilaterally  disputes  first  exchange o f the  freedoms o f a i r t r a n s p o r t , based on Bermuda 1 c a p a c i t y p r i n c i p l e s  (O'Connor, 1971, pp.49-52). to  The  there  arose  I n d i v i d u a l a i r l i n e s o r governments would be f r e e  establish rates, over  tariffs  r i g h t t o appear b e f o r e  as  long  or c a p a c i t y  as  they were  levels,  "reasonable".  governments  When  would have the  an i n t e r n a t i o n a l r e g u l a t o r y b o a r d t h a t had f u l l  powers  o f judgment.  The d r a f t agreement was Aviation  Organization  r e j e c t e d by the P r o v i s i o n a l I n t e r n a t i o n a l  (the p r e d e c e s s o r  115  t o ICAO) (O'Connor,  1971,  Civil  pp.54-55).  The  major  critic  constituting  of  an  the  agreement was  international  the U n i t e d  S t a t e s , which was  with  powers  board  real  over  against  the  economic  regulation of international a i r transport.  A  second post-Bermuda attempt  year l a t e r , except  i n 1947.  that  there  d i s p u t e s would be by  both  the  The  1947  would  be  at a m u l t i l a t e r a l  d r a f t was no  s i m i l a r to the 1946  international  and  U.K.,  countries  which  to  produce  r e p o r t i n f a v o u r o f b i l a t e r a l r e g u l a t i o n (O'Connor, 1971,  One of  pp.  rejected  a  minority  55-58).  f i n a l attempt a t d r a f t i n g an agreement f o r the m u l t i l a t e r a l exchange  route r i g h t s ,  yet  Instead,  T h i s agreement was  helped  one  d r a f t agreement,  r e g u l a t o r y board.  s e t t l e d on a b i l a t e r a l b a s i s .  U.S.  agreement f o l l o w e d  another  i n Geneva, i n 1947,  draft  multilateral  was  unsuccessful.  agreement,  the  Geneva  Instead of conference  producing concluded  t h a t b i l a t e r a l i s m s h o u l d be the b a s i s f o r the exchange o f r o u t e r i g h t s i n the future  ii)  (0'Conner, 1971,  Post-Bermuda  Bilateral  F o l l o w i n g , the signings. capacity  principles  grant f i f t h its  The  1 4  c o n c l u s i o n o f Bermuda .1, United  1956.  States  (Haanappel,  based on  J o n e s (1960, agreements s i g n e d . 1 5  Agreements t h e r e was  generally  1984,  stayed  p.35),  an  a spate  true  although  1 5  freedom r i g h t s to f o r e i g n c a r r i e r s .  bilaterals  1 4  p.58).  to  i t was  of  the  bilateral Bermuda  r e l u c t a n t to  The U n i t e d S t a t e s n e g o t i a t e d  " e q u i t a b l e exchange o f b e n e f i t s " ( S t o f f e l ,  p.231)  reported  that  An e x c e p t i o n was the U.S. b i l a t e r a l See: L i s s i t z y n (1964, p.251). 116  by  1  1949,  there  agreement w i t h  were  over  1959,  200  India, signed i n  p.127).  Since  the U n i t e d  States  market was much l a r g e r and more  than i t s b i l a t e r a l p a r t n e r s , the U.S. f e l t should  involve extra privileges  carriers.  t h a t an e q u a l exchange o f b e n e f i t s  i n the form o f f i f t h  As w e l l , the U.S. c o n s i d e r e d  In  a d d i t i o n to b a r g a i n i n g  freedom  rights  multiple  designation  Although t h i s  i t did result  carrier  flying 1 6  a i r carriers  New  Stoffel  i n significant  York-Paris,  1959, p.128).  States  also  carriers  and a second U.S.  (1959, p.132) r e p o r t e d  operated  competition" carrier  and  insisted  i n i t s post-Bermuda  "area  terminus"  (on the way t o A s i a o r  1 capacity provisions  the U n i t e d  d i d n o t always mean two U.S.  route,  Paris)!  of  markets  (Stoffel,  f o r Bermuda  for i t s carriers,  freedom r i g h t s f o r i t s  i t s market t o be a " n a t u r a l  as opposed t o the European " n a t u r a l s t o p - o v e r " A f r i c a o r t o o t h e r European c o u n t r i e s )  lucrative  fifth  on the  bilaterals.  the exact (e.g.,  flying  one  same U.S.  Washington-  t h a t by 1959, t h e r e were a t l e a s t  two U.S. c a r r i e r s a u t h o r i z e d t o serve a l l major t r a f f i c p o i n t s abroad.  The  U.S.  reluctance  t o grant  encountered s i g n i f i c a n t o p p o s i t i o n . demanded t h a t the U.S. r e n e g o t i a t e p. 234)  reported  that  Germany  were s u c c e s s f u l  three in  fifth  freedom  During  r i g h t s to f o r e i g n  the 1950s, a number o f c o u n t r i e s  their bilateral  countries,  carriers  agreements.  the N e t h e r l a n d s ,  renegotiating their  agreements  Jones  France,  (1960,  and West  to o b t a i n  fifth  freedom r i g h t s t o L a t i n America.  See: Keyes (1968, p.7) f o r a d e s c r i p t i o n o f t h i s p o l i c y w i t h U.S. P a c i f i c r o u t e s . 1 6  to  117  respect  While the U.S. many o t h e r p.231;  was  countries  Haanappel,  were s i g n i n g more r e s t r i c t i v e  1984,  which p r e - d e t e r m i n e d even d i v i s i o n capacities  of  n e g o t i a t i n g b i l a t e r a l s based on Bermuda 1 p r i n c i p l e s ,  p.35).  These  c a p a c i t i e s and  b u s i n e s s between  were  not  agreements  frequency the  agreements often  levels,  contained  operating  in  agreement,  the  on  1960,  clauses  resulting in a  airlines  pre - determined  (Jones,  fairly  a route. they  When  were  often  r e s t r i c t e d i n a s e c r e t d i p l o m a t i c note, known as a c o n f i d e n t i a l memorandum o f u n d e r s t a n d i n g (Slotemaker, 1966,  In  addition  bilaterals  that  to  containing  were  signed  revenue p o o l i n g p r o v i s i o n s . restrict  competition  by  e q u a l i z e revenue on a  p.903).  by  capacity  sharing  countries,  other  These agreements not  1 7  d i v i d i n g capacity,  but  Bermuda 1-type agreements and kept  Kingdom, d i d  more r e s t r i c t i v e  to Bermuda p r i n c i p l e s , other  only  the  U.S.,  of  the  also  had  a l l o w e d c a r r i e r s to  they a l s o a l l o w e d c a r r i e r s to  be  c h a r a c t e r i z e d as a mix  agreements.  countries,  whereas the  i n c l u d i n g the  of U.S.  United  not.  b)  IATA and  i)  IATA Conference In  than  many  route.  I n summary, the post-Bermuda b i l a t e r a l s may  generally  agreements,  Multilateral  order  international  to  Price-Setting  Machinery "set  routes,  rates IATA  (subject  established  to  governmental  traffic  approval)  conference  on  machinery.  Haanappel (1984, p.36) s t a t e s t h a t i n the case o f the U n i t e d S t a t e s , the CAB c o n s i s t e n t l y found p o o l i n g agreements to be a n t i - c o m p e t i t i v e , and adverse to the p u b l i c , i n t e r e s t . 1 7  118  Originally  nine  conferences  number was  reduced to t h r e e i n 1947.  number o f c o n f e r e n c e s was  were  reduced,  formed  on  a  geographical basis,  A c c o r d i n g t o Bebchick  but  this  (1958, p.22),  " i n r e c o g n i t i o n o f the interdependency  the of  many r o u t e s . . . and the i m p r a c t i c a l i t y o f d e a l i n g w i t h such r o u t e s i n i s o l a t e d segments...".  The  As  t h r e e c o n f e r e n c e s covered the f o l l o w i n g areas o f the w o r l d :  well,  Conference  1 - the  Conference  2 - Europe,  Conference  3 - A s i a and the  "joint  conferences"  Americas; Africa,  were  and the M i d d l e E a s t ;  Pacific.  convened  to  r e g i o n a l r o u t e s (e.g., North A t l a n t i c o r North  Membership for be one  active  i n the  traffic  IATA members, was  agreed unanimously  conferences  compulsory.  establish  on  during  the  post-Bermuda  1 9  This  to  T a r i f f s f o r o t h e r r o u t e s were c o n s t r u c t e d by IATA,  formula.  c l a s s , economy, e t c . ) ,  operations.  regime,  f o r major r o u t e s had  As w e l l as e s t a b l i s h i n g l e v e l s f o r the v a r i o u s c l a s s e s o f t a r i f f s first  inter-  Pacific).  Tariffs  18  tariffs  by the conference members and were g e n e r a l l y s e t f o r a  to two y e a r p e r i o d .  based on a mileage  and,  (i.e.,  IATA a l s o s e t the s e r v i c e c o n d i t i o n s f o r a i r l i n e  i n c l u d e d such  things  as  the  minimum  allowable seating  IATA a l s o had (and s t i l l has) a s s o c i a t e members. These are a i r l i n e s t h a t o p e r a t e o n l y domestic r o u t e s and do not p a r t i c i p a t e i n t a r i f f c o o r d i n a t i o n . 1 8  I f an a g r e e m e n t c o u l d not be reached, an "open r a t e " s i t u a t i o n resulted. A i r l i n e s , however, were p r e c l u d e d from c h a r g i n g "unacceptable" r a t e s , by the u l t i m a t e c o n t r o l w i t h which governments had over i n t e r n a t i o n a l tariffs. 1 9  119  density,  the  offered,  type o f meal s e r v i c e and  and  the  international service,  or  level  flights.  charging  of  IATA  tariffs  below  association.  ii)  Price-Setting  IATA  rate-setting  difficulties. Aeronautics fares. the  2 1  The  IATA l e v e l ,  that could  travel these  could  during  instructed  the  period,  1962 U.S.  The  CAB  was  traffic  the Post-Bermuda the  period  agents  on  conditions  of  be  f i n e d , or  even  was  fraught  with  Regime  1946-1965  carriers,  disagreement between the the  "Chandler  conference  IATA members not felt  be  2 0  in  most s i g n i f i c a n t  the  p.33).  to  violating  Board, g e n e r a l l y w i t h the support o f U.S.  post-Bermuda  to  in agree  Crisis"  CAB of  Chandler, to  international carriers,  A l t h o u g h no a i r l i n e s were (1969, p. 8) r e p o r t e d t h a t d u r i n g the t o t a l l i n g s e v e r a l hundred thousand however, was l i k e l y s m a l l compared to 2 0  payable  found  the  entertainment  IATA's major problem stemmed from the d e s i r e o f the U.S.  attending  1969,  commission members  e x p e l l e d from the  Multilateral  in-flight  tariff  and  Civil  to have lower IATA,  1962-63.  during Before  Arizona,  the  increases  (Pillai,  a t t h a t time, were  CAB  earning  e x p e l l e d from the a s s o c i a t i o n , Tauber post-Bermuda p e r i o d , IATA l e v i e d f i n e s d o l l a r s on i t s members. This t o t a l , the b e n e f i t s from " c h e a t i n g " .  The CAB, i n f a c t , r e j e c t e d the North A t l a n t i c t a r i f f s a r i s i n g from the f i r s t IATA r a t e agreement. The CAB was d i s s a t i s f i e d w i t h the f a i l u r e o f IATA t o p r o v i d e c o s t d a t a to support i t s f a r e r e q u e s t . The CAB later o v e r t u r n e d i t s d e c i s i o n and approved the IATA f a r e s (Bebchick, 1958, p.25). 2 1  I n 1956, t h e CAB, again, r e j e c t e d t h e IATA N o r t h A t l a n t i c t a r i f f request. Under i n t e n s e l o b b y i n g pressure from f o r e i g n governments and c a r r i e r s , the CAB r e v e r s e d i t s d e c i s i o n and g r a n t e d a p p r o v a l to the IATA fares. The r e a s o n p r o v i d e d by the CAB f o r i t s change o f p o s i t i o n was t h a t i t d i d not want to be r e s p o n s i b l e f o r the chaos t h a t would r e s u l t from f o r c i n g c a r r i e r s to change t h e i r t i c k e t i n g and s c h e d u l e s a t a l a t e date (Bebchick, 1958, p.26). 120  reasonable  rates  (Keyes, 1964,  The  of  p.183).  result  of  return,  and  Finally,  the  to  pressure  the CAB  its tariff  a  Chandler  was  conference  other  maintaining charter)  placed  d i d reverse  market  share  carriers. The  the  wanted  lower  fares.  As  not  justified  was,  on  the  CAB  however,  a  five  percent  disapproved  by  to  its decision.  reverse  the CAB,  but 2 3  i t s d e c i s i o n a f t e r IATA made a minor adjustment  difficulties  second  period, fares, well,  during  i n the  (Charters  agreement on t a r i f f s and During  was  filings.  major  chapter.)  increase  T h i s i n c r e a s e was  In a d d i t i o n to i t s disagreements w i t h three  fare  2 2  i n c r e a s e on r o u n d - t r i p f a r e s . considerable  that  problem  the  face  are  the CAB,  of  period  1946-1965.  competition  discussed  was  IATA encountered a t  the  i n the  difficulty  with next in  c o n d i t i o n s o f s e r v i c e from all  major and there  disagreements European were  a  arose  carriers number  between  which of  were  disputes  The  first  non-IATA  sub-section achieving  conference U.S.  least  (mainly of  over  the  unanimous members.  carriers  reluctant  was  to  24  which reduce  conditions  of  Chuang (1972, pp.118-119) n o t e d t h a t on t h e i r t r a n s - P a c i f i c r o u t e s , b o t h Northwest A i r l i n e s and Pan American Airways were e a r n i n g r e t u r n s w e l l i n excess of. the CAB g u i d e l i n e o f a 10.5 p e r c e n t r e t u r n on Investment. Returns on N o r t h A t l a n t i c r o u t e s f o r TWA and Pan American were, however, lower than the a l l o w a b l e g u i d e l i n e s . 2 2  2 3  the U.S.  P r e s s u r e came from f o r e i g n governments and c a r r i e r s , S t a t e Department ( P i l l a i , 1969, pp.7-8; Keyes, 1964,  as w e l l as p.182).  from  P i l l a i (1969, p.95) s t a t e d , t h a t most t r a f f i c c o n f e r e n c e meetings ended i n e i t h e r r e c e s s or adjournment due to disagreements among c a r r i e r s . 2 4  121  service,  including  2 5  the l e v e l  o f surcharge t h a t was  t o be demanded f o r j e t  transportation.  The that  introduction  resulted,  discounting (1969, of  p.11),  tariff  late  of  of j e t s  contributed its tariffs  the 1962  enforcement  1960s, by  i n the  which  to  coordination  time  There Bermuda  reached, from  not  t h e r e had been s u f f i c i e n t  and  "excess -  the  capacity" "illegal"  A c c o r d i n g to  Tauber  by the d i s c u s s i o n  alleviated  until  the  increases  i n demand to  problems  with  capacity.  significant  enforced  governments  period, to  and  a  i t should  great degree.  t h e r e was  be  noted IATA  2 6  tariff that  enjoyed  little  discussion  about  a i r transportation  d u r i n g the  post-  system.  Transportation two  period  -  The  IATA c a r r i e r s  problem  post-Bermuda  were  scheduled) .  The  the  Air  pp.177-178).  was  c o m p l e t e l y r e p l a c i n g the IATA  Non-IATA  problem  problems.  during  support  the  "dominated"  encounter  widespread  and  IATA annual meeting was  did  were  1950s, third  1964,  ,IATA  agreements  c)  IATA's  (Keyes,  make use o f much o f the excess  Although  late  was  types  o f non-IATA  non-IATA  percentage  scheduled of  and  charter  (also  known  as  non-  s c h e d u l e d p a s s e n g e r - k i l o m e t r e s performed  very, h i g h a t c l o s e  to n i n e t y p e r c e n t ,  2 7  so t h a t  by  non-IATA  See, f o r example, C a r t e r ' s (1965) d i s c u s s i o n o f the d i s p u t e over the o f f e r i n g o f i n - f l i g h t movies on the N o r t h A t l a n t i c . 2 5  2 6  The CAB  even a c t e d to e n f o r c e IATA t a r i f f s .  2 7  See F i g u r e  2.11. 122  See Tauber  (1969).  s c h e d u l e d a i r t r a n s p o r t was r e l a t i v e l y i n s i g n i f i c a n t . was c h a r t e r between agree  scheduled on  a  transport,  formula  agreed  transport.  that  charter  However, as Haanappel  relatively  Conference  regulate  the c o n f e r e n c e  regulation  transport  should  transport.  charter  carriers  could not  o f scheduled a i r operate  (1978, p.146) o u t l i n e d ,  charter  unfettered,  o f 1944 had d i s t i n g u i s h e d  Whereas  f o r the m u l t i l a t e r a l  to u n i l a t e r a l l y  operating  The Chicago  2 9  and c h a r t e r  i t was  unhindered. quick  transport.  F a r more s i g n i f i c a n t  2 8  relatively  governments were  In practice, rather  than  had t o conform w i t h  both  the r e g u l a t i o n s o f the o r i g i n c o u n t r y and o f the d e s t i n a t i o n c o u n t r y o f t h e i r flights.  In U.S.  3 0  the l a t e  1940s and i n most o f the 1950s, governments,  government,  hurting were  were  the o p e r a t i o n s  generally  reluctant  to authorize  o f the s c h e d u l e d  subsidized,  so  many  carriers.  the promotion  charters  i n c l u d i n g the f o r fear of  The s c h e d u l e d  of charters,  carriers  against  the  The o n l y ( r e a s o n a b l y ) major non-IATA i n t e r n a t i o n a l s c h e d u l e d c a r r i e r s were I c e l a n d i c and a few from the. E a s t e r n b l o c c o u n t r i e s (Tauber, 1969, p . l ) . 2 8  C h a r t e r t r a n s p o r t , a t l e a s t d u r i n g the post-Bermuda p e r i o d , c o u l d be viewed as t r a n s p o r t t h a t d i d n o t operate based on a p u b l i s h e d schedule or w i t h f l i g h t s so r e g u l a r o r f r e q u e n t t h a t they c o n s t i t u t e d a s y s t e m a t i c , recognizable series. See Haanappel (1978, p.145). 2 9  IATA, t o o , sought t o r e g u l a t e c h a r t e r o p e r a t i o n s . I n 1953, IATA adopted a r e s o l u t i o n which governed the c h a r t e r market u n t i l 1972 (Haanappel, 1978, p.147). The r e s o l u t i o n a l l o w e d IATA c a r r i e r s t o p e r f o r m c h a r t e r s e r v i c e s a t a p r i c e ( p e r passenger) lower than IATA s c h e d u l e d r a t e s o n l y i f one o f t h r e e c o n d i t i o n s was met: the a i r p l a n e was c h a r t e r e d by a s i n g l e e n t i t y (e.g., by a company); the a i r p l a n e was c h a r t e r e d by a study group; o r , the a i r p l a n e was c h a r t e r e d by an " a f f i n i t y group". The a f f i n i t y group had to have an aim o r purpose and " s u f f i c i e n t a f f i n i t y " prior to t r a v e l . According to Haanappel (1978, p.148), the r e a l importance o f the IATA r e s o l u t i o n l a y i n the f a c t t h a t i t was adopted by many governments i n the 1950s and 1960s, and s u b s e q u e n t l y a p p l i e d t o non-IATA c h a r t e r c a r r i e r s , thereby r e s t r i c t i n g charter competition. 3 0  123  interests  o f the scheduled  subsidies.  I n 1957, however,  international spurred  carriers  international  permitting  data  i n c r e a s e d , throughout international  ended  governments  i t s subsidies  legislation,  growth  a t the h e i g h t the 1960s,  Developments  post-Bermuda  establishing  of  scheduled This  and the CAB t o r e l a x i t s  of charter  operations  on U.S.  b e f o r e . 1970 a r e s c a r c e ,  Goldklang  characterized  routes. by  capacity  clauses,  primary  means was  o f the t o u r i s t season.  and by 1971 had c l o s e  witnessed method  the increased on U.S.  discounting,  to f o r t y  agreements  failed entry  during  use of r e s t r i c t i v e  traffic  percent  of  feuds  levels  at  and c a p a c i t y  on  the p e r i o d  IATA  with  from  the CAB  over  price  124  The  levels,  o f s e r v i c e , problems o f  non-IATA  services.  s e r v i c e s , however, d i d i n c r e a s e i n p o p u l a r i t y , e s p e c i a l l y d u r i n g  See F i g u r e 2.7.  were  remained the  f o r i n t e r n a t i o n a l routes.  and c o n d i t i o n s  and c o m p e t i t i o n  attempts  pre - d e t e r m i n a t i o n . o f  i n t e r n a t i o n a l routes.  to withstand  i n t e r n a l b i c k e r i n g over t a r i f f  the l a s t  of regulating  of establishing prices able  Charter  - A Summary  Bilateral  except  c h a r t e r s had e l e v e n  31  period  a multilateral  international  3 1  additional  1979, p.32, Marx, 1981, p.136).  operations  tonne-kilometres.  Post-Bermuda  illegal  cost  t h a t i n 1960 on the N o r t h A t l a n t i c ,  o f the b u s i n e s s  Association  the  on c h a r t e r  (1961, p.99) r e p o r t e d  The  t o enact  could  routes.  Although  d)  the U.S.  (Hammarskjold,  the U.S. Congress  regulations,  percent  carriers,  Charter  the 1960s.  The similar of  this  major  regulations to those  of  the  post-Bermuda  o f the Bermuda regime.  section of  regulatory  the  chapter  regime  The  were,  for  the  the  part,  major t a s k i n the a n a l y s i s h a l f  i s , t h e r e f o r e , to e x p l a i n why  changes d e s p i t e  most  developments  during  t h e r e were  the  period  no  1946-  1965.  2.  Analysis  of  Stability In  the  Maintenance  of  the  Regime Using  the  Modified  Hegemonic  Theory  this  section  of  the  chapter,  an  attempt  i s made  to  analyze  the  maintenance o f the post-Bermuda regime u s i n g the m o d i f i e d hegemonic  stability  theory.  sustained  as  Hegemonic s t a b i l i t y  l o n g as  there  the regime and to the  the  rest  continues  willing  of  fact,  the  p r e d i c t s t h a t a regime can be  to e x i s t  to c o n t i n u e  the world.  Bermuda regime,  theory  As was  United  a dominant power capable  of  maintaining  to bear the c o s t s o f s u p p l y i n g the regime shown i n the a n a l y s i s o f the  S t a t e s was  formation  the hegemon i n 1946.  Given  i n o r d e r to determine i f hegemonic s t a b i l i t y t h e o r y i s to be  the f o l l o w i n g q u e s t i o n s must be Did  the  United  maintaining  of  this  supported,  addressed?  States  continue  as  the  dominant power,  capable  of  the regime, d u r i n g the p e r i o d 1946-1965?  I f so, what were the i n c e n t i v e s f o r the U.S.  to c o n t i n u e  to  support  the regime? What were the c o s t s , to the U.S. What  incentives  support  or  coercive  i n maintaining  measures  were  o f o t h e r c o u n t r i e s f o r the regime?  These q u e s t i o n s  are addressed,  i n t u r n , below:  125  the regime?  used  to  maintain  the  a)  Did  the  U.S.  Continue  as  the  Dominant  Power During  the  Period  1946-  1965? During lead and  the one  the post-Bermuda regime, the U n i t e d S t a t e s c o n t i n u e d ,  airline o f the  military  and  i n d u s t r y , but  two  to  support  strongest m i l i t a r y  economic  superpower,  as  the  largest  forces. well  The  as  the  not o n l y to  economy i n the  United  S t a t e s was  world's  foremost  world both  a  aviation  country.  With r e s p e c t to a i r t r a n s p o r t , the U n i t e d S t a t e s was greater  than  Lissitzyn Atlantic early  fifty  share  of  the  world  (1964, pp.257-258) i n d i c a t e d , the U.S. market d i d s l i p  1960s.  Lissitzyn  revitalization  of  economies i n these  In  percent  summary,  from 60  percent  attributed  European  and  the  i n 1950  market.  carriers'  32  However,  airlines  a as  share o f the North  to under 40 p e r c e n t  d e c l i n e i n U.S.  Japanese  a b l e to m a i n t a i n  market  share  i n the to  and  to  the  able  to  maintain  the  stronger  regions.  i t would  appear  that  the  U.S.  was  the  dominant p o s i t i o n i n the a i r t r a n s p o r t i n d u s t r y d u r i n g the p e r i o d 1946-1965, although  i t s dominance d i d d e c l i n e d u r i n g those y e a r s .  o f the U.S. capable  economy and  of maintaining  military  The  s i z e and  f o r c e would i n d i c a t e t h a t the U.S.  strength was  also  the a i r t r a n s p o r t regime, i f i t so chose.  See F i g u r e 2.8 f o r the U.S. share o f the world's s c h e d u l e d k i l o m e t r e s f o r the p e r i o d 1955-1965. 3 2  126  passenger-  b)  into  What were the Incentives  for  The  U.S.  i n c e n t i v e s f o r the  two  categories  the U.S.  to Maintain  i n maintaining  - national security  and  the  the  Regime?  regime  economic.  can  be  divided  Thornton  (1970b,  pp.681-682) c i t e d examples o f b i l a t e r a l n e g o t i a t i o n s where the U.S. to  exchange p r o f i t a b l e  U.S.  security.  U.S.  actions:  Thornton  routes  to be  used by  foreign carriers  appeared  f o r increased  p r o v i d e d two n a t i o n a l s e c u r i t y - b a s e d reasons  f o r the  The f i r s t a s p e c t i s a r e s u l t o f t e c h n i c a l f a c t o r s . From 1949 u n t i l about 1962 the U n i t e d S t a t e s S t r a t e g i c A i r Force r e q u i r e d f o r e i g n b a s e s and o t h e r f o r e i g n a s s i s t a n c e to r e a c h p o s s i b l e t a r g e t s i n the S o v i e t U n i o n e f f e c t i v e l y . Faced w i t h this o v e r r i d i n g need, i n an environment i n which a g g r e s s i o n was f e a r e d more by the U n i t e d S t a t e s than by i t s a l l i e s , s e l e c t e d key n a t i o n s found themselves i n extremely s t r o n g b a r g a i n i n g p o s i t i o n s . Italy, Spain, P o r t u g a l , the U n i t e d Kingdom, Japan, the N e t h e r l a n d s and s e v e r a l o t h e r s t a t e s a l l were a b l e to b a r g a i n e f f e c t i v e l y f o r a v a r i e t y o f c o n c e s s i o n s from the U n i t e d S t a t e s . . .  The second a s p e c t o f the U.S. need f o r f o r e i g n agreements i s p r o b a b l y p a r t i a l l y a r e s u l t o f the f i r s t one. I t i s the U n i t e d S t a t e s ' d e s i r e to pursue a forward s t r a t e g y . U.S. p o l i c y c a l l e d for m a i n t e n a n c e o f non-communist governments i n a l l s t a t e s not a l r e a d y communist. T h u s , when a f o r e i g n c o u n t r y begged f o r f a v o r a b l e treatment from the U n i t e d S t a t e s government f o r t h e i r airline, the U n i t e d S t a t e s , f e a r f u l o f weakening a f r i e n d l y government or o f r e s t r i c t i n g the f o r e i g n exchange e a r n i n g power o f the seeker, f e l t , o b l i g e d to a s s i s t .  In reasons until  a d d i t i o n to  national security  interests,  there  f o r the U n i t e d S t a t e s to m a i n t a i n the regime.  1957,  maintenance  the U.S. of  IATA  provided prices,  were  As was  the  restrictions  carriers.  placed  on  o p e r a t i o n s , were seen as ways o f promoting the p r o f i t a b i l i t y o f the carriers,  and o f r e d u c i n g s u b s i d y payments (Goldklang,  127  1961,  economic  o u t l i n e d above,  s u b s i d i e s to i t s i n t e r n a t i o n a l and  also  The  charter scheduled  p.101; p.107).  I n a d d i t i o n , the maintenance o f the IATA c a r t e l l i k e l y p r o v i d e d economic benefits  to U.S.  that  U.S.  is  the  no  carriers  carriers.  Although  there  i s some  c a r r i e r s would have p r e f e r r e d lower-than-IATA p r i c e s ,  evidence  free-pricing  international  t h a t the  regime.  grew  evidence 3 3  there  c a r r i e r s would have p r e f e r r e d , as an a l t e r n a t i v e ,  As U.S.  stronger,  the  subsidy IATA  support  cartel  was  withdrawn,  provided  the  and  U.S.  a  as f o r e i g n  carriers  with  h e l p f u l p r o t e c t i o n against f o r e i g n competition.  In U.S.  summary,  to m a i n t a i n  support  of  there  were b o t h  the post-Bermuda regime.  NATO a l l i e s  while  economic  s u b s i d i e s and the support o f U.S.  c)  What were the costs The  U.S.,  security  to the U.S.  travellers  economic  incentives for  S e c u r i t y reasons  concerns  the  p e r t a i n e d to the  i n v o l v e d the  limitation  of  carriers.  major c o s t s o f m a i n t a i n i n g  were p a i d by  and  and  in maintaining  the  regime?  the post-Bermuda regime, shippers.  assumed by  IATA p r i c e s were  the  undoubtedly  h i g h e r than what would have r e s u l t e d under a more c o m p e t i t i v e regime, c o s t i n g travellers  and  s h i p p e r s a d d i t i o n a l monies to use  a i r transport.  Since  U.S.  c i t i z e n s were d i s p r o p o r t i o n a t e l y h i g h u s e r s o f i n t e r n a t i o n a l a i r t r a n s p o r t ,  3 4  Lower f a r e s , e s p e c i a l l y i n the 1950s, were seen by U.S. c a r r i e r s as a means f o r expanding t h e i r markets (Chuang, 1972, p.117). Pan American, f o r e x a m p l e , was i n s t r u m e n t a l i n the i n t r o d u c t i o n , by IATA, o f t o u r i s t and economy s e r v i c e s i n the 1950s (Keyes, 1964, p.177). 3 3  L i s s i t z y n (1964, p.257) r e p o r t e d , f o r example, t h a t between 1950 and 1962, U.S. c i t i z e n s comprised over s i x t y p e r c e n t o f i n t e r n a t i o n a l t r a v e l l e r s on r o u t e s t o u c h i n g down i n the U.S. 3 4  128  U.S.  citizens  maintaining  U.S.  had  to  bear  the regime.  The  favourable reduction  U.S.  as  well,  provided  route  awards,  i n valuable  disproportionate  a  share  incentives  to  to  of  the  smaller  participate in  routes  the  a v a i l a b l e , on  c a r r i e r s (Thornton, 1970b, p.681; L i s s i t z y n ,  d)  What Incentives of Other  Countries  There i s l i t t l e as  many b e n e f i t s  participant  as  of  Coercive for  the  Measures  the  of  costs  of  maintaining  countries, regime.  1964,  were used  i n the  the  form  of  r e s u l t was  a  duopoly b a s i s ,  to  The  p.252).  to Maintain  the  Support  Regime?  doubt t h a t the major aim possible  costs  a monopoly or  U.S.  or  share  .  c a r r i e r s paid,  regime.  a  o f most c o u n t r i e s was  for their national  carriers.  i n the n e g o t i a t i o n o f post-Bermuda b i l a t e r a l s  to secure  According  to  (Slotemaker,  one 1966,  p.901):  The n a t i o n a l a i r l i n e s a c t u a l l y s e t the course f o r n e g o t i a t i n g [bilaterals] and not for instance the national tourist organization, the n a t i o n a l h o t e l l e r i e or b u s i n e s s organizations l i k e Chambers o f Commerce. G e n e r a l l y speaking, not a s i n g l e element o f the n a t i o n a l economy, except the a v i a t i o n i n d u s t r y , had i n f l u e n c e on these n e g o t i a t i o n s .  The  incentives,  support  f o r the  therefore,  that  countries  wished  post-Bermuda regime, were i n the  from  the  U.S.  form o f b e n e f i t s  to  secure  for  their  carriers.  These  were  participating  two in  major the  incentives  regime.  The 129  that  were  first,  and  procured most  by  countries  important,  was  for IATA  pricing. by  High IATA p r i c e s were d e s i r e d by c a r r i e r s  governments  1972,  p.123).  to  ease  The  from the U.S.  subsidy  payments  second b e n e f i t was  According  Results Figure  from 4.2  the Analysis provides  an  carriers  (Chuang,  (1970b, p.681), t h e r e appeared to be  a  p r o v i d i n g f a v o u r a b l e r o u t e awards to f o r e i g n  c a r r i e r s a g a i n s t the b e t t e r i n t e r e s t s o f U.S.  3.  inefficient  and  i n the form o f f a v o u r a b l e r o u t e awards  to Thornton  number o f i n s t a n c e s o f the U.S.  to  to i n c r e a s e revenues  Using  carriers for security  the Modified  illustration  of  Hegemonic  the  reasons.  Stability  Theory  post-Bermuda regime  i n the  c o n t e x t o f the m o d i f i e d hegemonic s t a b i l i t y t h e o r y .  I t can be  seen,  from the  figure,  that  The  paid  costs  support  the  shippers, return, other  and  the  the  U.S.  regime a U.S.  countries  p r i c e - s e 11 i n g circumstances  of  in  the  as  form  the of  hegemon.  high  prices  r e d u c t i o n i n monopoly/duopoly r e c e i v e d both benefited and  by  the  t h e o r y o f hegemonic  The  continued  from  security  routes  and  post-Bermuda  in  favourable regime  U.S.  f i t nicely,  for i t s carriers.  In  benefits. regime route  Finally,  through  IATA  awards.  The  therefore, with  the  stability.  o t h e r e x p l a n a t o r y f a c t o r s d e s c r i b e d i n Chapter  i n p r o v i d i n g an e x p l a n a t i o n f o r the s t a b i l i t y Bermuda p e r i o d .  and  the  U.S.  to  travellers  economic  participating  receiving  to  U.S.  a l s o be  helpful  o f the regime d u r i n g the p o s t -  These f a c t o r s are examined below.  130  3 may  Figure The of  Post-Berauda  the Modified  4.2  Regime  Hegeaonic  i n the Context Stability  Theory  COSTS High p r i c e s t o t r a v e l l e r s and r e d u c t i o n i n monopoly/duopoly a v a i l a b l e t o U.S. c a r r i e r s Uni t e d (The  shippers; routes  Post-Bermuda  Regime  Multilateral coordination  tariff through  IATA  Some n o n - I A T A t r a n s p o r t , especially charters  States  Hegemon) Bilateral routes  Incent i ves  Other Countries  IATA p r i c e s for carriers favourable r o u t e awards  BENEFITS P e r c e i v e d g e n e r a l s e c u r i t y b e n e f i t s and economic b e n e f i t s i n t h e form of d e c r e a s e d subsidy p a y m e n t s b y t h e U.S. g o v e r n m e n t a n d i n c r e a s e d r e v e n u e s a n d p r o f i t s f o r U.S. c a r r i e r s  r e g u l a t i o n of  and c a p a c i t i e s  Bermuda 1 and pred e t e r m i n a t i o n of c a p a c i t y bi l a t e r a l s  4.  Other  Factors  in  the  Explanation  of  the  Adoption  of  the  1965  post-  Bermuda Regime a)  Domestic Why  which  Affairs  d i d c o u n t r i e s c o n t i n u e t o support a regime, the major components o f  were  the  bilateral  s e t t i n g of p r i c e s ?  exchange  of  route  because o f a c o n t i n u a t i o n o f U.S.  industry.  However, domestic  the  maintenance  and  The hegemonic s t a b i l i t y t h e o r y argued  maintained  in  rights  of  the  political regime,  seems f a i r l y  clear  multilateral  t h a t the regime  was  l e a d e r s h i p i n the a i r t r a n s p o r t  factors  especially  also  appeared  with  respect  t a r i f f c o o r d i n a t i o n , an a s p e c t o f the regime f a v o u r a b l e t o  It  the  t h a t the a i r l i n e s ,  given t h e i r  to p l a y a r o l e to  multilateral  airlines.  l a r g e stake i n the  outcomes, were a b l e to dominate the a i r t r a n s p o r t p o l i c y - m a k i n g p r o c e s s e s most c o u n t r i e s .  There was  c o n s i d e r a b l e i n p u t by c a r r i e r s  o f government p o l i c i e s and n e g o t i a t i n g p o s i t i o n s . i n v o l v e d , t o any e x t e n t , i n these p r o c e s s e s  One  reason  f o r the  close connection  making i n many c o u n t r i e s was  due  3 5  of  i n the f o r m u l a t i o n  Consumer groups were not  (Slotemaker,  of a i r l i n e s  1966,  to  p.901).  government  policy-  to government ownership o r c o n t r o l .  Chuang  (1972, pp.161-164) found t h a t , as o f 1970,  68 o f 92 a c t i v e IATA c a r r i e r s were  either  But  U.S.  fully  o r p a r t l y government owned.  where the  reflect the CAB,  carriers  a pro-airline  were p r i v a t e l y  bias?  and were p o w e r f u l  U.S.  owned.  carriers  t h i s was D i d U.S.  not the case w i t h policy  choices  also  d i d manage to work c l o s e l y  with  a c t o r s i n the d e t e r m i n a t i o n o f U.S.  See: Slotemaker (1966, p.901); and r e s p e c t to the U n i t e d S t a t e s . 3 5  132  the  Stoffel  policy.  Even  (1959, pp.124-125), w i t h  the  CAB's a c t i o n s t o p r e s s  w i t h the i n t e r e s t s  f o r lower  o f U.S. c a r r i e r s  p.117; Keyes, 1964, p . 1 7 7 ) .  It  would  international those  Department  that  the major  governments,  Foreign  i n order  (Bebchick,  foreign  governments  that t h e i r  decisions security  the s t a b i l i t y to trade  aside  represented from  carriers,  and c a r r i e r s  rights,  with  i n the U.S.  the a i r l i n e s ,  a n d the U.S.  l o b b i e d through  views be r e p r e s e n t e d  o f NATO.  route  interests  processes,  Defense Department was concerned  ensuring  1958, pp.25-26; Chuang, 1972,  3 6  a i r policy-making  of foreign  Department.  The  appear  f a r e s w i t h i n the IATA system c o i n c i d e d  (Pillai,  t o be used  by f o r e i g n  Defense  the S t a t e  1969, p . 7 ) .  s e c u r i n g U.S. overseas  The department was l i k e l y  were  3 7  bases and  instrumental i n  carriers,  f o r U.S.  objectives.  U.S. c a r r i e r s , e s p e c i a l l y i n the 1950s, were concerned w i t h expanding the market f o r i n t e r n a t i o n a l a i r t r a v e l and s u p p o r t e d the i n t r o d u c t i o n o f low fare services. Chuang (1972, pp.117-119) n o t e d t h a t the U.S. c a r r i e r s ' support f o r lower f a r e p r o p o s a l s by the CAB, w i t h i n the IATA system, was s t r o n g e r b e f o r e 1960 than a f t e r 1960. A f t e r 1960, p r o f i t r e t u r n s were h i g h f o r U.S. c a r r i e r s , and they t h e r e f o r e were l e s s eager t o t r y t o expand the market through the o f f e r o f lower f a r e s . 3 6  The l i b e r a l i z a t i o n o f c h a r t e r r u l e s by the U.S. i n the 1960s a l s o may be viewed as a move i n support o f U.S. c a r r i e r s . The U.S. c a r r i e r s ' share o f the North A t l a n t i c market had d e c l i n e d d u r i n g the 1950s. By expanding the c h a r t e r market, the CAB hoped t h a t U.S. c h a r t e r c a r r i e r s would be a b l e t o expand the t o t a l U.S. share o f the market (Hammarskjold, 1979, p.33). It s h o u l d be n o t e d t h a t the U.S. scheduled c a r r i e r s a l s o had a l a r g e share o f the c h a r t e r market, so they were n o t c o m p l e t e l y adverse t o the expansion o f the c h a r t e r market. F o r e i g n governments and c a r r i e r s were g e n e r a l l y a g a i n s t CAB and U.S. c a r r i e r s ' demands f o r lower f a r e s and a g a i n s t CAB e f f o r t s t o b l o c k IATA agreements i n o r d e r t o a c h i e v e the lower f a r e s . 3 7  133  In  summary,  international  U.S.,  Other i n t e r e s t s ,  were r e p r e s e n t e d  overcome  the dominance  of a i r l i n e  interests i n  a i r p o l i c y - m a k i n g h e l p e d to ensure the maintenance o f the p o s t -  Bermuda regime. the  i t would appear t h a t  the  free-rider  such as t h a t  to a l e s s e r problem  o f the Defense Department i n  degree.  and  Consumers  participate  in  were n o t a b l e to the  policy-making  p r o c e s s e s o f t h e i r governments.  b)  Structural  Factors  Four s t r u c t u r a l developments were o u t l i n e d an  impact on m u l t i l a t e r a l p r i c e - s e t t i n g  Table  3.2).  introduction  These o f new  and, a change the  latter  industry  a  change  change  i n the h e i g h t o f e n t r y b a r r i e r s  two  and  developments would have  since  barriers  significantly.  between  undermined stable  i)  the  1946  of  to e n t r y  and  stability  into  (see  a i r carriers;  contributed since  the i n d u s t r y .  t h e r e were no s e r i o u s  (especially  regulatory  1965. of  the  Both  of  regime,  economic  barriers)  developments  d i d not.  The  (i.e.,  could  reasons  did  i n the  cost-saving technology  these  but  cycle;  i n the  However, t h e r e were s i g n i f i c a n t i n c r e a s e s o f new  the  Neither of  to i n s t a b i l i t i e s  have why  a  regime was m a i n t a i n e d d e s p i t e these developments a r e d i s c u s s e d below:  Increase  in Number of  Carriers  An i n c r e a s e i n the number o f c a r r i e r s can c o n t r i b u t e of  a i r transport  c o s t - s a v i n g technology; a downturn i n the economic  number o f c a r r i e r s and the i n t r o d u c t i o n jets)  i n international i n the number  d u r i n g the post-Bermuda p e r i o d ,  downturns not  were:  i n Chapter 3 which c o u l d have  the  setting.  regime,  whether  or not  I f the.new c a r r i e r s  the  carriers  did participate  134  t o the i n s t a b i l i t y  participated  i r i IATA  price-  i n IATA p r i c e - s e t t i n g ,  then a  unanimous larger  pricing  number  carriers  decision  of  would  carriers  be  involved  d i d not p a r t i c i p a t e  non-IATA of  1946  carriers  and  80  there  i n 1965.  members  How  were  on  because  prices.  t h e n IATA  increases  Figure  o f IATA  d i d IATA  achieve  o f the  I f the  tariff  new  coordination  competition.  (mainly c h a r t e r s ) .  tariff-coordination  over  1965,  to  i n deciding  i n IATA p r i c i n g ,  c o u l d become v u l n e r a b l e to l o w - p r i c e  Between  difficult  b o t h i n IATA  2.14  indicated  increased  continue  from  to achieve  that  about and  members  60  and  the number i n 1951  maintain  to  pricing  agreements d e s p i t e the i n c r e a s e d numbers o f c a r r i e r s ?  There were a number o f f a c t o r s which c o n t r i b u t e d to the a b i l i t y o f IATA to  reach  and  to maintain  offered  to c a r r i e r s  better  interests  place,  governments  and  (Pillai,  to f i n e  enforced  restrictionist  First,  to agree to a p r i c i n g  1969,  members  p.79).  competition.  guilty  the p r o v i s i o n s  bilaterals  post-Bermuda  price  reluctant  agreements.  Second,  side  payments  were  schedule against  once  agreements  their  were i n  IATA used i t s enforcement b r a n c h to i n v e s t i g a t e breaches o f the IATA  agreements  the  pricing  regime,  and  of undercutting  o f the IATA a g r e e m e n t s .  revenue p o o l i n g  reduced the  agreements,  incentives  fares. 38  Third,  Finally,  introduced  for carriers  I f the c a r r i e r s were r e s t r i c t e d  o f revenue o r t r a f f i c ,  IATA  the  during  to engage  in  to a f i f t y p e r c e n t share  t h e r e were few i n c e n t i v e s t o charge lower p r i c e s than  "competitors".  See: Tauber (1969) f o r a d i s c u s s i o n b r e a c h e s o f IATA agreements. 3 8  135  o f the CAB  investigation  into  The its  major  prices  IATA and  f a c t o r which c o n t r i b u t e d  despite  charter  competition  to  the  was  the  governments on c h a r t e r o p e r a t i o n s .  Charter  carriers  i n d i v i d u a l passenger  In  summary,  during  by  by  IATA  and  were  the  Introduction The  leap  increases  of Jet  According  the to  air  placed  groups  by  both  (Haanappel,  to compete d i r e c t l y w i t h  i n the  numbers o f b o t h  were  able  to  IATA f o r  IATA and  non-  However, measures undertaken protect  the s t a b i l i t y o f the  multilateral  tariff  regime.  Aircraft  i n t r o d u c t i o n of j e t s ,  over  maintain  government r e g u l a t i o n s  "affinity"  post-Bermuda regime.  governments  c o o r d i n a t i o n and m a i n t a i n  b)  allowed  IATA to  business.  there  IATA c a r r i e r s  were not  of  restriction  IATA and  r e s t r i c t e d the s a l e o f c h a r t e r s to r e c o g n i z a b l e 1978) .  ability  i n the late. 1950s, r e p r e s e n t e d  transport  Straszheim  equipment  (1969,  p.84),  that  the  jet  was  a technological  previously  engines  available.  produced,  "greater  t h r u s t , g r e a t e r speeds, and hence much lower c o s t s f o r f u e l , maintenance, labour  per  ton-mile  of  payload."  Jones  (1960, p.240) found  that  the  and jets  c o u l d t r a n s p o r t over t h r e e times as many passengers as the p r o p e l l e r a i r c r a f t they r e p l a c e d due  The  to t h e i r i n c r e a s e d speed and  introduction of j e t s  caused two  size.  problems  f o r IATA.  o f t h e i r g r e a t e r p a y l o a d , the j e t s added a c o n s i d e r a b l e major  routes,  contributed fares  to  (Keyes,  such low 1964,  as  the  load  North  factors  pp.177-178).  Atlantic. and The  136  to  the  The  First,  amount o f c a p a c i t y to  additional capacity  "illegal"  second problem  because  discounting  levels of  IATA  r e s u l t e d because  jets  were not  introduced  simultaneously  t r a v e l w i t h c a r r i e r s t h a t had by  the home c o u n t r i e s  The late  the  of non-jet  2.4).  IATA  dealt  the  with  instituting  (Cohen, 1960,  p.154).  and  IATA  the  governments,  and  to r e s t r i c t the use  of  non-uniform  rate-making system was  strong  of  industry  jets.  the mid(see  d i f f u s i o n of on  3 9  to  Figure the  new  the N o r t h A t l a n t i c  more w i d e l y used.  developments  system.  the  to  i n e f f e c t f o r the p e r i o d 1959-1961,  - an  i n t r o d u c t i o n of j e t technology  to  wanted  t h i s r e s u l t e d i n moves  growth l e v e l s i n the  surcharge was  were two  rate-making  Passengers  a l l e v i a t e d i n l a r g e p a r t by  problem  by which time j e t t e c h n o l o g y was  carriers,  equipment, and  a surcharge on j e t t r a n s p o r t  The  summary, there  a l l carriers.  operators  strong the  t e c h n o l o g y by  the  new  excess c a p a c i t y problem was  1960s, because o f  In  by  However, growth  l a r g e l y a v o i d e d and  i n the number o f  - which c o u l d have weakened  due  i n the  increase  to  actions  industry,  by  IATA  damage to  the  and IATA  the p r i n c i p l e s o f the post-Bermuda  regime m a i n t a i n e d .  c)  Overriding It  was  interests  State argued  state  longer  be  required  See  however,  that  countries  national  appeared  c a r r i e r s and  to  that  i n d i r e c t government support f o r the  i n t e r e s t could  evidence,  3 9  above  i n maintaining  means o f p r o v i d i n g this  Interests  lead  to p r o v i d e that  to  regime changes,  state  interests  examples i n S t r a s z h e i m (1969, p.45). 137  the  overriding  that  the  a  Changes i n  IATA might  carriers. in  state  IATA c a r t e l . was  carriers.  given  support f o r i n e f f i c i e n t  overriding  have  no  There i s no  maintenance  of  national  carriers  waned  during  c o u n t r i e s were, i n f a c t , enroll  their  continue their  5.  carriers  to be  post-Bermuda p e r i o d .  anxious to own  in  a popular  the  the  IATA  and  cartel.*  The  0  IATA  to p r o v i d e  cartel  appeared  i n d i r e c t support  to to for  carriers.  Summary  Bermuda regime used to a n a l y z e could  be  support  the  costs  developments.  maintained, the  of  regime.  the  s u p p o r t e d by  r e g u l a t o r y developments d u r i n g the  (1946-1965) were o u t l i n e d , and  post-Bermuda regime,  as  long  The  as  Although  there  the  The  modified  hegemonic  posttheory  p r e d i c t e d t h a t a s t a b l e regime  existed a  dominant power w i l l i n g  the  dominant power c a p a b l e o f assuming  the  hegemonic  the  U.S.  to  declined during  stability  the f a c t the post-Bermuda regime was  system o f IATA t a r i f f c o o r d i n a t i o n -- was were two  the  p o s i t i o n of  i t remained the  regime.  theory  Other f a c t o r s were a l s o used to assess  why  theory  was,  therefore,  maintained.  the  regime -- e s p e c i a l l y the  maintained.  I t was  seen t h a t  there  developments t h a t c o u l d have caused a regime change - an i n c r e a s e i n  number  of  carriers  and  the  i n t r o d u c t i o n of  developments were s u c c e s s f u l l y c o u n t e r e d by by  independent  operate n a t i o n a l c a r r i e r s and  means f o r c o u n t r i e s  I n t h i s s e c t i o n o f the chapter,  the  Newly  the s t r o n g growth o f the  jets  IATA and  - but  that  these  two  government f o r c e s ,  and  industry.  ' Figure 2.15 i n d i c a t e d t h a t t h e number o f IATA c a r r i e r s from d e v e l o p i n g c o u n t r i e s more than doubled from 21 to 44 between 1950 and 1965. 4 0  138  In were  summary,  both  successfully  relatively w i l l be  D.  stable.  1981  During  its  the  drastically  The  the  rather  prices  disregarded. were the  "free  chapter,  other  factors  regime  remained  the p e r i o d  1966-1981  l i b e r a l regime was  IATA  adopted.  and  greatly  as  the  since  policy,  the  Bermuda  about  launched  post-Bermuda  influenced  by  in  p r i c i n g and  IATA  most  1977.  discounted. of  industry  The  As  "liberal"  prices  (or  were  i n regulatory  bilaterals  139  on  as  a  policy  which a  had  result,  international  international policy maintained,  although  the  1981  environmental f a c t o r s .  The  attempted  routes,  to  was  persisted.  and  continued  Other p o i n t s  ICAO  part  other c h a r a c t e r i s t i c s of  international  competitive  regime  mechanism,  U.S.  industry  i n large  regimes.  the  o f IATA f a r e s  relevant  although on  or  changes  a i r transport  multilateral pricing  discounting  involvement  market"  international  m u l t i l a t e r a l p r i c e - s e t t i n g was  Instead,  "illegally" renewed  the  than m u l t i l a t e r a l p r i c i n g , emerged on U.S.  regime, as w e l l  establish  and  post-Bermuda  changes were brought  Bermuda  illustrates  that  the  regulatory  the  Europe-Asia),  shows  the  theory  next s e c t i o n o f the  major  In markets not  T a b l e 4.3  table  why  pro-competitive  problems o f " i l l e g a l "  liberal  show  1966-1981,  undermined  competitive,  (e.g.,  hegemonic  which time the  greatest  U.S.  characterized  routes.  to  In the  period  i n 1946. of  modified  L i b e r a l Regime  the  experienced  result  used  examined, d u r i n g  The  adopted  the  the  to  prices  established  note  from  matters;  some U.S.  continue)  the the  or  were IATA  table  often prices  include:  introduction  routes;  the  to  of  growing  Table  4.3  S n a p - s h o t o f t h e 1981 L i b e r a l R e g i m e a n d R e l a t e d E n v i r o n m e n t a l and I n d u s t r y F a c t o r s  1981 L i b e r a l Regime  Characteristic or Factor  1.  Regime  Characteristics  a) Role of IATA i n s e t t i n g prices  Prices set by IATA on most routes but often not adhered to by a i r l i n e s . Widespread use of "free market" p r i c i n g and i l l e g a l discounting.  b) Membership i n IATA  Major i n t e r n a t i o n a l scheduled c a r r i e r s excluding: most U.S. c a r r i e r s ; some important c a r r i e r s of developing countries; and some Eastern bloc c a r r i e r s . Membership was 111 a i r l i n e s with about 6 0 percent of active members representing developing countries.  c) Role of ICAO  Involvement i n technical and safety matters plus recommendations on economic matters  d) B i l a t e r a l Capacity Clauses  Introduction of the "freemarket" or l i b e r a l approach to the determination of capacities on U.S. international routes. Predetermination of capacities wide-spread on other routes.  e) Regulation by regional organizations  Several regional intergovernmental and intera i r l i n e organizations operating, e s p e c i a l l y i n the developing world. The organizations of the developing countries had  14.0  Table 4.3  (Continued) become advocates f o r r e s t r i c t l o n i s t regulatory approaches.  Environmental  3.  Factors  a) The World Economy  Economic growth slowed considerably i n much of the world during the year, s i g n a l l i n g the beginning of a recession.  b) Third World Development  Uneven development i n the Third World, depending on o i l resources and/or a b i l i t y to take advantage of low-wage labour.  c) U.S. Government  Conservative, Republican administration concerned with countering communist influence i n the world and rebuilding U.S. defenses. Previous administration, however, was l i b e r a l , Democratic.  Industry  Factors  a) Maturity of A i r l i n e Industry  Growth rates l e v e l l e d industry matured.  b) State of Technology  Wide-bodied a i r c r a f t operated by most major c a r r i e r s on long distance routes.  c) Government Ownership  Government ownership of most national a i r l i n e s , except U.S.  d) Role of Charter Operators  Easy access to charters on many routes, although charter t r a f f i c declined from the early 1970s due to low price competition from the scheduled c a r r i e r s .  e) Size of Industry  The industry performed 1,119 b i l l i o n passenger-kilometres (compared to 199 b i l l i o n i n 1965).  141  as  Table 4.3  (Continued)  f) Product Offerings  F i r s t c l a s s , economy class and discount t i c k e t prices available on international routes; e s p e c i a l l y U.S. international routes. Discount t i c k e t s offered on a capacity-controlled basis.  g) " I l l e g a l " Discounting  Widespread  h) U.S. Dominance of A i r Transport  U.S. a i r l i n e s ' share of world a i r services ( i n passengerkilometres) was 35 percent.  142  discounting.  influence  of  transport;  regional organizations  the  moderating  c h a r t e r r u l e s ; and,  previous  formation the  the  factors. chapter  The  is.why was  Developments  a)  Pre-Liberal There  adoption, of the the  these  by  signing  The  followed.  first  question  be  reviewed,  hegemonic  Leading  to the  a  number  1981  the  liberalization  and  addressed  Liberal  of  i n the i n d u s t r y .  the  the  format o f  leading  f o l l o w e d by  theory  t h a t must be  international a i r  Developments  to  the the  an  a n a l y s i s of  other  explanatory  i n this  section of  or l i b e r a l  regime.  the  Regime  - 1966-1977 of  important  States,  developments  of a pro-competitive  Bermuda  2  bilateral  that  preceded  p o l i c y , i n 1977.  the  Three  changes i n the c h a r t e r i n d u s t r y ;  o f i n c r e a s i n g l y p r o t e c t i v e measures by of  the  regime,  t h e r e a movement to a c o m p e t i t i v e  the U n i t e d  by  the  the U n i t e d  United  States;  States  and  and,  United  1977.  Development  1960s and  rates;  liberal  developments are d i s c u s s e d below:  adoption  The  be  modified  Developments  were  Kingdom i n  i)  using  major  1.  will  regime w i l l  developments  growth  developments o f the  sections  of  industry  regulation of  the d e c l i n e i n dominance o f the U.S.  In examining the two  of  i n the  impetus  of  the Charter  for  the  e a r l y 1970s was  Chandler  crisis  strong  Industry growth  l i n k e d by  o f 1963  of  the  some authors  charter  market  i n the  to the Chandler  i n v o l v e d a d i s p u t e between the CAB  late  "crisis".''  and  1  IATA over  See, For example, Lowenfeld (1975, p.41). The " c r i s i s " was named a f t e r the town o f Chandler, A r i z o n a where IATA h e l d i t s 1962 meeting a t which p r i c e h i k e s were adopted. 4 1  143  the  level  of  fares.  increase  fares.  position  under  State  The  changes.  The  liberalize  charter  1975,  resolved  foreign  IATA p r o p o s a l of  the  regulations  provide  the  lower  fares  when the  CAB,  CAB  governments,  f o r higher  low-fare  to a l l o w  services  IATA  wanted  retreated  carriers,  and  explicitly charter  the  CAB  U.S.  o n l y minor  stated,  operators desired  to  from i t s the  fares held, with  a l t h o u g h not  i n order  while  was  to  a better  (Lowenfeld,  p.41).  The  first  charters". tour  l i b e r a l i z a t i o n occurred  These were c h a r t e r  groups.  authorized services  In  1966,  tour  the U.S.  1960s.''  The  i n 1964  flights  there  i n c l u s i v e tour  i n t o the  r e l a x e d by the  The  desired  was  from  response  to  CAB  crisis  pressure  Department.  opportunity  The  was  package.  t h a t c o u l d be  a  charters;  when the CAB  further  s h a r e d by  liberalization  i . e . , charters  The  authorized  that  two  "split or more  when  the  incorporated  rules for a f f i n i t y  CAB  ground  c h a r t e r s were a l s o  (as w e l l as by o t h e r c o u n t r i e s ) d u r i n g the l a t t e r h a l f o f of  the  a f f i n i t y c h a r t e r s , but by  the e a r l y 1970s i t became apparent t h a t much o f  the  increased  due  2  r e l a x a t i o n of  p o p u l a r i t y was  the  to  the  rules  increased  A control  The  a f f i n i t y c h a r t e r r u l e s had become  number over  of the  countries charter  form o f c h a r t e r known as  met  the  As described above, r e c o g n i z a b l e groups or c l u b s . t r a n e l purposes! 4 2  i n 1972  market.  popularity  emergence o f bogus groups.  groups formed s o l e l y to take advantage o f low p.148).  the  The  c h a r t e r f a r e s (Haanappel,  1978,  unenforceable.  i n order countries  to  find  decided  advance booking c h a r t e r .  a f f i n i t y c h a r t e r s were Soon, such groups were  144  These were  ways o f to  regaining  institute  a  new  These c h a r t e r s would  charters s o l d to created s o l e l y for  not  require  the e x i s t e n c e  o f an a f f i n i t y  purchase ground s e r v i c e s , b u t o n l y days i n advance.* replaced  group,  that charter  o r the requirement t o  t i c k e t s be p u r c h a s e d  The advance b o o k i n g c h a r t e r s p r o v e d p o p u l a r ,  3  the a f f i n i t y  charters  as  the primary  form  of  ninety  and q u i c k l y  non-scheduled  service.  The share to  charter  carriers,  however, were n o t a b l e  i n the 1970s, as the scheduled  compete  i n the low p r i c e range.  carriers  to increase  introduced  The s c h e d u l e d  their  market  new d i s c o u n t  carriers  drove  fares  down the  c h a r t e r share o f the market from 40% i n 1971 t o 27% i n 1977, and t o under 15% i n 1985 (see F i g u r e 2.7).  In conclusion, charter But lost  traffic  following  by the 1970s, market  market  still  during  share  the p r e - l i b e r a l p e r i o d ,  t h e r e were l a r g e gains i n  the r e l a x a t i o n (and f l a u n t i n g ) o f c h a r t e r  the scheduled  c a r r i e r s were a b l e  by o f f e r i n g lower  promotional  dominated by the scheduled  rules.  t o r e g a i n much o f t h e i r  fares.  c a r r i e r s but with  The r e s u l t  was a  a wider range o f  discount p r i c e o f f e r i n g s .  ii)  The Adoption By  the  the l a t e  United  of New Protective 1960s, v i r t u a l l y  States,  incorporated  Measures a l l bilaterals, means  other  than those s i g n e d by  of pre-determining  capacity  levels  Advance purchase requirements have s i n c e been lowered t o t h i r t y i n some s i t u a t i o n s (Haanappel, 1978, p.149). 4 3  days  L o w e n f e l d a n d Mendelsohn (1979, p.483) s t a t e d t h a t by 1977, the advance b o o k i n g c h a r t e r s had over t w o - t h i r d s o f the U.S. o r i g i n a t i n g c h a r t e r market, compared t o twelve p e r c e n t f o r the a f f i n i t y c h a r t e r s . 4 4  145  (Harbison, facto  1982,  p.3).  The  4 5  Bermuda  1  principle  of  reviews o f c a p a c i t y l e v e l s had been r e p l a c e d by  capacity  between  carriers.  become the norm on r o u t e s ,  But  Pre-determination  other  i n the mid-1970s,  the  of  having  only  States,  too,  post  the ex ante d i v i s i o n capacity  bilaterals  than those i n v o l v i n g the U n i t e d  United  ex  of had  States.  changed i t s p o s i t i o n and  began promoting c a p a c i t y s h a r i n g agreements as a means o f p r o t e c t i n g i t s f l a g carriers.  The  e a r l y 1970s had  been a d i f f i c u l t  time f o r the U.S.  The  c a r r i e r s had  i n v e s t e d h e a v i l y i n wide-bodied a i r c r a f t  but  expectations  of continued  realized price  (due,  in  large  part  The  result  increases).  problems f o r the (Dempsey, 1978,  In o r d e r  high  two  to  major U.S.  of  was  i n passenger demand had  economic  low  load  recession  factors  4 6  international carriers,  to improve the p o s i t i o n o f the U.S.  t h e i r B r i t i s h counterparts. number  the  technology), not been  r e s u l t i n g from o i l  and  severe  financial  Pan  American and  TWA  p.417).  a u t h o r i z e d Pan American and TWA  the  increases  (a new  carriers.  flights  The  between  carriers,  the CAB,  in  1975,  to d i s c u s s c a p a c i t y r e d u c t i o n agreements w i t h d i s c u s s i o n s r e s u l t e d i n agreements to reduce London  and  four  U.S.  cities  (Dempsey,  1978,  p.417).  Capacity themselves, or understanding. 4 5  c o n t r o l agreements may have been i n c l u d e d i n the b i l a t e r a l s , incorporated i n t o accompanying c o n f i d e n t i a l memoranda of  ICAO (1981f) showed t h a t the weight l o a d f a c t o r s f o r i n t e r n a t i o n a l a i r t r a n s p o r t averaged between 50 and 55 p e r c e n t i n the e a r l y 1970s. They d i d not r i s e above 55 p e r c e n t u n t i l 1977. 4 6  146  In a d d i t i o n to a l l o w i n g carriers the U.S.  sought to n e g o t i a t e  level. by  The  U.S.  United  c a p a c i t y agreements a t a b i l a t e r a l  S t a t e s was  airlines  in  a  to r e a c h c a p a c i t y r e d u c t i o n agreements,  d i s s a t i s f i e d with  number  of  North  d i s s a t i s f a c t i o n l e d to n e g o t i a t i o n s w i t h i n c r e a s e the market shares o f the U.S.  In  summary,  capacity  by  agreements  international  routes.  the  early  had  become  But  Atlantic  carriers.  the  share o f t r a f f i c c a r r i e d markets.  f o r e i g n governments i n an  1970s,  i n the  the  governmental  mid-1970s,  attempt.to  4 8  restrictive, norm  This  4 7  on  pre-determination  a l l routes,  the  U.S.  of  except  a l s o sought  U.S.  capacity  agreements, i n an e f f o r t to i n c r e a s e market shares f o r i t s c a r r i e r s .  i i i ) The  Bermuda 2 Bilateral  Although number  States  States'  carriers  had  of North A t l a n t i c  routes,  they had  been doing  In  percentage 117;  the United  United  market.  this  of  Larsen,  majority  the  Between  market,  traffic 1977,  Consequently, denunciation  i n 1976,  the  transported  p.85).  of b e n e f i t s  i t was  from the  The the U.K.  their  U.K.  felt  carriers that  well  Kingdom  poorly  on  (Bridges,  U.S.  required  1977,  carriers  year's  the  pp.116-  received  a i r agreement, one  a  i n the U.S.-U.K.  were d i s s a t i s f i e d w i t h  existing bilateral gave the  the United  been p e r f o r m i n g  B r i t i s h who  by  and  Bermuda  notice for  the 1. the  o f Bermuda 1.  Lowenfeld (1975, p.11) showed t h a t U.S. c a r r i e r s had l e s s than twenty p e r c e n t o f the market share to f i v e out o f s i x i n t e r i o r or n o r t h e r n European c o u n t r i e s i n the e a r l y 1970s. 4 7  See, f o r example, H a a n a p p e l (1976) f o r a d i s c u s s i o n n e g o t i a t i o n s between the U n i t e d S t a t e s and the N e t h e r l a n d s . 4  8  147  of  the  In  the  negotiations  over a new  bilateral  agreement,  the U n i t e d  o u t l i n e d a number o f demands aimed a t r e s t r i c t i n g c o m p e t i t i o n , f o l l o w i n g ( L a r s e n , 1977, an  equal  American  division  of  the  U.S.-U.K. market  between  British  and  carriers;  continuation  of  severe  c a r r i e r per c o u n t r y per  IATA  governmental c o o p e r a t i o n a  i n c l u d i n g the  pp.85-88):  the d e s i g n a t i o n o f o n l y one a  Kingdom  reduction  price -setting,  and  to ensure the support  in  fifth  freedom  route;  closer  bilateral  o f IATA p r i c e s ;  routes  and,  a l l o c a t e d to  U.S.  carriers.  The  U.K.  was  not  agreement, as the new 1.  Unlike  Bermuda  governmental these  increases  in  restricted but  two  1,  achieve  Bermuda 2 r e q u i r e d prior  to  capacity  levels  i t s aims,  known, was  taking  could,  (Bridges,  (where each c o u n t r y  with  1977,  could designate  to  Period  During  pre-liberal  the in  regulations  governing  the  submit  place.  p.117).  two  Bermuda  schedules  After  As  to one  2  than Bermuda  well,  for  reviewing  some l i m i t a t i o n s ,  curtail  Bermuda  2  each on a l l r o u t e s  carriers),  freedom r i g h t s p r e v i o u s l y a l l o t t e d to U.S.  Pre-Liberal  but  more r e s t r i c t i v e  airlines  operations  e i t h e r government  relaxation  the  fully  the d e s i g n a t i o n o f c a r r i e r s per c o u n t r y  o f the f i f t h  iv)  to  b i l a t e r a l was  approval  submissions,  able  and  removed some  carriers.  - A Summary  charter  period  (1966-1977)  regulations  scheduled  but  a  there  was,  tightening  a i r transport..  Charter  of  the  a  bilateral  t r a n s p o r t ' s share  i n t e r n a t i o n a l market i n c r e a s e d u n t i l the e a r l y 1970s, and  148  concurrently,  then f e l l  of  after  the  IATA c a r r i e r s i n s t i t u t e d  rest  of the world  scheduled routes, market s h a r e s . signed  lower p r o m o t i o n a l  i n opting  f o r capacity  e s p e c i a l l y on those r o u t e s  Finally,  a new b i l a t e r a l  a t the u r g i n g  fares.  The U.S. j o i n e d the  agreements  on i n t e r n a t i o n a l  where the U.S. c a r r i e r s had low  o f the B r i t i s h ,  the U.S. and the U.K.  agreement, Bermuda 2, which was more r e s t r i c t i v e  than  the agreement i t r e p l a c e d .  b)  The U.S. Pro-Competitive In  While  1977, U.S.  the U n i t e d  policy,  began promoting basis  - 1977-1981  international a i r policy  States  culminating  Policy  had been  changed  directions.  an i n c r e a s i n g l y  restrictionist  i n the s i g n i n g o f Bermuda 2, i t r e v e r s e d  d i r e c t i o n s and  a pro-competitive,  f o r the p r o - c o m p e t i t i v e  following  abruptly  consumer o r i e n t e d  policy,  policy.  the new chairman  O u t l i n i n g the  o f the CAB, A l f r e d  Kahn (1978, p.159) s t a t e d :  [ I t ] i s our b e l i e f t h a t the f u n c t i o n o f economic p o l i c y i s t o serve consumers r a t h e r than p r o t e c t p r o d u c e r s , and t h a t the b e s t way t o do t h a t i s by promoting c o m p e t i t i o n a t home and abroad r a t h e r than c a r t e l i z a t i o n . The u n d e r l y i n g premise i s t h a t t h i s i s not a zero sum game; t h a t the p u b l i c b e n e f i t s by mutual e x t e n s i o n s of competitive o p p o r t u n i t i e s ; a n d t h a t once we t h i n k o f our c o n s t i t u e n t s as t r a v e l l e r s and s h i p p e r s , r a t h e r than a i r l i n e s , t h e r e a r e indeed t h i n g s t h a t those importunate f o r e i g n e r s have t o o f f e r us - most p r o m i n e n t l y , as a s s u r e d h o s p i t a l i t y t o c o m p e t i t i o n - multiple designations and l o w - f a r e s c h e d u l e d s e r v i c e , an acceptance o f l i b e r a l c h a r t e r r u l e s - as w e l l as the competing s e r v i c e s t h a t t h e i r own c a r r i e r s a r e so anxious t o o f f e r us. Our i n t e n t i o n i s to trade l i b e r a l i z a t i o n s f o r l i b e r a l i z a t i o n s , o f f e r i n g f o r e i g n g o v e r n m e n t s expanded a c c e s s t o our markets i n s t e a d o f c a p a c i t y l i m i t a t i o n s , r e s t r i c t i o n s on gateways, and p r o h i b i t i o n s o f p r i c e competition.  The ways:  United  States  sought t o i n s t i t u t e i t s p r o - c o m p e t i t i v e  policy i n five  through the promotion o f low c o s t s c h e d u l e d s e r v i c e s , e s p e c i a l l y Laker 149  Airways' by  S k y t r a i n ; through  signing " l i b e r a l "  "show  cause"  why  the f u r t h e r l i b e r a l i z a t i o n o f c h a r t e r r e g u l a t i o n s ;  bilateral IATA  tariff  international  routes;  competition  international  briefly,  i)  on  and  o r d e r i n g concerned  coordination  finally, routes.  by  should  passing  Each o f  continue  legislation  these  policies  Airways was  knighted).  The  world,  in  but  authority.  formed  company 1971  Laker  Under  the  operated  Airways  Bermuda  a u t h o r i t y to d e s i g n a t e  in Britain,  applied,  between London and New  to  U.S.  support  i s discussed,  charter  for  wished  the  to  i n 1966,  by  F r e d d i e Laker  first  offer  a  time,  for  low-priced  scheduled scheduled  1  bilateral  Laker  agreement,  the  United  as an a d d i t i o n a l c a r r i e r on i n 1973,  a  be  a  designated  "spheres  the  route  service  on  the  of i n f l u e n c e " p o l i c y ,  the  the  Laker  U n i t e d S t a t e s , however, r e f u s e d  i t s d e c i s i o n , and  carrier  had  York-London  f i n a l l y accepted  s e r v i c e , c a u s i n g the S k y t r a i n to remain g r o u n d e d .  reversed  The  the New  to p e r m i t Laker  longer  the c a r r i e r .  the U.K.  Kingdom  designated  the U.K.  of  York, known as the " S k y t r a i n " .  A f t e r a l e n g t h y review,  I n 1974,  (later  services i n various parts  a p p l i c a t i o n and  adopted  on  to  Airways  Laker  no  parties  below:  Laker  route.  agreements; by  New  decided  York-London  49  t h a t Laker route.  The  which d i v i d e d i n t e r n a t i o n a l  should U.K. routes  Banks (1982, pp.39-40) noted t h a t the CAB never p r o v i d e d reasons f o r i t s r e f u s a l to p e r m i t Laker to operate the S k y t r a i n , a l t h o u g h t h e r e was a f e e l i n g t h a t the CAB wished to p r o t e c t U.S. money-losing c a r r i e r s , TWA and Pan American. The CAB a l s o had been unhappy, i n the p a s t , w i t h Laker because the a i r l i n e had f l a u n t e d a f f i n i t y r u l e s f o r c h a r t e r c a r r i a g e . 4 9  150  between B r i t i s h Airways Laker  i n c o u r t on two  again, i n 1977.  By  1977,  promoting,  of  British  to o p e r a t e i n t e r n a t i o n a l  policy  CAB  and  the p o l i c i e s  rather  than r e s t r i c t i n g ,  i n September  charter  fares  and  1982,  1977.  about  the  second  liberalization been  and  fares  awarded a r o u t e d e s i g n a t i o n  airline  p e r c e n t below  folded.  p.10).  on  began  The  5 1  implementation  thus p e r m i t t e d to b e g i n Laker were  comparable  discount fares  offered  by  The  IATA c a r r i e r s responded  by  low  North fares  Atlantic ushered  from  onto  1977  the  North  of  the  1970s  with  the  United As  S t a t e s was  outlined  introduction  the. f u r t h e r  above,  of  rules  advance  See collapse.  Banks  (1982)  for a  discussion  151  of  the  reasons  behind  had  booking  I t was thought t h a t the r e a s o n f o r the U.K. d e c i d i n g to r e l e n t d o u b l e d e s i g n a t i o n on two r o u t e s i n t h e Bermuda 2 a g r e e m e n t was accommodate Laker Airways. See Banks (1982, p.54). 1  to  Regulations  5 0  5  to  the  the  charter, r e g u l a t i o n s .  early  CAB  to compete w i t h L a k e r .  pro-competitive p o l i c y  r e l a x e d i n the  changed. . The  remained.  of Charter  o f U.S.  Laker was  o f f e r e d by  low-priced service  The Liberalization A  The  fifty  A t l a n t i c by Laker, however,  ii)  finally  saw Laker as a v e h i c l e f o r the  low f a r e s o f t h e i r own  provided  when  no p r o v i s i o n f o r  c o m p e t i t i o n on i t s i n t e r n a t i o n a l r o u t e s .  (Adkins, e t . a l . , 1982,  i n s t i t u t i n g new  was  Laker s u c c e s s f u l l y c h a l l e n g e d t h i s  o f the U n i t e d S t a t e s had  pro-competitive p o l i c i e s ,  IATA c a r r i e r s  There  50  service  Laker  services.  o c c a s i o n s and was  Chairman Kahn (and the CAB) i t s new  Caledonian.  to to  Laker's  charters.  In  1978,  institution  of  public  group s i z e , no  the  charters.  The  requirement  length  of  non-scheduled  (Lowenfeld  and  the  other  the one  hand,  clause  had  that  bilaterals  required  no  purposes,  1979,  scheduled  p.484).  the  minimum  requirement f o r the  Mendelsohn,  the  to  to  reject  bilateral,  purchase no  round  The  public  s e r v i c e s operated  The  airlines  to  the  and  the  Other  levels  country features  ( R o s e n f i e l d , 1982,  liberal freely  restricted  In some o f the fare  virtually  by  which  bilaterals,  determine  governmental  which  a  were  flight  in  the  two  i n route  This sub-section  were  disapproval both of  into  the In  5 3  originated  incorporated  the  could  liberal  pp.478-479):  restrictions.  countries  on  capacities  they were d i s a p p r o v e d .  Each c o u n t r y  could designate  number o f c a r r i e r s to serve r o u t e s between the two Reduction  allowing either  liberal bilaterals,  before  from  a l l agreements  a second c l a u s e  levels.  interference,  reject  fare.  fare  allowed  only  included  "liberal"  Multiple designation of a i r l i n e s .  5 2  with  r u l e s , no minimum p r i c e , and  r e g u l a t i n g c a p a c i t y and  typically  bilaterals,  reject  of  over f a r e l e v e l s .  governments other  advent  governmental  authority  charters  further  52  governments  without  step  Bilaterals  Until  of  one  carriers.  Liberal  contained  went  public  stay  c h a r t e r s were, f o r a l l i n t e n t s and  Hi)  States  advance purchase requirement, no  o f ground s e r v i c e s , no trip  United  More r o u t e s  allowed.  As  states;  between more  well,  any  restrictions  i s adapted from Dresner and Tretheway  cities were  (1987a).  T h i s method i s known as "double d i s a p p r o v a l " or "mutual d i s a p p r o v a l " and i s the type o f c l a u s e c o n t a i n e d i n the U.S. model l i b e r a l b i l a t e r a l agreement. See Bogosian (1981, pp.1030-1032). 5 3  152  eased  on  incorporating third  countries into  beyond the s i g n a t o r i e s to the l i b e r a l The  inclusion  of  charter  scheduled  The  only  contained  a section regulating charter f l i g h t s .  of  the  country  allowed  the  without  having  in  as l o n g as  which  United  The  traditional  governed  t h a t c h a r t e r s were a l l o w e d  the  States'  to seek the p e r m i s s i o n  liberal  bilaterals  bilaterals The  originated.  to  conduct  o f the  also  clause stated  they conformed w i t h  flights  carriers  r o u t e s between or  bilateral;  flights.  services.  the  the laws  This  public  clause  charters  d e s t i n a t i o n country;  and, A  fair  and  designated  competitive  practices clause.  a i r l i n e must be  allowed  a fair  compete on a i r r o u t e s r e g u l a t e d by the  Between 1978 bilaterals  and  (Haanappel,  d i d not  specifically  create  a  fares.  The  and  1982,  liberal  1984,  rule  competitive  agreements  out  the  agreements  undermine  3).  making  allowed  IATA the  and  stated  equal  that  to  to  bilateral.  liberal  Although  i t more  sufficient  or p a r t i a l l y  the  liberal  difficult  liberal  bilaterals  to  they d i d  coordinate  numbers, o f new  scheduled  (such as the N o r t h A t l a n t i c ) to  fare-setting  U.K.  each  opportunity  a u t h o r i t y o f IATA to s e t p r i c e s ,  procedures.  liberalize  f o r f e a r of l o s i n g North A t l a n t i c business Ibanez and Morgan, 1984,  23  onto major r o u t e s  the  a l s o encouraged  signed  Appendix  environment  non-scheduled c a r r i e r s  effectively  the U.S.  This  the  5 4  Bermuda  The 2  liberal  bilateral,  to o t h e r European gateways (Gomez -  pp.119-120).  I t i s shown i n the next c h a p t e r o f t h i s paper t h a t the b i l a t e r a l s c o n t r i b u t e d to s i g n i f i c a n t l y lower p r i c e s on l o n g - d i s t a n c e 5 4  153  liberal routes.  iv)  Show-Cause Order A  fourth  international against  IATA.  Board,  1978).  o p p o s i t i o n from o t h e r  first  o f a n t i - t r u s t laws,  stayed,  from  t o implement  i t s  pro-competitive  show-cause  U.S.  a n t i - t r u s t laws  countries.  and these  Despite  5 5  findings  that  findings  pressure,  and u l t i m a t e l y d r o p p e d .  restructured.  The r e o r g a n i z a t i o n  participate  i n IATA  IATA  coordination  tariff  coordination trade  trade  activities  association procedures.  had been  5 5  (see F i g u r e  States,  attracted  t h i s o p p o s i t i o n , the  IATA p r o c e e d i n g s were made f i n a l  the show-cause o r d e r  were i n i n 1981.  against  IATA  56  made  i t possible  activities (Previously,  compulsory  without  i n 1979 IATA  for airlines  to  participating in  participation i n tariff  f o r a l l active  a s s o c i a t i o n o p t i o n has proved t o be a p o p u l a r c h o i c e  carriers  conferences  (United  A major consequence o f the show-cause p r o c e e d i n g s was t h a t was  proceedings  The U.S. show-cause p r o c e e d i n g s  i t s tentative  However, due t o i n t e n s e p o l i t i c a l was  used  p o l i c y was t o i n s t i t u t e  t o be exempted  i n 1980, i s s u e d  violation  t h e U.S.  i n t e r e s t e d p a r t i e s t o "show cause" why IATA t a r i f f  Aeronautics  considerable  IATA  These p r o c e e d i n g s , i n i t i a t e d by the CAB i n June 1978, r e q u i r e d  continue  Civil  CAB,  method  a i r transport  IATA and o t h e r should  Against  members.)  The  f o r international  2.14).  See, f o r example, ICAO (1980g), pp.34-35.  Haanappel (1984, p.162) r e p o r t e d t h a t the CAB r e c e i v e d l e t t e r s from the European C i v i l A v i a t i o n Conference, the L a t i n American C i v i l A v i a t i o n Commission, the U.S. S t a t e Department, and P r e s i d e n t Reagan s u p p o r t i n g a s t a y o f e x e c u t i o n o f the o r d e r . 5 6  154  Pro-Competitive The air  final  Legislation  method the U.S. used t o promote c o m p e t i t i o n  t r a n s p o r t a t i o n was by p a s s i n g  International 1980)  Air Transportation  called  emphasized  f o r the U n i t e d "the greatest  functioning  international  new  pro-competitive  Competition  States degree  Act of  t o develop  i n international  legislation.  1979  (United  States,  a negotiating policy  of competition  compatible  a i r t r a n s p o r t a t i o n system."  with  Among  The  a  which well-  the g o a l s  o u t l i n e d f o r U.S. i n t e r n a t i o n a l a i r p o l i c y were the f o l l o w i n g : the  s t r e n g t h e n i n g o f the c o m p e t i t i v e p o s i t i o n o f U n i t e d S t a t e s a i r  carriers  t o a t l e a s t assure e q u a l i t y w i t h f o r e i g n a i r c a r r i e r s . . . ;  freedom o f a i r c a r r i e r s and f o r e i g n a i r c a r r i e r s t o o f f e r f a r e s and r a t e s which c o r r e s p o n d w i t h consumer demand; the fewest p o s s i b l e r e s t r i c t i o n s on c h a r t e r a i r t r a n s p o r t a t i o n ; the  maximum  degree  of multiple  and p e r m i s s i v e  authority f o r United States a i r c a r r i e r s to the  respond  q u i c k l y to s h i f t s  international  so t h a t they w i l l be a b l e  i n market demand;  e l i m i n a t i o n o f o p e r a t i o n a l and m a r k e t i n g  restrictions  t o the  greatest extent p o s s i b l e ; an i n c r e a s e i n the number o f nonstop U n i t e d S t a t e s gateway opportunities  for carriers  cities;  of foreign countries to increase  their  a c c e s s t o U n i t e d S t a t e s p o i n t s i f exchanged f o r b e n e f i t s o f s i m i l a r magnitude f o r U n i t e d S t a t e s c a r r i e r s o r the t r a v e l l i n g  vi)  The U.S. Pro-Competitive  Policy  The  five  policy  United  States  - i t allowed  used  Laker  Airways  public...  - Summary methods  to. implement  i t s pro-competitive  (as w e l l as o t h e r l o w - p r i c e d c a r r i e r s ) to  155  operate  on  U.S.  i n t e r n a t i o n a l routes;  l i b e r a l b i l a t e r a l s were signed; and,  new  pro-competitive  competitive U.S.  initiative  included:  i n trade  showed t h a t following  the  competitive  c)  research the  were l a r g e  implementation o f  field  and  especially  in  as  the  the  for  policy.  Third  during  This  the  could  period  attempt, by  emergence World.  Economic  carriers take  part  to in  e f f e c t of Figure  the 2.18  profits  i n the  years  imply  t h a t the  pro-  industry.  of  Each  study  ICAO, to r e - e n t e r  regional of  under  regulatory  these  (1966-1981) the  economic  organizations,  developments  are  briefly  Regulation  o u t l i n e d above,  during  c h a r t e r r e g u l a t i o n s and  a whole, more c o m p e t i t i v e .  came,  to  on  below:  ICAO and  liberalize  without having  pro-  Developments  regulatory  was  to p e r m i t  conducted to determine the  the  These were the  As  IATA  fluctuations i n operating  were noteworthy.  i)  IATA;  competition  f i n a n c i a l h e a l t h of a i r c a r r i e r s .  a d d i t i o n a l developments  discussed,  increased  p o l i c y i n c r e a s e d the o p e r a t i n g r i s k o f the  Further Two  p o l i c y on  there  brought a g a i n s t  Major r e s u l t s o f the  lower p r i c e s and  r e s t r u c t u r i n g of  liberalized;  the l i b e r a l i z a t i o n o f the Bermuda 2 b i l a t e r a l .  been l i t t l e  pro-competitive  was  enacted.  association activities  t a r i f f c o o r d i n a t i o n ; and,  There has  the  r e g u l a t i o n s were  a show-cause o r d e r  l e g i s l a t i o n was  i n t e r n a t i o n a l routes;  participate  charter  the  most p a r t ,  from  The the  the  1970s t h e r e  was  a movement f i r s t  to  then to make i n t e r n a t i o n a l a i r transport,, impetus  for this  developed world,  156  l i b e r a l i z a t i o n movement and  e s p e c i a l l y from  the  United  States.  liberalizing  There was,  however,  a  large  international a i r transport  bloc  of  countries  regulations.  opposed  Among the  countries  interested  i n a r e t u r n to a more t i g h t l y - r e g u l a t e d regime were many from  developing  world.  a i r l i n e s played carriers looked  of to  objectives.  These c o u n t r i e s were d i s s a t i s f i e d w i t h  5 7  i n IATA, b e l i e v i n g t h a t o r g a n i z a t i o n to be  the  developed w o r l d .  ICAO  as  a  vehicle  Consequently,  5 8  for  achieving  (1984,  p.167)  cited  involvement i n economic i s s u e s d u r i n g  define  the  the  roles  their  dominated by  large  developing  countries  their  economic  regulatory  following  examples  of  5 9  Haanappel  1980s:  the  the  to  development  scheduled  and  transport conferences;  of  a  standard  non-scheduled and,  the  the the  l a t t e r p a r t o f the  bilateral  tariff  services;  the  establishment  by  to examine the r e g u l a t i o n o f a i r t r a n s p o r t and  ICAO's  1970s and  clause;  convening  ICAO o f "panels  early  attempts of of  to  ICAO a i r experts"  the machinery f o r e s t a b l i s h i n g  The f e e l i n g among some d e v e l o p i n g c o u n t r i e s was t h a t t h e i r c a r r i e r s c o u l d o n l y r e c e i v e a f a i r share o f the market i f the i n t e r n a t i o n a l system was t i g h t l y regulated. (Major e x c e p t i o n s to t h i s l i n e o f t h i n k i n g i n c l u d e d a number o f Southeast A s i a n c o u n t r i e s , such as Singapore and Hong Kong.) For example, a t ICAO's T h i r d A i r T r a n s p o r t Conference, I n d i a , T a n z a n i a , Mexico, Lebanon, and P a k i s t a n put forward the f o l l o w i n g recommendation (ICAO, 1985f): 5 7  With the o b j e c t i v e t o p r o m o t i n g a j u s t and equitable i n t e r n a t i o n a l c i v i l a v i a t i o n o r d e r , and w i t h a view to a c h i e v i n g g r e a t e r c o o p e r a t i o n between the n a t i o n s o f the w o r l d i n o r d e r to discourage u n i l a t e r a l measures and reduce u n f a i r c o m p e t i t i o n and growth o f u n h e a l t h y p r a c t i c e s the Conference recommends t h a t the Contracting States recognize the p r i n c i p l e that a i r s e r v i c e s between them s h o u l d r e s u l t i n an e q u i t a b l e and f a i r s h a r i n g o f b e n e f i t s by t h e c o n c e r n e d S t a t e s and t h e i r c a r r i e r s f o r t h e i r mutual advantage. 5 8  See,  5 9  See  f o r example, Feldman (1983, p.52). Ellingsworth  (1977, p.32). 157  tariffs.  However,  numerous  recommendations  concrete no  ii)  as  a c t i o n " has  Haanappel  resulted.  o b l i g a t i o n to obey the  The  Growth of  on  (1984, p.24)  economic  the  Arab  for  regionalism.  because,  Air  to  give  The  devote  enough  detail".  he  little  are  under  provided  their  members  feel  they  reasons  an  can  (1983, p.109) o f as  organizations  identity...In have  a  more  justification  the  effective  exist  regional impact." difficult  the]  be  interest, for  four  Sharif  "A w o r l d meeting i s too heterogeneous and smaller  t h i r d r e a s o n c i t e d was  time  Amer A.  6 1  have been formed, both  stated that regional a i r l i n e  members  [whereas  international  adopted  "very  noted that countries  organizations  levels.  Organization,  claimed that,  direct...  matters,  ICAO  ICAO recommendations.  airline  First,  "they  homogeneous." of  and  Carriers  o r g a n i z a t i o n s . . . the Second, he  although  Regionalism.  governmental  the  regulatory  I t must be  6 0  A number o f r e g i o n a l a i r t r a n s p o r t at  stated,  so  that,  regional  tend  to  t h a t many r e g i o n a l problems are  "[t]he  such m a t t e r s w h i l e  S h a r i f ' s f o u r t h r e a s o n was,  groups  i n t e r n a t i o n a l meeting would the  regional  body would  " t h a t the r e g i o n a l body i s an  go  more not riot into  excellent  An i n d i c a t i o n o f ICAO's poor r e s u l t s i n the economic f i e l d has been t h a t i s s u e s a r e d e b a t e d y e a r a f t e r y e a r a t ICAO meetings but are not resolved.; An example o f such an i s s u e i s the p r a c t i c e o f the "illegal" d i s c o u n t i n g o f IATA t a r i f f s . Recommendations a g a i n s t t h i s p r a c t i c e were made a t the t h r e e ICAO a i r t r a n s p o r t c o n f e r e n c e s i n 1977, 1980, and 1985. See ICAO (1977f, p.6; 1980g, p.58; 1985g, p.64). 6 0  :  At the governmental l e v e l , these o r g a n i z a t i o n s i n c l u d e the Arab C i v i l A v i a t i o n C o u n c i l , the A f r i c a n C i v i l A v i a t i o n Commission and the European C i v i l A v i a t i o n Conference.At the a i r l i n e l e v e l , r e g i o n a l organizations include the A s s o c i a t i o n of A f r i c a n A i r l i n e s , the Arab A i r C a r r i e r s O r g a n i z a t i o n , the A s s o c i a t i o n des T r a n s p o r t e u r s A e r i e n s de l a Zone Franc, the A s s o c i a t i o n o f European A i r l i n e s , the I n t e r n a t i o n a l A s s o c i a t i o n o f L a t i n American A i r T r a n s p o r t and the O r i e n t A i r l i n e s A s s o c i a t i o n . 6 1  158  forum  a t which  to discuss  i n t e r n a t i o n a l meetings". present  i n t e r n a t i o n a l problems  going  t o the  The c o u n t r i e s o f the r e g i o n a l o r g a n i z a t i o n may then  a u n i f i e d p o s i t i o n a t the i n t e r n a t i o n a l forum.  I n the 1970s, some o f the r e g i o n a l o r g a n i z a t i o n s became  involved  organizations  in tariff  (Feldman,  coordination.  The  i n the d e v e l o p i n g  world  involvement  these  of  i n t a r i f f and o t h e r economic m a t t e r s has been a t t r i b u t e d t o the  d i s s a t i s f a c t i o n o f developing  their  before  c o u n t r i e s and t h e i r c a r r i e r s w i t h  1983, p.52; G i d w i t z ,  carriers,  have  sought  1980, p . 8 6 ) .  to i n s u l a t e  T h i r d World  6 2  themselves  from  IATA p o l i c i e s countries,  and  IATA p o l i c i e s  and  r e g u l a t e economic m a t t e r s on a r e g i o n a l b a s i s .  d)  Developments The  parts.  period From  Leading leading  1966  to  to the 1981 Liberal t o the 1981 l i b e r a l 1977  regulations  governing  After  i n a movement  1977,  liberalization  of  Regime - A Summary  there  scheduled  a  transport  l e d by  both  was  regime c a n be d i v i d e d trend  b u t more  the U n i t e d  scheduled  towards  and  liberal  States,  charter  more  there  i n t o two  restrictive  charter was  rules.  a dramatic  a i r transport.  The  l i b e r a l i z a t i o n p o l i c y was opposed by a number o f c o u n t r i e s ,  e s p e c i a l l y those  of  policies.  the d e v e l o p i n g  effort this  to counter  trend,  organizations  world,  which  preferred  the l i b e r a l i z a t i o n  the d e v e l o p i n g  countries  trend  more  restrictive  and t o i n s u l a t e themselves  sought  to i n v o l v e  ICAO  and  I n an from  regional  i n the economic r e g u l a t i o n o f a i r t r a n s p o r t .  Griffiths (1978, p.30) found, f o r example, t h a t the c a r r i e r s o f d e v e l o p i n g c o u n t r i e s were d i s s a t i s f i e d w i t h the IATA r e s t r u c t u r i n g o f 1978. These c a r r i e r s would have p r e f e r r e d the requirement t h a t a l l a c t i v e c a r r i e r s p a r t i c i p a t e i n t a r i f f c o o r d i n a t i o n t o have remained. 6 2  159  In  the  next  f a c t o r s w i l l be importantly, air  of  this  used to a n a l y z e  hegemonic  transport  involving  section  regime  the  chapter,  the  the  i f i t i s to be  changed  i n much  of  theory  and  other  reasons b e h i n d these developments.  theory,  replacement  hegemonic  IATA  of  supported, must show why  the  tariff  Most  world  to  a  coordination  liberal  with  the  regime,  market-based  pricing.  2.  was  Analysis  of  the  Formation  Hegemonic  Stability  Theory  the  Liberal  There were a number o f  changes  i n the  regulated  period  1946  liberalized, increased did  of  not  the  use  the  substantially  governments, The  bilateral  change  routes and  way to  IATA c o n f e r e n c e mechanism was  of r e s t r i c t i v e  regulated:  IATA.  during  and  most  the  way  were  still  international a i r transport  Using  the  Modified  i n t e r n a t i o n a l a i r transport 1977.  Charter  streamlined,  agreements.  still  were  t h e r e was  an  These changes, however,  negotiated  coordinated regulatory  rules  and  international air  c a p a c i t i e s were  fares  Regime  transport  was  bilaterally,  multilaterally,  regime remained  by  through  basically  intact.  The  first  institution  major post-war change i n r e g u l a t o r y regimes o c c u r r e d  of  the  liberal  i r r e l e v a n t on major a i r r o u t e s ,  The  conclusion  1970s c o n t r a d i c t s the  that  there  regime. as i t was  was,  in  f i n d i n g s o f Busza  160  IATA  tariff  coordination  r e p l a c e d by c o m p e t i t i v e  fact,  a  (1987) and  with  regime  change  Jonsson  the  became  pricing.  in  (1987),  the  late  described  i n the p r e v i o u s a very  few  bilateral the U.S. Results was  a  chapter.  liberal  Both Busza and J o n s s o n contended t h a t because o n l y  bilaterals  agreements)  are presented regime  change  on major  i n Appendix i n that  routes,  maintained  i f there  capable  sufficient  theory  of  policy,  multilateral  stability  a dominant  maintaining  Therefore,  hegemon  maintaining The  coordination price  s t a b i l i t y e x p l a i n t h i s regime  o f hegemonic  exists  tariff  the  country  costs  of  must  was  setting.  there  largely Can  willing the  the  change?  t o support  regime,  to e n l i s t  i n o r d e r f o r a regime t o change  lose  change.  s t a t e s t h a t a regime w i l l  exist  m a i n t a i n e d ) a t l e a s t one o f the f o l l o w i n g must The  number o f  the c o n t e n t i o n t h a t  of u n i l a t e r a l  i n c e n t i v e s or c o e r c i v e measures  i n t o the regime.  t o the t o t a l  then t h e r e was no regime  C which support  i n favour  m o d i f i e d t h e o r y o f hegemonic  The m o d i f i e d  (relative  and because o t h e r • c o u n t r i e s d i d n o t f o l l o w the l e a d o f  and adopt a p r o - c o m p e t i t i v e  abandoned  and  were s i g n e d  and  be  the regime  as  well, i f  smaller countries (i.e.,  to not  be  occur:  i t s dominance  or  the  capabilities  of  net  to  the regime;  hegemon  must  no  longer  receive  sufficient  benefits  j u s t i f y the maintenance o f the regime; o r , The  i n c e n t i v e s and/or c o e r c i v e measures  countries  into  used t o e n l i s t  the regime must be d i m i n i s h e d  the s m a l l e r  t o make p a r t i c i p a t i o n  i n the regime no l o n g e r worthwhile.  Each o f the p o s s i b l e e x p l a n a t i o n s below:  161  f o r the change  i n regimes i s examined  a)  Did or  the the  The is  incapable  and  i n the  1981.  far,  its  Dominant Position  of Maintaining  to which,  of  supporting  the  the Air  airline  a regime  industry  largest  Transport  i s not  Airline  Industry  Regime?  c l e a r i n the hegemonic  leadership  i n particular declined  position  i n both  during  the  the  world  economy  and  it  stability  i n the w o r l d i n  general  period  t h i s d e c l i n e the U.S.  the d e c l i n e i n the p o s i t i o n o f the U n i t e d  1960s and  A l t h o u g h the U n i t e d  1970s, i t s t i l l  Countries  continued  to  lucrative  routes  the  still  to  c o u l d buy  Bermuda-like b i l a t e r a l s . appear to be  6 3  the  1965-  maintained, the  airline  6 4  change i n regimes?  the U.S.  in  dominance o f a hegemon must d e c l i n e b e f o r e  What, i s c l e a r i s t h a t U.S.  6 3  the  Was  not  Lose  What i s a l s o c l e a r , i s t h a t d e s p i t e  industry.  the  States  Capabilities  extent  literature.  by  United  See,  due  desire  States  p o s s e s s e d the routes  airlines  declined  the  United  countries  the a c q u i e s c e n c e o f s m a l l e r The  fact  that  responsible i n importance  the  States.  (e.g.,  the  during  By  awarding  w i t h Bermuda 2),  countries,, i n support o f  regime was  not  to a d e c l i n e i n the p o s i t i o n o f the  f o r example, R u s s e t t ' s  for  l a r g e s t a i r market i n the w o r l d .  into  of other  States  (1985) c r i t i q u e o f the  m a i n t a i n e d would  U.S.  theory.  F i g u r e 2.8 showed t h a t U.S. c a r r i e r s m a i n t a i n e d j u s t under f o r t y p e r c e n t o f the w o r l d a i r t r a n s p o r t market i n 1977, the y e a r the U.S. proc o m p e t i t i v e p o l i c y was launched. F i g u r e s 2.9 and 2.10 showed the s i z e o f the U.S. a i r t r a n s p o r t i n d u s t r y i n r e l a t i o n to the a i r t r a n s p o r t i n d u s t r y o f other major a v i a t i o n c o u n t r i e s . Depending on the d a t a used, the U.S. i n d u s t r y was about twice as l a r g e as the i n d u s t r y o f the next l a r g e s t c o u n t r y . 6 4  162  b)  Were  There  Still  Maintaining It  was  benefits  Sufficient  the Post-Bermuda apparent  on  a  number  that of  U.S.  routes  a l s o apparent t h a t , on  U.S.-U.K.), (e.g., But  were  there  the  routes  the  United  where U.S. to  be  i n order  sufficient  not  States  receiving  U.S.-Netherlands,  c a r r i e r s of  had  Bermuda 1)  still  c a r r i e r s were (e.g.,  additional benefits  Bermuda 2 v s .  to  from  Regime?  These markets were dominated by was  Benefits  the  U.S.-Scandinavia).  foreign countries.  c a r r i e r s were d o i n g w e l l conceded  to  the  to m a i n t a i n the  benefits  substantial  accruing  to  It  (e.g.,  foreign  country  regulatory  regime.  the  United  States  to  s u p p o r t the post-Bermuda regime, i f i t so chose?  The of  answer i s e q u i v o c a l .  measuring  total  answer i s yes, be  From the t r a d i t i o n a l a i r t r a n s p o r t  benefits  by  only  t h e r e were s t i l l  regime. likely  6 5  be  enough  The  regime  a t t r i b u t e d to  States,  rather  suddenly  justify  r e a s o n f o r the  pro-competitive consumers  to  than fell  for short  the  sudden  r e j e c t i o n of  primary  to  carriers,  There d i d not  r e j e c t i o n of  the  Seen  achieving  l a t e 1970s, post-Bermuda  b e n e f i t s were viewed.  in this  sufficient  light, benefits  the  the  appear to  the post-Bermuda regime may  o b j e c t i v e became a c h i e v i n g  airlines. of  benefits  c a r r i e r s , between the e a r l y and  a change i n the way  p o l i c y , the  at  sufficient benefits.  a decrease i n b e n e f i t s to U.S.  significant  looking  perspective  more  With  the  benefits  for  post-Bermuda  for  the  United  thus p r e c i p i t a t i n g the regime change.  A d k i n s , e t al (1982, p. 18) showed t h a t n e a r l y a l l c a r r i e r s - U.S. domestic, U.S. i n t e r n a t i o n a l , and f o r e i g n - earned r a t e s o f r e t u r n , i n the 1970s, b e l o w the average f o r U.S. non-financial corporations. Rates o f r e t u r n , however, g e n e r a l l y t r a c k e d the b u s i n e s s c y c l e and the p e r i o d 19751977 was one o f s t r o n g p r o f i t growth f o r Pan American and TWA on the North Atlantic. 6 5  163  c)  Were  There  Still  Participate  in  Sufficient  the  Post-Bermuda  There were a number o f benefits many  from the  from  the  Incentives  countries  World.  the  Smaller  Countries  to  share o f  the  Regime? dissatisfied  post-Bermuda regime.  Third  for  The  with  their  Prominent among these c o u n t r i e s  developing  countries  attempted  were  to  work  through ICAO to a c h i e v e a l a r g e r share o f the b e n e f i t s from i n t e r n a t i o n a l a i r transport. b e n e f i t s by  As  well,  the  developing  countries  conducting t a r i f f coordination  Although  regionalism  coordinator,  i t d i d not  may  have  IATA's  not  liberal, -policies.  involvement  of  ICAO,  regulations.  The  contributed  minimal.  3.  Analysis  The that  From the  modified  be  the  regime.  for  the  it  sufficient From the  to  the  as  liberal  the  liberalization  nor  the  of  tariff  regime.  additional benefits  regionalism,  Modified  be  i f there  to m a i n t a i n the benefits analysis  regime change was  considered  Using  maintained  a hegemon b o t h w i l l i n g and,  the  basis.  air  Hegemonic  Stability  hegemonic s t a b i l i t y t h e o r y (used f o r t h i s t h e s i s )  a regime w i l l  regime;  to  additional  The  through economic  transport  e f f e c t o f these " c o u n t e r - l i b e r a l " measures on the change i n  regimes appears to be  Results  Neither  capture  position  a d o p t i o n o f the  d e v e l o p i n g c o u n t r i e s were i n t e r e s t e d i n a c h i e v i n g protective,  to  on a r e g i o n a l  weakened  p r e c i p i t a t e the  sought  that  "benefits"  regime and  accruing above, the  164  to  smaller  States  benefits  the  capable of  modified to  predicted following:  supporting  countries  i t would appear t h a t  United  from  c o n t i n u e d to e x i s t  Theory  the  to  the  remain i n  major reason  i t s views on what  airlines  to  benefits  to  consumers. benefits  As  a  arising  result,  the  The  their  o f b e n e f i t s from  the  regime  fact  The  p r e c i p i t a t e a change i n  U.S.  i n the  figure,  major  The  6 6  increased  route  cost  to  Other  a)  Domestic It  the  international The  longer  sufficient  t h a t i t c o u l d no  l o n g e r be  countries d i s s a t i s f i e d regime  c o u n t r i e s were  d i d not  not  with  c o n t r i b u t e to  powerful  enough  to  regimes.  I t must be  e x i s t e d only policies  United  United  i n those  (i.e.,  States  t h a t the  areas  chiefly  the  o f f e r e d the  in  States  noted  exchange  of  ( p a r t i a l ) regime,  the w o r l d  North  carriers  for  i n supporting  a  affected  in the Adoption  of  the 1981  and  of  countries,  other  North  regime.  regime was  Liberal  by  Atlantic  competitive  this  as  the  The  loss  of  carriers.  Regime  Affairs evident  from  a i r policy  p u r s u i t of  the  coordination  on  i s "Why  the  discussion earlier  changed  from p r o - a i r l i n e  consumer b e n e f i t s , r a t h e r  precipitate  addressed  no  (and perhaps, monopoly p r o f i t s ) a v a i l a b l e to U.S.  Factors  was  developing  opportunities  monopoly r o u t e s  4.  the post-Bermuda  theory.  pro-competitive  Pacific).  were  i l l u s t r a t e s the l i b e r a l regime i n the c o n t e x t o f the m o d i f i e d  hegemonic s t a b i l i t y shown  there  t h a t t h e r e were d e v e l o p i n g  change.  F i g u r e 4.3  felt  from the post-Bermuda regime and  supported. share  U.S.  change major  in  than  in this  to pro-consumer  airline  r e g i m e s - - e s p e c i a l l y the  international  routes.  The  section that  key  in  U.S. 1977.  b e n e f i t s , helped  demise  of  IATA  to  tariff  q u e s t i o n t h a t must  be  d i d t h i s happen?"  In o t h e r p a r t s of the w o r l d , the a l t h o u g h under a t t a c k by p r i c e d i s c o u n t e r s . 6 6  165  post-Bermuda  regime  remained,  F igure The  Liberal  Regiae  i n the Context  4.3  of the Modified  Hegeaonic  Stability  Theory  Liberal COSTS Decreased monopoly/duopoly f o r U.S. c a r r i e r s  cn  - Compet i t i ve pr i c e - s e t t i ng opportunities  United States — ( T h e H e g e m o n ) «J-  Increased o p p o r t u n i t i es for carriers Threat traffic  Other  countries  - Bilateral regulation routes -  BENEFITS Incentives and Coercive Measures  of diversion  Regime  Lower p r i c e s and g r e a t e r p r o d u c t c h o i c e f o r t r a v e l l e r s and s h i p p e r s and g r e a t e r r o u t e flexibility for carriers  of  Liberal bilaterals allowing individual c a r r i e r s to determine capacity levels  The  development  p o l i c y can be (1980)  of  viewed as  described  deregulation.  the  Before  the  pro-competitive  an a d j u n c t  to U.S.  political the  international air  transport  domestic d e r e g u l a t i o n .  Behrman  processes  mid-1970s,  behind  the  case  the  for  6 7  institution  deregulation  of  was  s e r i o u s l y by v i r t u a l l y no-one o t h e r than academic economists (p.91). promoted  anti-competitive  established  carriers  these p o l i c i e s .  Senator candidate) hearings. thought for  p.100).  The  considerable  (a  for  liberals, the  Kennedy  press  Administration  a  chairman o f the CAB  (p. 101). to p r e s s  in  the  widespread  for  and The  topic  on  chosen f o r the  because  The  CAB  interests  of  opposition  to  of  and  the  which  presidential  to  hearings  provided hearings  perceived  i t s regulators;  into  "big  hold  public  because  it  was  the a  business-government and  government" airline  forum  conservatives, (Behrman,  industry  1980,  attracted  for  the  airing  also provided  the  impetus f o r the  f o r r e g u l a t o r y reform have been the  Ford appointed  Party  consumers, because o f the p o t e n t i a l  reducing  hearings  coverage  President  no  of  Democratic  popular  more v i g o r o u s l y than would otherwise initiatives,  was  possible  airlines  potential  d e r e g u l a t i o n views Ford  Kennedy  to a b r o a d audience:  between the  there  d e r e g u l a t i o n was  prices;  of  and  protective  taken  however, t h i s began to change.  searching  to a p p e a l  complicity because  Edward  Airline  lower  (pp.96-98),  I n 1974,  was  policies,  U.S.  John Robsoh as  significantly case the  (p.102). first  of  sooner  pro-  and  Among h i s  reform-minded  1975.  The domestic and i n t e r n a t i o n a l p o l i c i e s were i n i t i a t e d i n the l a t t e r h a l f o f the 1970s. 6 7  167  simultaneously  In the 1976 of  less  p r e s i d e n t i a l campaign, James C a r t e r campaigned on a p l a t f o r m  government  involvement  i n the  marketplace.  According  to  Harbison  (1982, p.23):  I t was n o t s u r p r i s i n g t h e r e f o r e t h a t on t a k i n g o f f i c e i n J a n u a r y 1977 he f o l l o w e d the a d v i c e o f h i s White House a v i a t i o n a d v i s o r s to support s t r o n g l y the domestic a v i a t i o n d e r e g u l a t i o n moves a l r e a d y underway. J u s t i f y i n g t h i s approach, inter alia, was the t h e s i s t h a t 'support ( f o r a v i a t i o n d e r e g u l a t i o n l e g i s l a t i o n ) may produce a q u i c k h i t , to f u l f i l l campaign commitments, to c u t outdated and unnecessary programs, b e n e f i t consumers, c h a l l e n g e s p e c i a l i n t e r e s t i n f l u e n c e over the b u r e a u c r a c y ' . 6 8  In Kahn,  1977  to  people  head  who  took  to  still  passed  views  course  had  to be  69  and  began  U.S.  filled  (Behrman,  of  so  pro-deregulation  quickly  1980,  deregulation.  convinced  I n 1978, the  the  to become the  Kahn was  airlines  pp.119-120). was  his  Kahn  the  p.114). U.S.  appointed  CAB.  i t upon h i m s e l f  1980, few  the  shared  committed however,  Carter  of  key  economist,  CAB  p.112). The  the m e r i t s  The  Congress  c h i e f spokesman f o r the  support  the Airline signed  airline Deregulation  its  first  The quote ( w i t h i n the q u o t a t i o n ) members o f h i s T r a n s i t i o n A d v i s o r y Team. 6 8  was  CAB and  staff the  Act  from  a  became public,  and  1978,  Kahn  even a  (Behrman,  (United  liberal  with  cause , (Behrman,  t h a t , by  deregulation  Alfred  positions  of deregulation,  successful i n his efforts to  staff  Dr.  States,  bilateral  memo to  (with  Carter  1980, 1978) the  from  It should be noted t h a t the o p p o s i t i o n to i n t e r n a t i o n a l l i b e r a l i z a t i o n from the U.S. a i r l i n e s was not as u n i f i e d as the o p p o s i t i o n to domestic deregulation, since t h e r e were fewer c a r r i e r s operating i n t e r n a t i o n a l routes. Many c a r r i e r s which were not i n t e r n a t i o n a l o p e r a t o r s , i n f a c t , l i k e l y f a v o u r e d some i n t e r n a t i o n a l r e g u l a t o r y r e f o r m as a means o f o b t a i n i n g d e s i g n a t i o n s on i n t e r n a t i o n a l r o u t e s . See H i g h t (1981, p.19). 6  9  168  Netherlands). years  U.S.  p o l i c y had  from p r o t e c t i o n i s t to  In  conclusion,  i n f o r m a t i o n was  the  advantages  that  (especially  Carter)  and  lower  could  impetus  for  Carter.  arise  from  used r e g u l a t o r y  key  The  airline  people, Kahn was  r e c e i v e the support  Structural  such  regulatory  regulatory reform  able  to  Kahn,  promote  downturn i n the  the  few  when  new  the  The  who the  were  political  politicians  a campaign i s s u e ,  p o l i c y was  Ford,  i n order  to  lower taxes)  implemented  committed  to  by  airline  p o l i c y s u c c e s s f u l l y enough  to  legislation.  was in  difficult  for  argued the the  industry.  i n t r o d u c t i o n o f new  impact  on  multilateral  These were:  changes i n  c o s t - s a v i n g technology; a  a change i n the h e i g h t  of entry b a r r i e r s  Each o f these f a c t o r s are examined, i n t u r n , below:  in Number of Air  increase  price  as  saw  reform.  t h a t c o u l d have an  economic c y c l e ; and  industry.  It  a  Factors  the number o f a i r c a r r i e r s ;  Changes  of  came  i n Congress n e c e s s a r y to pass d e r e g u l a t i o n  p r i c e - s e t t i n g i n the i n t e r n a t i o n a l a i r l i n e  i)  course  reform  These p o l i t i c i a n s  deregulation  as  Four f a c t o r s were i d e n t i f i e d  to the  the  from c i t i z e n s i n t e r e s t e d i n l e s s government ( i . e . ,  deregulation.  b)  in  pro-competitive.  President  prices.  appointing  completely  p r o v i d e d by economists to p o l i t i c i a n s such as P r e s i d e n t  Senator Kennedy, and  a t t r a c t votes  changed  in  number  the  Carriers t h e o r e t i c a l section  of  coordination  coordinator's  firms  would,  of p r i c e s .  difficulties  would  169  ceterus I t was be  of  this  chapter  paribus, argued,  compounded  as  that  make well  i f the  an  i t more that  new  the  firms  possessed  d i f f e r e n t cost  structures  c a r r i e r s d i d not j o i n the  from  e x i s t i n g c a r r i e r s or  the  problem  carriers, there  the  with  was  carriers  can,  i n part,  divergent  first,  an  cost-cutting  competition  charter  carriers  attempting discount consider,  to  fares  views  compete (see  on in  Laker  i n two into  a t t r i b u t e d to fares charter  countries;  carrier  charter  be  increase  from d e v e l o p i n g  cartel  with  Figure  by  71  the  2.17).  of  developing  to  high-cost  operators,  f a r e s i n the  increases charged.  carriers; the  IATA  (Haanappel,  charters  by  number  During  the  second,  an  to  the  1978,  low  offering a  larger  by  priced  to e n l i s t  pp. 150-151);  of  in  i n s t i t u t i o n of service  responded  70  1970s  increase  However, w i t h a l a r g e r a r r a y  countries  1970s  i n the  trying, unsuccessfully,  the  and  by  array  of  of fares  to  difficult.  caused problems f o r IATA because  were g e n e r a l l y a g a i n s t measures to l i b e r a l i z e As  be  third,  Airways.  ways:  the  and  t a r i f f c o o r d i n a t i o n became more  Carriers  new  cartel.  IATA d i d , i n f a c t , e x p e r i e n c e problems c o o r d i n a t i n g and  i f the  t a r i f f coordination  they  procedures.  these c a r r i e r s were opposed to measures which would  See, f o r example, the d i s c u s s i o n i n ICAO (1977g, problems t h a t IATA encountered f i x i n g r a t e s i n 1976.. 7 0  pp.42-47) on  C h a r t e r c a r r i e r s have been a b l e to o f f e r lower than r e g u l a r f a r e s f o r the f o l l o w i n g reasons ( G i d w i t z , 1980, p . l ) : 7 1  the  scheduled  O v e r h e a d c o s t s a r e low s i n c e t o u r o p e r a t o r s h a n d l e commercial p r o c e d u r e s s u c h as p r o m o t i o n and r e s e r v a t i o n s , and traffic management f u n c t i o n s , s u c h as p a s s e n g e r s e r v i c e , a i r p o r t o r g a n i z a t i o n , and ground t r a n s p o r t ; C h a r t e r c a r r i e r s g e n e r a l l y operate a t an average c a p a c i t y t o one hundred percent, s i n c e they do not m a i n t a i n a during off-peak periods. 170  of close schedule  likely  result  carriers the  of  advent  enter  in  the  lowering  developing of  and  regional  offered  The  d i s s e n s i o n between  tariff  coordination field.  and  to  the  a  below new  IATA  array  levels. of  the  IATA, c o n t r i b u t e d attempt  to  to have ICAO  7 2  Laker caused problems f o r IATA because  fares  introduce  IATA p r i c e s .  developed c o u n t r i e s , w i t h i n  the economic r e g u l a t o r y  Finally,  of  7 3  Laker  promotional  i t , like  forced  fares,  the  the  IATA  thereby  charters,  carriers  making  to  tariff  c o o r d i n a t i o n even more d i f f i c u l t .  In for  summary,  IATA  the  increase  i n coordinating  in carriers  fares.  during  different  cost  c a r r i e r s of developing  ii)  Introduction The  structures  of New  from  the  new  the c h a r t e r s and Laker) or  many  e x i s t i n g IATA  carriers  can  cause problems  in  (i.e.,  Technology new  technology  p r i c e s because companies t h a t use from  problems  countries).  i n t r o d u c t i o n of  structures  1970s caused  Problems were e x a c e r b a t e d because  c a r r i e r s o f t e n d i d not adhere to IATA f a r e s ( i . e . , had  the  companies  that  do  the new not,  coordinating  t e c h n o l o g y w i l l have d i f f e r e n t and  will,  t h e r e f o r e , want to  cost  charge  V o t i n g p r o c e d u r e s a t ICAO made t h a t o r g a n i z a t i o n more amenable than IATA to the wishes o f the d e v e l o p i n g c o u n t r i e s . ICAO o p e r a t e d by means o f m a j o r i t y v o t i n g , u n l i k e IATA, where r e s o l u t i o n s had to be p a s s e d unanimously. T h e r e f o r e , a t ICAO, the d e v e l o p i n g c o u n t r i e s c o u l d use t h e i r m a j o r i t y to pass r e s o l u t i o n s f a v o u r a b l e to t h e i r i n t e r e s t s . 7 2  I n a d d i t i o n t o L a k e r , t h e r e were o t h e r . non-IATA c a r r i e r s t h a t , d i s c o u n t e d IATA p r i c e s , such as the Southeast A s i a n c a r r i e r s : T h a i Airways I n t e r n a t i o n a l , M a l a y s i a n A i r l i n e System, Cathay P a c i f i c Airways (Hong Kong) and Singapore A i r l i n e s . 7 3  171  different prices. the  lower  As w e l l , i f the c a r t e l does n o t lower p r i c e s to respond to  industry  discounting,  costs,  then  this  can  lead  as companies lower p r i c e s on t h e i r  The major  i n 1969.  problems  also  increased  contributing difficult (e.g.,  to  to  low  the load  separate  economic  capacity factors  The  wide-bodied j e t s  the  recession,  effect  available i n the  for  early  The  7 4  jets  from  other  i n the number o f c a r r i e r s ,  w i d e - b o d i e d j e t s undoubtedly c o n t r i b u t e d  wide-bodied routes,  Although  75  the  lowered the  international  1970s.  o f wide-bodied  an i n c r e a s e  illegal  the p e r i o d 1965-1981 was  c o s t s o f t r a n s p o r t i n g passengers over h i g h d e n s i t y r o u t e s . jets  of  own.  t e c h n o l o g i c a l breakthrough during  i n t r o d u c t i o n o f wide-bodied j e t s  to  i t is effects  e t c . ) , the  t o IATA t a r i f f c o o r d i n a t i o n  problems  i n the 1970s.  Hi)  Economic The  Downturns  airline  tracking  the  business  performance  of  is cyclical the  economy  with  airline  as  a whole.  performance 76  This  generally  i s because  a  l a r g e p a r t o f a i r t r a n s p o r t demand i s d i s c r e t i o n a r y , and d i s c r e t i o n a r y demand generally  declines  during  periods  of recession.  If a fall  i n demand i s not  Doganis (1985, p.108) i l l u s t r a t e d the r e l a t i o n s h i p between a i r p l a n e s i z e and c o s t p e r s e a t - k i l o m e t r e . The l a r g e r a i r c r a f t , l i k e the Boeing 747, had a s i g n i f i c a n t l y lower c o s t per s e a t - k i l o m e t r e than the s m a l l e r a i r c r a f t . 7 4  7 5  See:  ICAO (1981f, p.44).  Adkins et al (1982, p.28) p r e s e n t e d b e t a c o e f f i c i e n t s f o r the s t o c k s o f twelve p u b l i c l y t r a d e d a i r l i n e s f o r the p e r i o d s 1954-1965, 1966-1975 and 1976-1981. A l l t h e c o e f f i c i e n t s , b u t one, were g r e a t e r than unity, i n d i c a t i n g t h a t the a i r l i n e s have a h i g h degree o f o p e r a t i n g r i s k . 7 6  172  met  by a r e d u c t i o n i n c a p a c i t y or a l o w e r i n g  o f p r i c e s , then t h i s can l e a d to  problems o f i l l e g a l d i s c o u n t i n g o f c a r t e l p r i c e s .  A major economic r e c e s s i o n , the  mid-1970s,  f o l l o w i n g the  during  dramatic  t r a n s p o r t growth c u r v e s ( F i g u r e s 2.1, fact,  a moderation  i n the  the  p e r i o d under study,  o i l p r i c e increases 2.2,  and  2.3)  growth o f a i r t r a n s p o r t  occurred  o f 1973.  The  air  showed t h a t t h e r e was, during  the  period.  in  in This  economic downturn l i k e l y c o n t r i b u t e d to problems o f i l l e g a l d i s c o u n t i n g as i t coincided  with  increases  in  industry  capacity,  due  to  the  introduction  of  wide-bodied j e t s .  iv)  Changes I t was  in  in  the Height  easily  potential  and  argued t h a t a r e d u c t i o n  price coordination.  more  of Entry  enter  Barriers  i n entry b a r r i e r s could  I f b a r r i e r s were  (or  entrants)  Exit  lowered,  p o t e n t i a l l y enter)  might  choose  undermining the e f f e c t i v e n e s s o f the  not  to  a  then new  market.  charge  l e a d to problems companies New  cartel  1966-1981.  permitted  through  i n t r o d u c t i o n o f the  to .entry o f scheduled  (or  thereby  cartel.  a  relaxation  c h a r t e r c a r r i e r s to operate w i t h  Second, through the barriers  First,  entrants  prices,  E n t r y b a r r i e r s i n t o a i r l i n e markets were lowered i n two period  could  of  ways d u r i n g  charter  which  fewer r e s t r i c t i o n s on more r o u t e s .  liberal bilateral,  which lowered  c a r r i e r s onto a d d i t i o n a l r o u t e s .  173  rules  the  The  the  liberal  bilaterals  t u r n e d monopoly or duopoly r o u t e s  competitive)  A  routes.  result  of  coordination  undermined  institution  became  multilateral  more  of  liberal  difficult.  the  The  introduction  IATA  of  bilaterals  As  p r i c e - s e t t i n g became the  price - setting.  by  (or p o t e n t i a l l y  7 7  the  carrier-specific  into competitive  the  is  was  t h a t IATA  illustrated  i n Appendix  norm on major r o u t e s , tariff  rather  coordination  pro-competitive  tariff  than  system  liberal  C,  was  bilateral  policy.  It  should  be  noted  that  the  major e x i t b a r r i e r s were not  lowered.  Governments o f n e a r l y e v e r y c o u n t r y  publicly  or  privately  owned  flag  concomitantly  i n the w o r l d s t i l l  carriers,  and  those  with  insisted  on  inefficient  c a r r i e r s were not p r e p a r e d to a l l o w t h e i r c a r r i e r s to e x i t from i n t e r n a t i o n a l markets.  In  High e x i t b a r r i e r s o n l y compounded IATA's ratemaking  summary,  coordination the  number  wide-bodied  during of  were  the  carriers  jets  discounting; overcapacity  there  an and  which  period  number  factors  1966-1981.  contributed  These  discounting  the  problems;  and  to i n c r e a s e c o m p e t i t i o n  in  t h a t weakened  IATA  included:  increase  carriers);  to problems  recession  r e s t r i c t i o n s on c h a r t e r o p e r a t i o n s which s e r v e d  of  ( e s p e c i a l l y non-IATA  economic illegal  a  of  the  an  finally,  tariff in  i n t r o d u c t i o n of  overcapacity  mid-1970s and  difficulties.  that the  the i n t r o d u c t i o n o f l i b e r a l  and  illegal  exacerbated lowering  of  bilaterals  on i n t e r n a t i o n a l a i r r o u t e s .  R o s e n f i e l d (1982, p.473) found t h a t f o u r , p r e v i o u s l y c a r r i e r s e n t e r e d i n t e r n a t i o n a l markets to take advantage o f r e s u l t i n g from the U.S. p r o - c o m p e t i t i v e p o l i c y . 7 7  174  domestic U.S. opportunities  c)  is  Overriding  State  Interests  The  factor  discussed  third  overriding  state  as p o s s i b l y  i n t e r e s t i n the maintenance  factor  likely  had  ways:  First,  because a number o f s t a t e s  and 1970s, due  i n f l u e n c i n g regime  the e f f e c t o f weakening  IATA  state  tariff  was  undermined  interest), coordination  countries  on how  favoured  stricter  countries,  by  to best  because  control  over  t h i s would  share" o f t r a f f i c regardless  5.  developments 1981.  The  liberal  its  hegemonic  i n the major  regime  stability  was  between  national prices  best  This  i n two  of t a r i f f s  ensure  became more  d e v e l o p e d and  than  of  developing  Developing  capacities  their  (i.e.,  Second, c o o r d i n a t i o n  carriers.  and  airlines  countries  d i d developed  carriers received  a  "fair  of a i r l i n e e f f i c i e n c y .  Summary The m o d i f i e d  U.S.  differences  support  coordination  formed n a t i o n a l  d i f f i c u l t because o f the l a r g e r numbers o f c a r r i e r s . tariffs  carriers.  a c h i e v e d independence i n the 1960s  and because most o f these s t a t e s  t o the o v e r r i d i n g  of national  developments  international  development during  explained  viewed as  t h e o r y and o t h e r f a c t o r s were used to examine  the  that  had  period  the change  "benefits".  a i r transport t o be  whereas,  consumers. competitive  The  under new  the  new  U.S.  was  view,  i n exchange  benefits resulted  had  175  of  and to a  hegemonic  o f what the  regime the  U.S.  f o r b e n e f i t s to to  flow  i n a change  regime from a p r o - a i r l i n e framework.  1966  the change  theory  the post-Bermuda  framework  d e f i n i t i o n of benefits  regulatory  The  between  of a r e c l a s s i f i c a t i o n  under  p r e p a r e d t o support the r e g u l a t o r y carriers,  explained  1977-1981.  i n terms  industry  the  to  U.S.  to a pro-  The  other  even p r i o r  f a c t o r s helped  to  the  most  wide-bodied  notably  jets,  contributed discounting policy  to of  after  economic  a  CAB.  a  growing slowdown  of  of  new  air  use  of of  liberal  the U.S.  and the  made  the  liberals  in  domestic  the  and  E.  The 1986  In t h i s s i n c e 1981 implemented United to  a  transport e f f e c t s of  were  and able  process  by  favour  of  to key p o s i t i o n s i n  already  faltering  IATA  i n t e r n a t i o n a l routes,  thus  routes.  Post-Liberal Regime  s e c t i o n o f the paper, the major developments t h a t have  are  o u t l i n e d and  discussed.  i t s pro-competitive  S t a t e s has more  factors  deregulation  in  of  "illegal"  its air  policy-making  weakened the  p r i c i n g system on these  the  conservatives  system o f m u l t i l a t e r a l t a r i f f c o o r d i n a t i o n on U.S. c r e a t i n g a competitive  in  Politicians  advocates o f d e r e g u l a t i o n  bilaterals  These  deleterious  attractive.  airlines  to change  introduction  growth.  changed  on  weakened  decided  the  resulted  U.S.  being  to a number o f s t r u c t u r a l  carriers,  information  politically  coalition  of  of  transport  influence  why  a i r transport  Finally,  and by a p p o i n t i n g  The  number in  regime was  weakened due  overcapacity  tariffs.  release  the  broad  deregulation, the  the  the  p o l i c y , and  regime was  liberalization  counteract  forming  IATA  regulation  international to  and  The  industry  the  e x p l a i n why  change i n U.S.  i t s regulatory policy. factors,  to  D u r i n g the p e r i o d 1977-1981 the  p o l i c y with  full  r e t r e a t e d from the f u l l - s c a l e  traditional  pro-airline  have begun to l i b e r a l i z e  occurred  stance.  At  force.  Since  1981,  U.S. the  implementation o f t h i s p o l i c y the  same time,  other  states  t h e i r r e g u l a t i o n s over i n t e r n a t i o n a l a i r t r a n s p o r t .  176  It  should  be  noted,  however,  that  despite  these  post-liberal  developments,  the major f e a t u r e s o f the l i b e r a l r e g u l a t o r y regime have remained  Table as  well  as  indicates, of  the  4.4  presents  related the  the  industry  post-liberal  liberal  regime.  unilateral price-setting. restrictionist. air  The  transport.  there  was  no  characteristics and  regime r e p r e s e n t s , There  This  longer  the  commitment  a  mixture  maintained  by  the  to r e g u l a t o r y  s e c t i o n d e s c r i b e s the major events  followed  analysis  hegemonic t h e o r y and o t h e r  factors.  Developments  by  of  Under the Post-Liberal  the  change by and  the  agreement between Europe  the U.S. trend  the  of  multilateral  to  1981, the  i s that i n  extension  r e g i o n s o f the world,  the  177  to  of  1986 pro-  reform.  o f the p o s t - l i b e r a l p e r i o d .  developments  using  the  modified  Regime  and  liberalization  e s p e c i a l l y Europe.  and  t h e r e had been some movement  the  section:  United  the s i g n i n g o f  States  i n 1982;  from a pro-consumer p o l i c y back to a p r o - a i r l i n e  towards  table  to range from l i b e r a l  and  Three major developments are d i s c u s s e d i n t h i s a multilateral  As  regime  i t s leadership position i n  U.S.  As w e l l , by 1986,  an  2.  is  still  post-liberal  i n most ways, a c o n t i n u a t i o n  major d i f f e r e n c e between 1986  by c o u n t r i e s , o t h e r than the U.S.,  next  is  1986  factors.  B i l a t e r a l forms c o n t i n u e  consumer r e g u l a t o r y p o l i c i e s .  The  environmental  U n i t e d S t a t e s has  The  o f the  intact.  of  a i r regulations  in  the  policy; certain  Table  4.4  S n a p - s h o t o f t h e 1986 P o s t - L i b e r a l R e g i m e a n d Related Environmental and Industry Factors  Characteristic Factor  Regime  1986  or  Post-Liberal Regime  Characteristics  a) R o l e o f IATA i n Setting Prices  Prices set routes but adhered to Widespread market" p r "illegal"  b) Membership i n  Major international scheduled carriers excluding: some U.S. c a r r i e r s ; some c a r r i e r s o f developing countries; and some E a s t e r n b l o c c a r r i e r s . M e m b e r s h i p w a s 147 a i r l i i n e s w i t h a b o u t 60 p e r c e n t o f a c t i v e members representing developing countries.  c) Role o f  IATA  ICAO  d) B i l a t e r a l Clauses  by IATA on most often not by a i r l i n e s . use o f "freei c i n g and discounting.  Involvement i n t e c h n i c a l and safety matters plus recommendations on economic matters.  Capacity  e) R e g u l a t i o n by Regional Organizations  17.8  Mixture of liberal bilaterals, pre-determination of c a p a c i t y b i l a t e r a l s , and Bermuda b i l a t e r a l s . The European C i v i l A v i a t i o n Conference played an a c t i v e r o l e i n f i x i n g p r i c i n g zones on r o u t e s between the U.S. and Europe. Regional o r g a n i z a t i o n s i n the developing world s t a r t e d to coodinate prices.  Table 4.4 Environmental  (Continued)  Factors  a) The World Economy  R e l a t i v e l y strong economic prospects i n much of the developed world. Many of the countries of the developing world experienced low or negat i v e growth rates, and were burdened by heavy foreign debts.  b) Third World Development  Continued uneven development with many countries burdened by large foreign debts.  c) U.S. Government  Conservative, Republican administration concerned with countering communism. Congress, however, more concerned with finding ways to a l l e v i a t e huge trade d e f i c i t .  Industry  Factors  a) Maturity of A i r l i n e Industry  Positive, but lower growth rates than during 1950s, 1960s and 1970s.  b) State of Technology  Wide-bodied j e t s operated on long haul routes. A i r l i n e s of developing countries using much of the o l d equipment.  c) Government Ownership  Government ownership of most national a i r l i n e s , except U.S., but trend towards p r i v a t i z a t i o n and development of independent carriers.  d) Role of Charter Operators  Easy access to charters on many routes but r e s t r i c t i o n s designed to protect scheduled c a r r i e r s on other routes.  e) Size of Industry  The industry performed 1,485 b i l l i o n passenger-kilometres (1985 data) compared to 1119 b i l l i o n i n 1981.  f) Product Offerings  Several t i c k e t prices available on many international routes, e s p e c i a l l y on U.S. international routes 179  Table 4 . 4  (Continued)  g) " I l l e g a l " Discounting  Widespread discounting.  h) U.S. Dominance of A i r Transport  U.S. a i r l i n e s ' share of world a i r services ( i n passengerkilometres) was 40 percent.  180  a)  The  U.S.-E.C.A.C. Memorandum of  A memorandum o f u n d e r s t a n d i n g twelve European c o u n t r i e s on May behalf  of  the  (ECAC), and provided  for  the  creation  fares)  intergovernmental  fares  on  of  were  A  working  subject  major  to  The  78  the U n i t e d  agreement was  European C i v i l  reference  fares  Atlantic  group.  the  to  importance  ended A  8 1  carriers  the  s i g n e d by  States  and  negotiated  on  Aviation  Conference  and  routes  C a r r i e r s were  within  the  approval  fare by  free  f a r e zones.  conditions  of  zones a  MoU  (about  the  U.S.-European  to  establish prices  Outside the  The  7 9  o f the  relevant  zones,  bilateral  8 0  effectively p.163).  1982.  by  North  governmental a p p r o v a l  agreement.  was  i s known as the U.S.-ECAC Memorandum o f U n d e r s t a n d i n g .  reference  without  (MoU)  2,  European c o u n t r i e s  Understanding  the  condition  of  U.S. of  participate in  the  agreement  show-cause o r d e r the  MoU  IATA  was tariff  that  to  the  against  Europeans IATA  countries  coordination.  was  that  (Haanappel,  agree The  to  it  1984,  allow  their  Europeans  also  The MoU i s r e p r i n t e d i n Haanappel (1984, pp.191-199) and R o s e n f i e l d (1984, B o o k l e t 14, pp.71-79). The twelve European c o u n t r i e s were Belgium, France, Germany, Greece, I r e l a n d , I t a l y , the N e t h e r l a n d s , P o r t u g a l , Spain, S w i t z e r l a n d , the U n i t e d Kingdom and Y u g o s l a v i a . The MoU was i n i t i a l l y s i g n e d f o r a s i x month p e r i o d , but has been s i n c e renewed a number o f times (the l a t e s t b e i n g February, 1987). Three a d d i t i o n a l c o u n t r i e s , Denmark, Sweden and Norway, are now p a r t y to the agreement. 7 8  The European C i v i l A v i a t i o n Conference European c o u n t r i e s a f f i l i a t e d w i t h ICAO. 7 9  i s an  organization of  twenty  F o r e x a m p l e , i f t h e b i l a t e r a l r e q u i r e d f a r e a p p r o v a l by governments, then b o t h governments had to approve f a r e s o u t s i d e o f the zones. 8 0  As o u t l i n e d e a r l i e r i n t h i s c h a p t e r , the show-cause order was by the United States and r e q u i r e d IATA t o " s h o w - c a u s e " why c o o r d i n a t i o n s h o u l d c o n t i n u e to be exempted from a n t i - t r u s t laws. 8 1  181  both fare  issued tariff  wanted the agreement because they thought t h a t i t might r e s t o r e some o r d e r  to  the  in  North A t l a n t i c  Hudson, 1985, North  p.4):  Atlantic  f a r e s which may  The provided  market.  As  a i r t r a n s p o r t market  importance  pricing  of  flexibility  Switzerland,  Therefore,  all  MoU,  subject  were  country.  He  the  in particular  MoU  f o r U.S.  to  i n the  avoid disruptive  to  the  carriers  United on  States  routes  to  to  was  that i t  countries  A number o f European c o u n t r i e s , such as  had  not  signed  approval  by  both  A f t e r the s i g n i n g o f the MoU,  liberal  bilaterals  the  U.S.  and  with  not  France,  the  U.S.  the s i g n i n g o f the  the  relevant  European  o n l y f a r e s o u t s i d e the p r i c i n g zones  approval.  s i g n i f i c a n c e o f the MoU  determine. 7) .  and  p r i c e s on r o u t e s to these c o u n t r i e s , b e f o r e  r e q u i r e d governmental  The  (quoted  not be c o n s i s t e n t w i t h c o s t s o f o p e r a t i o n . "  major  and  ECAC s t a t e d  "ECAC Member S t a t e s wish to see g r e a t e r s t a b i l i t y  p a r t y to l i b e r a l b i l a t e r a l s . Italy  the p r e s i d e n t o f the  Some evidence,  to North A t l a n t i c o p e r a t i o n s  however, was  presented  by  is difficult  Hudson  to  (1985, Appendix  showed t h a t a l a r g e percentage o f N o r t h A t l a n t i c p r i c e s were s e t by  airlines  outside  of  evidence  t h a t market  the  U.S.-ECAC t a r i f f  zones.  f o r c e s remained prime  I t would appear  f a c t o r s i n the  from  establishment  this of  North A t l a n t i c f a r e s .  b)  The  Re-Establishment  Shortly  after  of a Pro-Airline  Policy  by  the  Ronald Reagan assumed the p r e s i d e n c y  S t a t e s began to e v a l u a t e  i t s pro-competitive  policy.  The  U.S. i n 1981,  United  evaluation resulted  i n a change back from a pro-consumer p o l i c y to a more t r a d i t i o n a l  182  the  pro-airline  stance.  The new  8 2  situations  U.S.  negotiating  on a case by case b a s i s  stance  i n order  stressed  evaluating  bilateral  t o o b t a i n maximum b e n e f i t s f o r  U.S. c a r r i e r s .  As liberal  a result  o f the new p o l i c y , post-1981 U.S. b i l a t e r a l s  to r e s t r i c t i v e .  Switzerland  A liberal  i n 1986, w h i l e  agreement was s i g n e d  with  bilateral,  bilateral related foreign  negotiating to a i r l i n e  countries  official,  the U.S.S.R.  p.28). an  three  stance  reasons under  complaints  and c a r r i e r s .  competition  f o r example, was s i g n e d  with  I n each case t h e r e were s t r o n g p r o 8 3  f o r the U.S. a d o p t i n g  the Reagan  According  a pro-airline  administration.  o f "unfair", competitive 8 4  a revenue p o o l i n g  The  practices  to a T r a n s p o r t a t i o n  had n o t been "a two-way s t r e e t " (quoted  first  against  Department  i n O t t , 1984,  The new American p o s i t i o n was t h a t U.S. c a r r i e r s were o f t e n p l a c e d a t  unfair  competitive  advantage  under  c o u n t r i e s ' c a r r i e r s d i d n o t compete  See, f o r example, Banks Feldman (1984, p.29). 8 2  from  the same y e a r a b i l a t e r a l w i t h  a i r l i n e reasons f o r s i g n i n g the b i l a t e r a l s .  There were a t l e a s t  ranged  liberal  bilaterals  because  the o t h e r  fairly.  (1982, p.144), Kozicharow (1982, p.128) and,  The p r o b a b l e r e a s o n f o r the U.S. a g r e e i n g t o a l i b e r a l b i l a t e r a l w i t h S w i t z e r l a n d was because U.S. c a r r i e r s r e q u i r e d p r i c i n g f l e x i b i l i t y i n order to compete w i t h the h i g h s e r v i c e Swiss c a r r i e r , S w i s s a i r . U.S. c a r r i e r s c h a r g i n g the same r a t e s as S w i s s a i r had d i f f i c u l t y competing f o r passengers, so t h a t p r i c i n g f l e x i b i l i t y was d e s i r e d . With r e s p e c t t o the U.S.S.R. b i l a t e r a l , the U.S. c a r r i e r t r a d i t i o n a l l y has had d i f f i c u l t y competing w i t h the S o v i e t c a r r i e r . A e r o f l o t because S o v i e t passengers have been d i r e c t e d to t h e i r own n a t i o n a l c a r r i e r . A revenue p o o l i n g agreement, t h e r e f o r e , would ensure t h a t the U.S. c a r r i e r , Pan American, a c h i e v e s a r e a s o n a b l e share o f the revenue from the r o u t e . 8 3  8 4  See Conahan (1981) f o r an o u t l i n e o f the a l l e g e d u n f a i r p r a c t i c e s . 183  A second r e a s o n f o r the U.S. CAB  in  U.S.  aviation  altogether. States,  Under  1978),  international  the air  Transportation. under P r e s i d e n t  Finally, stance  under  stance,  U.S.  transport  It to  the  policy-making  first  provisions  the  CAB  was  C a r t e r , not  policy  the  Reagan  was  be  under  the  in  posture. North  See,  passed  31,  to  official  because In  received  of  was  removed  Act  (United  1984,  the  and  Department  were, u n l i k e  a  policy.  general  accordance greater  the  of CAB  8 5  pro-business  with  input  its  the  Reagan  i n t o U.S.  air  stance,  force  the  regime were  gains  were  not  t h a t had  not  rolled  repealed.  The  the U.S.  switch  already  been won  back.  The  fact  Pacific  ensured  a  already  continuation  in  place  that  of  on  by  liberal existing  reduced the market e f f e c t s o f the change i n  Liberal bilaterals  back  the  competitive  U.S. North  price-  routes.  f o r example, Feldman (1984, p.29).  See, Banks (1982, p.149). 8 6  then  the  8 6  repealed  s e t t i n g on these major  8 5  changed  f o r and  liberal  already  and  December  roles  influence of  Deregulation  s t r o n g l y noted, however, t h a t d e s p i t e  b i l a t e r a l s were not  Atlantic  on  administration.  a p r o - a i r l i n e negotiating  negotiating  Airline  and  committed to a p r o - c o m p e t i t i v e  c a r r i e r s lobbied  bilaterals  policy  t h a t the  declined  Department o f T r a n s p o r t a t i o n  policy-making.  consumers  of  disbanded  transport  U.S.  should  p o l i c y change was  (1982,  p. 144)  and  184  Aviation  Week and  Space  Technology  c)  Liberalization In  the  transport air  decades  confidential  Elsewhere  following  agreements  memoranda o f  through  third  and  Civil  Aviation  European  and  the  Second  may  fourth  freedom  have  that  pooling  capacity  carriers.  Conference  A  (1982) found  the  Bermuda  1 principles, and  evenly  cooperative  divided  commissioned by  following  air  Even though b i l a t e r a l  agreements  would be  report  intra-European  the  between European  i n d i c a t i o n s of  intra-  protectionism:  there  in  was  than one  two-thirds  no  designated  per  . of  the  bilateral  agreements  on  the  number  airlines  limitation route,  only eight percent  c a r r i e r operating  Between s e v e n t y - f i v e  and  p o o l i n g agreements combination  of  to the h i g h  and  investigated  that  could  o f c o u n t r y p a i r s had  e i g h t - f i v e percent  more  and,  o f the  s c h e d u l e d r o u t e s was  be  tonne-kilometres  subject  to revenue  (p.37).  capacity  revenue p o o l i n g  of  per c o u n t r y (p.19);  performed on i n t r a - E u r o p e a n  entry,  War,  incorporated  understanding,  IATA ensured  Although  The  World  r e g u l a t i o n grew i n c r e a s i n g l y p r o t e c t i o n i s t .  transport  pricing  in Europe  fixing,  confidential restrictions  rate-making through IATA undoubtedly  l e v e l o f f a r e s found i n E u r o p e .  on  carrier  contributed  87  The European C i v i l A v i a t i o n Conference (1981) summarized a number o f s t u d i e s t h a t compared f a r e s i n Europe and N o r t h America i n the l a t e 1970s. The s t u d i e s i n d i c a t e d t h a t European f a r e s were s i g n i f i c a n t l y h i g h e r than N o r t h American f a r e s . One study, f o r example, found t h a t the B r i t i s h Airways s h o r t - h a u l y i e l d was twenty-one p e r c e n t h i g h e r than t h a t o f a comparable U.S. c a r r i e r o p e r a t i n g i n 1976 before U.S. d e r e g u l a t i o n (p.9). I t s h o u l d be n o t e d t h a t some o f the p r i c e v a r i a t i o n s can a l s o be a t t r i b u t a b l e to "unmanageable" c o s t d i f f e r e n c e s between Europe and N o r t h America, such as more c i r c u i t o u s r o u t e s and h i g h e r l a n d i n g f e e s . 8 7  185  D u r i n g the regulatory  1980s a debate ensued over the p o s s i b i l i t y  structure  of  intra-European  lower p r i c e s f o r scheduled  services.  number o f European p o l i t i c a l and consumer groups. carriers) carriers  or  political between  national and  the  air carriers  in  two  1987  by  countries  the  for  liberalization wanted  After  8 9  transport  limited  order  to  achieve  a i r l i n e groups  regional a i r carriers  organizations  groups.  in  regulatory organizations,  wide-scale  regulatory  above  formulated Community  the  transport  the  P a r t i c i p a n t s i n the debate i n c l u d e d a  8 8  Consumer groups and  wanted  air  o f changes to  only  of  limited  liberalization.  a  of  the  changes;  Plans  the  themselves  p o l i c y was the  flag  while  positioned  debate,  ministers  non-flag  regulations;  generally  much  (i.e.,  and  finally  twelve  European  included  (Melly,  1987): new  opportunities f o r discount p r i c i n g during off-peak  the m u l t i p l e d e s i g n a t i o n o f c a r r i e r s on h i g h d e n s i t y new  routes  countries;  allowed  more  regional c i t i e s  f o r l i m i t e d f i f t h freedom t r a f f i c  revenue p o o l i n g nor  - Probably  routes; in  different  and,  the o p p o r t u n i t y Neither  between major and  periods;  c a p a c i t y s h a r i n g , however, was  significant  to  European  a i r transport  rights. abolished.  than  the  limited  r e g u l a t o r y reforms d e s c r i b e d above were the f i v e l i b e r a l b i l a t e r a l s s i g n e d  I t s h o u l d be n o t e d t h a t a p p r o x i m a t e l y f i f t y European a i r t r a n s p o r t was conducted by c h a r t e r c a r r i e r s . 8 8  percent  of  by  intra-  For consumer views, see Bureau Europeen des Unions de Consummateurs (1985). For the r e g i o n a l a i r l i n e s p o s i t i o n , see Bonhoff (1985). For the p o s i t i o n o f the IATA c a r r i e r s , see IATA (1985e). For the p o s i t i o n o f v a r i o u s g o v e r n m e n t and r e g u l a t o r y a g e n c i e s , see the Commission o f the European C o m m u n i t i e s (1981; 1984); the European C i v i l A v i a t i o n Conference (1982, 1985); and, Haanappel (1985, pp.110-114). 8 9  186  the U n i t e d Kingdom. with  the  D u r i n g 1984  Netherlands,  Results  showed  that  a d d i t i o n a l routes o f f e r i n g o f new  and  Luxembourg, the  international Prominent  among  Australian of  IATA  attend  these  Trade  to IATA  conferences,  fares.  Canada  liberal  agreement w i t h  and  reached  commuter  air  Canada and  d)  they  least  on  this  but  could  services  the U . S .  and  of  Europe, as w e l l as to  the  Space Technology,  (1984; 1985)  no  be  States  two  eliminated  the  carriers  compelled  1985)  t h a t would i n c l u d e not  the  authority  could charge  still IATA  extremely  only  pricing  A l t h o u g h an agreement has  90  limited  liberal  agreements  u n d e r u t i l i z e d a i r p o r t s have  been  not  covering  concluded  by  91  Regime - A Summary  During  post-liberal  there  limited  to  1985,  proposed an  Under the Post-Liberal  liberalization"  their  circumstances. In  Developments the  1985).  Canada.  Although  longer  also cabotage.  proposal,  the  Switzerland.  initiation  A u s t r a l i a and  agreements.  the U n i t e d  to  and  under l i m i t e d  (Department o f E x t e r n a l A f f a i r s ,  capacity f l e x i b i l i t y ,  been  were  its tariff  Week and  at  P r a c t i c e s Commission  enforce  Germany,  agreements  o f Europe a l s o sought to l i b e r a l i z e  policies,  countries  West  Continental  f a r e s (Aviation  a i r transport  signed l i b e r a l  contributed  and  A number o f c o u n t r i e s o u t s i d e  the U.K.  Belgium,  agreements  between the U.K.  discount  1985,  of  U.S.  liberalization  regime  was,  concurrently,  i n t e r n a t i o n a l policy-making in  other  developed  regions  and of  the  the  the  movement  world  such  "deto as  Cabotage i s the r i g h t to enplane passengers and to t r a n s p o r t them to a d e s t i n a t i o n i n the same c o u n t r y . See Appendix B f o r a d e s c r i p t i o n o f cabotage and the o t h e r a i r freedoms. 9 0  9 1  See  Canada, Department o f E x t e r n a l A f f a i r s 187  (1984a; 1984b).  Europe, Canada, and airline  stance  especially of  in  U.S.  bilateral  attempted  parties  the  significant scheduled  other  to  r e v e r t e d to  negotiations  than  the  national  a more t r a d i t i o n a l  while  accommodate on  post-liberal period  multilateral  air  bilateralism  transport in  the  p r o v i d e d f o r the  Despite  a  other  carriers  in  pro-  countries,  limited basis  of  agreement  since  1940s.  also  covering  the  the  air  the  signing  economic  multilateralism  was  The  Memorandum  developments,  l i b e r a l regime. the  w o r l d and  routes influenced North  t h e r e was  views  transport  U.S.-ECAC  by U.S.  Pacific) .  the  post-liberal  international Routes  and  capacities  in  first of  favour  of  Understanding routes.  remained  largely  set m u l t i l a t e r a l l y i n  i n o t h e r markets  p o l i c y such as  the  regulation  of  regime  P r i c i n g c o n t i n u e d to be  competitively  of  abandoned  e s t a b l i s h m e n t o f f a r e zones on N o r t h A t l a n t i c  these  to the  some p a r t s  the  The  formulation.  During  similar  its  i n Europe,  interested  policy  Australia.  the  (i.e.,  mainly  on  North A t l a n t i c  continued  to  be  and  established  bilaterally.  2.  Analysis  of  Stability  Theory  Just  as  the  continuation  of  continuation  of  negotiating was  not  a  Post-Liberal  Developments  post-Bermuda  the  Bermuda  the  stance  liberal  regime  regime,  rollback  of  liberal  188  Modified  for  post-liberal  Certainly,  from a pro-consumer to  wholesale  the  represented,  the  regime.  Using  the  a pro-airline  the  regime U.S.  Hegemonic  most  part,  a  represented did  position,  change but  a  its  there  b i l a t e r a l s already negotiated.  As  well,  the  their  Europeans  limited  did  not  change  liberalization.  regulatory  Capacity  and  routes  b i l a t e r a l b a s i s while p r i c e s continued  to be  most  between  significant  regimes  was  regulatory  the  change  institution  Understanding.  However,  of  as  the  was  affairs  substantially,  remained  r e g u l a t e d on  set m u l t i l a t e r a l l y . the  liberal  multilateral  discussed  and  U.S.-ECAC  above,  the  with a  Perhaps the post-liberal  Memorandum  agreement  did  of not  e l i m i n a t e u n i l a t e r a l or market-based p r i c i n g on the N o r t h A t l a n t i c .  How  can  the  hegemonic  developments?  The  t h e o r y p r e d i c t s t h a t a regime w i l l be  there  continues  to e x i s t  and w i l l i n g to c o n t i n u e of  the w o r l d .  not  the  U.S.  The  stability  used  to  analyze  these  s u s t a i n e d as l o n g as  of maintaining  the  regime  to b e a r the c o s t s o f s u p p l y i n g the regime t o . t h e  the  what i n c e n t i v e s the U.S. o t h e r c o u n t r i e s had  be  a dominant power capable  i s s u e s t h a t must be  remained  theory  dominant  had  addressed,  power  capable  f o r maintaining  t h e r e f o r e , are whether or of maintaining  the regime; and,  to p a r t i c i p a t e i n the regime.  rest  a  regime;  what i n c e n t i v e s  These i s s u e s are  discussed  below:  a)  Did  the U.S.  The  U.S.  relatively that  the  between  position  U.S. 1981  share and  and  t h a t the U.S.  as  the Dominant Power in the Post-Liberal  i n the  stable during  showed t h a t o t h e r traffic  Continue  the  international first  half  o f the world's  1985,  to j u s t  under  the  forty  traffic.  1980s.  F i g u r e 2.8  indicated  passenger-kilometres  increased  percent.  f a r behind  of international  d i d continue  a i r t r a n s p o r t i n d u s t r y remained  scheduled  countries t r a i l e d  percent  of  the U.S.  Figures  2.9  i n percent  and of  2.10 total  I t i s s a f e to say, t h e r e f o r e ,  as the dominant power i n the p o s t - l i b e r a l  189  Regime?  regime.  b)  Were There It  mainly  i s evident interested  liberal  1980s,  very  before  to Continue  benefits  to Support  the Regime?  for i t s carriers.  sufficient benefits  poorly  i n their  f o r U.S.  to economic  to a i r l i n e s  during  i t can be  as the post-Bermuda  the  recession.  s u p p o r t a pro-consumer  The  incentives  post-  carriers the  early  performance  argued  that  a  regime, w i t h a  o f m u l t i l a t e r a l p r i c e - s e t t i n g ) would have b e t t e r  from  U.S.  A l t h o u g h the poor  92  recession,  (such  a g a i n became  D i d the  carriers?  i n t e r n a t i o n a l operations  i n the m i d - 1 9 8 0 s .  attributed  regime more f a v o u r a b l e  carriers  the U.S.  i n obtaining  recovering  l a r g e l y be  predominance  for  t h a t under the p o s t - l i b e r a l regime, the U.S.  regime p r o v i d e  performed  can  Incentives  f o r the U.S.  insulated to continue  U.S. to  regime w h i l e f o l l o w i n g a p r o - a i r l i n e b i l a t e r a l p o l i c y  appeared weak, e s p e c i a l l y i n l i g h t o f the r e c e s s i o n .  c)  What were  the  Incentives  for  Smaller  Countries  to Participate  in  the  Regime? The i n c e n t i v e s f o r s m a l l c o u n t r i e s same as under for  their  carriers Singapore operating  the l i b e r a l  air carriers were  regime.  Smaller countries  under  liberalized  reasonably  under  f i f t h and s i x t h freedom  a  competitive.  International freedoms  to p a r t i c i p a t e i n the regime were the  and a  KLM)  regulatory  Competitive  from  liberalized  could  smaller  regime  to  framework carriers  countries increase  could the  if  (such use  carriage  the as the of  traffic.  See B r e n n e r , et al (1985, pp.114-117) f o r an c a r r i e r s ' p r o f i t a b i l i t y i n the 1970s and e a r l y 1980s. 9  achieve b e n e f i t s  2  190  assessment  of  U.S.  Other freedom  countries  opportunities  liberalized regime  regime.  (on a  diversion. from  with  real  Often  inefficient  for their  carriers,  Some o f these o r de facto  countries  the c o m p e t i t i v e  carriers,  countries  basis)  were a b l e  or without would  fifth  not benefit  were c o e r c e d  because  e f f e c t s o f the regime  of  insulate their  by a l l o w i n g  from the  i n t o j o i n i n g the  o f the t h r e a t  to p a r t i a l l y  and s i x t h  their  traffic carriers  a i r l i n e s to  p a r t i c i p a t e i n r e g i o n a l rate-making a s s o c i a t i o n s .  3.  Results The  from  United  international  the Analysis States  Using  maintained  a i r transport  industry  changed i t s p o l i c y o f p r e s s i n g for  benefits  transformed  Hegemonic  i t s leadership  i n the p o s t - l i b e r a l  4.5 i l l u s t r a t e s  post-liberal figures  shows  preference to  regime  degree  The f a c t  that  maintaining  to r e f l e c t  results Under  i n the c o n t e x t under  the change  o f the l i b e r a l this  o f the hegemonic  the Bermuda  regime  d i d i n fact  theory  these regimes  i n the The U.S.  regime was n o t  i n U.S.  preferences  theory.  the problem o f e x p l a i n i n g the developments o f the  the regimes  stability  position  the l i b e r a l  because  favour  there  carriers.  were  t h e U.S.  also  support  defined  consumers, and the regime d i d , i n f a c t ,  191  rather  consumers.  than  supports the  t o the U.S. i n  stability  i n terms  The  when the  for i t s carriers.  the hegemonic  favour  This  incentives  incentives  theory.  regimes,  to c a r r i e r s ,  - i . e . , to obtain benefits  regime  stability  and post-Bermuda  o f the U.S. government was f o r b e n e f i t s  consumers,  hegemonic  that  Theory  period.  cannot be p r o p e r l y a d d r e s s e d u s i n g the hegemonic s t a b i l i t y  Table  Stability  f o r consumer b e n e f i t s t o a p o l i c y o f p r e s s i n g  f o r U.S. c a r r i e r s . t o any l a r g e  the Modified  The  theory.  o f b e n e f i t s to  However, under the  Table  4.5  A p p l y i n g M o d i f i e d Hegemonic S t a b i l i t y T h e o r y t o the D i f f e r e n t R e g u l a t o r y Regimes  Regime  Dominant Country  Primary Concerns of Dominant Country  Bermuda (1946)  U.S.  Security and airline interests  Airlines  Yes  PostBermuda (1965)  U.S.  A i r l i n e and security interests  Airlines  Yes  Liberal (1981)  U.S.  Consumer interests (travellers, shippers)  Consumers  Yes  PostLiberal (1986)  U.S.  Airline interests  Consumers (primarily)  No  192  Major Recipient of Benefits From the Regime  Agreement w i t h Modified Hegemonic S t a b i l i t y Theory  p o s t - l i b e r a l regime, when the U.S. over  consumers,  the  basic  r e v e r t e d to a p o l i c y o f f a v o u r i n g  pro-consumer  features  of  the  airlines  liberal  regime  remained.  4.  Other  Factors  a)  Domestic  in  this  developments  i n the  United  section.  pro-consumer the  the Adoption  of  the  1986  Post-Liberal  Regime  Affairs  Political industry  in  to  contrary;  The a  pertaining  States, U.S.  Europe,  shifted,  the  and  international a i r  transport  elsewhere were d e s c r i b e d  earlier  under the Reagan a d m i n i s t r a t i o n ,  more t r a d i t i o n a l  European s t a t e s and  to  pro-airline other  p o l i c y , despite  developed c o u n t r i e s ,  from a  r h e t o r i c to  such as Canada  and A u s t r a l i a , have moved towards the l i m i t e d l i b e r a l i z a t i o n o f a i r t r a n s p o r t regulations. support  major  discussed:  and  reasons  states;  eliminated;  to a i r l i n e no  lobbying  further  r e g u l a t o r y reform. from  with  for  the  implementing  the  and,  shift  than was  benefits The the  exceptions,  i n U.S.  have  p o l i c y have  u n f a i r competitive  influence of the U.S.  few  continued  to  9 3  There were problems w i t h  countries  were  countries,  restrictive air regulations.  The  then was  Developing  the  p r a c t i c e s of  pro-competitive  CAB  government under Reagan was  the  Carter  that  could  administration. be  achieved  C a r t e r a d m i n i s t r a t i o n had pro - c o m p e t i t i v e  policy  so  other  declined  193  and  more r e c e p t i v e there  politicians  from  r e c e i v e d the  there  were  no  credit further  These e x c e p t i o n s i n c l u d e a number o f Southeast A s i a n c o u n t r i e s p r o m i n e n t l y Singapore) w i t h r e a s o n a b l y e f f i c i e n t a i r c a r r i e r s . 9 3  been  In a d d i t i o n ,  by  already  already  (most  benefits  to be  a c h i e v e d by  a i r l i n e lobbying  o t h e r developed  regional carriers able  f o r the l i m i t e d  quest  have c a l l e d  national  f o r r e g u l a t o r y reform.  of  airline  Privatization  has  national  i n their  carriers  officials opened  Consumer  i n Europe groups and  These groups have been  o f U n i t e d S t a t e s ' d e r e g u l a t i o n as ammunition i n  f o r r e g u l a t o r y reform  privatization  l i b e r a l i z a t i o n of p o l i c i e s  c o u n t r i e s have a l s o been d i s c u s s e d .  to use the e x p e r i e n c e s  their  t o v o t e r s and b y - p a s s i n g the  groups.  Some o f the reasons and  appealing d i r e c t l y  from  has the  own  countries.  likely,  i n some  government  the p o l i c y - m a k i n g  process  As  well,  cases,  policy-making  the  distanced process.  t o o t h e r views,  such  9 4  as  those from consumers and r e g i o n a l a i r c a r r i e r s .  Finally, restrictive the  why  most  developing countries continue  r e g u l a t o r y measures have  a i r fleet  aircraft  the reasons  of developing  developed  world.  effectively As  a  been d i s c u s s e d .  countries' a i r l i n e s  with high operating c o s t s .  c o u n t r i e s cannot  also  9 5  Carriers  to support  A large part of  i s comprised  of o l d , noisy  o f many o f these  developing  compete w i t h the more e f f i c i e n t c a r r i e r s  result,  developing  countries  support  o f the  measures  to  C o u n t r i e s t h a t have p r i v a t i z e d or have p l a n s to p r i v a t i z e a l l o r p a r t of t h e i r n a t i o n a l c a r r i e r s i n c l u d e I t a l y , Belgium, the U n i t e d Kingdom, Canada, West Germany, Japan, Singapore and M a l a y s i a . 9 4  ICAO (1984h, p.21) r e p o r t e d , f o r example, t h a t o n e - t h i r d o f A f r i c a ' s a i r f l e e t was s u f f i c i e n t l y outdated t h a t i t c o u l d n o t meet new ICAO n o i s e standards. 9 5  194  restrict of  b)  competition  t h e i r c a r r i e r s can o b t a i n a " f a i r  share"  Four f a c t o r s were i d e n t i f i e d as h a v i n g an impact on p r i c e - s e t t i n g  i n the  traffic.  Factors  international  airline  industry.  the i n t r o d u c t i o n  economic  that  9 6  Structural  carriers;  i n order  cycle;  and  a  These were:  o f new  change  changes i n the number o f a i r  cost-saving  i n the h e i g h t  technology;  a downturn i n the  of entry b a r r i e r s  into  airline  markets.  It  was  outlined  developments  were  coordination period  there  carriers; slowdown  more  generally difficult.  had  the  i n the  been:  a i r l i n e markets.  moving In  large  introduction  i n economic  discussion  growth;  of  i n the  the y e a r s increases  o f new  the  direction  before  and  regime  that  o f making during  i n the number  cost-efficient  and a l o w e r i n g  liberal  of  the  the  tariff liberal  international  a i r c r a f t ' technology;  i n the b a r r i e r s  Most o f these developments c o n t i n u e d i n t o  to entry  a  into  the p o s t - l i b e r a l  period.  First,  Figure  international figure,  2.14  carriers  provided increased  i t can e s p e c i a l l y be n o t e d  an  indication  of  i n the p o s t - l i b e r a l that  c a r r i e r s n o t p a r t i c i p a t i n g i n IATA t a r i f f  how  the  period.  number From  of the  the i n c r e a s e has been l a r g e l y among coordination.  See, f o r example, ICAO (1985f) which c o n t a i n s the recommendation o f I n d i a n , T a n z a n i a , Mexico, Lebanon and P a k i s t a n f o r an " e q u i t a b l e and f a i r s h a r i n g o f b e n e f i t s " from a i r s e r v i c e s . 9 6  195  Second,  new  cost-efficient  aircraft  continued  major m a n u f a c t u r e r s d u r i n g the p o s t ; l i b e r a l p e r i o d . have  been  sold  t o the a i r l i n e s  d i f f e r e n c e s between d e v e l o p i n g  Third,  of developing  t o be  introduced  Many o f the o l d a i r c r a f t  countries,  exacerbating  to slow i n the e a r l y 1980s.  Figure  i n d i c a t e d t h a t the i n t e r n a t i o n a l a i r t r a n s p o r t growth r a t e d u r i n g  Finally, markets.  The  liberalization  l e s s than o n e - h a l f  the b a r r i e r s five of  liberal  to  cost  and developed c o u n t r i e s ' c a r r i e r s .  i n d u s t r y growth c o n t i n u e d  1980-1985 was  by the  2.4  the p e r i o d  the growth r a t e d u r i n g the p e r i o d 1970-1979.  entry  continued  bilaterals  signed  the European Community,  to be by  lowered  the U.K.,  f o r example,  into certain  and  the  limited  lowered b a r r i e r s to  e n t r y by s m a l l e r c a r r i e r s i n t o some European markets.  I n summary, t h e r e has been a c o n t i n u a t i o n i n the e x t e r n a l p o l i t i c a l economic  developments which s e r v e d  achieve.  The  trends  to make t a r i f f  o f the p r e - l i b e r a l  and  and  coordination d i f f i c u l t  liberal  period  have  not  to  been  reversed.  c)  Overriding The  State  Interests  overriding state  interest  i n operating  national carriers  remained  d e s p i t e the movement towards the p r i v a t i z a t i o n o f state-owned a i r l i n e s and to the  liberalization  post-liberal carriers have  o f European and  period,  no  to more e f f i c i e n t  their  other  countries  i n t e r n a t i o n a l routes.  were  willing  f o r e i g n competitors  i n t e r n a t i o n a l routes  operated  196  to  sell  During  their  the  national  nor were c o u n t r i e s w i l l i n g to  e x c l u s i v e l y by  foreign  carriers.  Countries and  by  protected  negotiating  to the c a r r i e r  5.  bilateral  l i m i t i n g f i f t h freedom  agreements based m a i n l y on  what was  traffic  favourable  ( r a t h e r than to the t r a v e l l i n g p u b l i c ) .  Summary During  the  international this  t h e i r n a t i o n a l c a r r i e r s by  p o s t - l i b e r a l period,  retreated  a i r p o l i c y to a more t r a d i t i o n a l  change o f  stance,  the  major  unilateral  p r i c e - s e t t i n g , remained  using  modified  the  the U.S.  hegemonic  features  of  intact.  theory,  so  p r o - a i r l i n e stance. the  This that  from a pro-consumer  liberal was  the  not theory  Despite  period,  including  what was  predicted  proved  to  be  not  h e l p f u l i n e x p l a i n i n g the developments o f the p o s t - l i b e r a l p e r i o d .  The  other  developments. U.S.  f a c t o r s proved I t was  politicians  to  to be  more u s e f u l  shown t h a t there was continue  a  pro-consumer  the r e v e r s i o n to a p r o - a i r l i n e stance. political  incentives  explained,  in  liberalization.  part, As  analysis  the of  next  the  movement  Europe  changes  (in  not  yet and  exhausted elsewhere)  economic f a c t o r s c o n t i n u e d rendering  the  chapter,  and  future  international a i r transport regulatory  197  policy--thus  I n other p a r t s o f the w o r l d , however, were  w e l l , the  incentives for  international a i r  liberalization  s e c t i o n of  regime  longer p o l i t i c a l  for  m u l t i l a t e r a l t a r i f f coordination  In  no  i n explaining p o s t - l i b e r a l  prospects regime.  will  will be  be  this  towards  to m i t i g a t e  IATA impotent i n t h i s  conclusions  and  against  area.  drawn from  predicted  for  the the  F.  C o n c l u s i o n s and F u t u r e  1.  Prospects  Conclusions The  theory  purposes o f t h i s c h a p t e r were t w o f o l d :  o f hegemonic s t a b i l i t y  to determine how  developments i n i n t e r n a t i o n a l a i r t r a n s p o r t . not  the  other  understanding adoption  of  relevance  explanatory of  four  of  regime  factors  developments.  other  explanatory  to t e s t the m o d i f i e d  w e l l i t c o u l d e x p l a i n regime  Second, to determine whether or  could  add  The  regimes were used to t e s t  the  First,  significantly  developments  the  theory  factors.  The  and  results  to  leading  the  to  the  to determine  the  of  the  analysis  showed the f o l l o w i n g :  a)  1946  Bermuda Regime  The  modified  formation capable U.S.  of  of  the  forming  the  hegemonic  There  regime  was  able  to  correctly  e x i s t e d a dominant c o u n t r y  and  there  were  identifiable  predict  ( i . e . the  transport  the U.S.)  b e n e f i t s to  the  the regime as w e l l as f o r s m a l l e r c o u n t r i e s i n j o i n i n g  i n m a i n t a i n i n g the regime.  e x p l a i n i n g the  interests  of  As w e l l , as the t h e o r y p r e d i c t e d t h e r e were c o s t s t h a t had  b o r n by the U.S.  air  regime.  for establishing  the regime.  in  theory  nature  o f the  policy-making  i n maintaining  by  The  other f a c t o r s proved  regime t h a t was a i r carriers  as  national a i r carriers  f o r m a t i o n o f t h a t IATA c a r t e l .  198  adopted. well likely  The  as  to be  helpful  dominance  of  overriding state  contributed  to  the  b)  1965  Post-Bermuda  The  modified  Regime  theory  of  hegemonic  stability  correctly  predicted  maintenance o f the a i r t r a n s p o r t regime d u r i n g the post-Bermuda p e r i o d . U.S.  remained the  general, other  and  dominant power i n a i r t r a n s p o r t and  was  capable  f a c t o r s were  powerful  position  also  of  rate-making  paying  helped  the  in  air carriers  the U n i t e d S t a t e s and IATA  of  costs  of  explaining  i n the  and • m a i n t a i n  regime  the  the  regime  economy, i n The  stability.  features  of  The  process  government support  major  The  maintenance.  domestic p o l i c y - m a k i n g  elsewhere a c t e d to s o l i d i f y  system  the w o r l d  the  of  f o r the  the  Bermuda  r e g u l a t o r y regime.  c)  1981  Liberal  The  modified  transformation liberal  Regime hegemonic  from  regime.  The  theory  multilateral United  considered--most n o t a b l y securing  benefits  t r a n s p o r t a t i o n be  d)  The  1986  The  modified  liberal U.S.  not  predict,  unilateral  maintained  transformed.  rather  than  on  i t s own,  price-setting  in air  policy f o r U.S.  to one  that  favoured  carriers--could  the  e x p l a i n the maintenance o f  the  explained.  Regime  hegemonic t h e o r y  into  policy.  regime.  the  Only when o t h e r f a c t o r s were  c o u l d not  the p o s t - l i b e r a l I f the  period i n light  o f the r e v e r s a l o f  Yet  the  the  dominant power, the U n i t e d S t a t e s , p r e f e r r e d a  p r o - a i r l i n e p o l i c y , hegemonic t h e o r y p r e d i c t e d t h a t i t s h o u l d support airline"  the  during  i t s dominant p o s i t i o n  change i n the U.S.  consumers  Post-Liberal  regime  liberal  for  the  to  States  t r a n s p o r t y e t the regime was. s t i l l  could  post-liberal  199  regime,  with  a  "pro-  i t s predominance  of  unilateral  price - setting  favourable  to consumer  examined,  which  on  interests.  indicated  coordinated  price - setting  maintenance  of  setting  maintained  was  major  routes,  I t was  how  the  the  after  became  IATA  a  regime  largely  economic f a c t o r s were  was  difficult,  price-setting  because  only  industry  extremely  unilateral  remained  transformed  that  the  to  reasons  for  clear.  Unilateral  was  longer  cartel  no  make the  price-  capable  of  c o o r d i n a t i n g p r i c e s i n l i g h t o f f a c t o r s such as:  the growth i n the number o f  carriers;  international  the  lowering  of  the  barriers  to  enter  markets;  and  the i n c r e a s e i n the p e r c e n t o f IATA members from d e v e l o p i n g c o u n t r i e s .  In  summary,  explain  the  Bermuda  the  adoption  regime  developments.  but  The  Future  theory  of  hegemonic  o f the Bermuda regime and could  other  to the u n d e r s t a n d i n g  2.  modified  not  explain  explanatory  stability  the  liberal  f a c t o r s were a b l e  and  lowering more  significantly  useful.  factors  (mainly  of entry b a r r i e r s  difficult.  in predicting  i n a i r t r a n s p o r t , the p r e d i c t i o n s made w i l l  the o t h e r e x p l a n a t o r y f a c t o r s . the  post-  post-liberal  to add  o f these developments and thus proved  to  Prospects  developments  1980s,  able  the maintenance o f the  S i n c e the m o d i f i e d hegemonic t h e o r y d i d not prove h e l p f u l recent  was  The  The an  a n a l y s i s showed t h a t d u r i n g the 1970s  increase  in  the  i n t o markets) s e r v e d  economic  factors  number  Pacific.  200  of  carriers  to make t a r i f f  helped  to  render  c o o r d i n a t i o n n e a r l y o b s o l e t e on major i n t e r n a t i o n a l r o u t e s A t l a n t i c and the North  be based  and  on and a  coordination IATA  such as  the  tariff North  There  has been  unification  of  to  trend,  however,  carriers  t o the amalgamation  across  national  ranged from code s h a r i n g among c a r r i e r s ,  equity  U.S.-based  investments  Texas  A i r Corp.  between  carriers  by S c a n d i n a v i a n  (such  to cooperative  9 7  Airlines),  as the investment  A i r System).  One might  the t r e n d towards the c l o s e c o o p e r a t i o n between i n t e r n a t i o n a l  could  lead  to a  lessening o f competition  perhaps t o a renewal o f p r i c e - f i x i n g  Is t h i s p o s s i b l e ? Europe  and o t h e r  remained  supportive  of carrier  countries, interests  airlines  likely  that  cooperative  have  i n government  governments  will  marketing,  and  strengthen t h e i r c a r r i e r s predicted  (with  policy  areas  IATA).  the e x c e p t i o n  o f the U n i t e d  arrangements,  o f the w o r l d  and  has g e n e r a l l y  9 8  g i v e n the l a r g e  Therefore,  such  equity  i n international operations.  t h a t i n developed  arena  policy  formulation.  (minority)  expect  liberalization in  T h i s i s t o be expected  support even  government  in  carriers  ( a l t h o u g h n o t n e c e s s a r i l y through  S t a t e s d u r i n g the p e r i o d 1977-1981). stake  i n the i n t e r n a t i o n a l  Even though t h e r e has been l i m i t e d  developed  or  boundaries.  arrangements (such as between B r i t i s h Airways and U n i t e d  actual  that  recent  international  Developments have marketing  a  as  i t  is  code-sharing,  investments,  that  Consequently,  i t is  there w i l l  be a l e s s e n i n g o f  p r i c e c o m p e t i t i o n as c a r r i e r s c o n t i n u e t o c o o r d i n a t e t h e i r o p e r a t i o n s .  Code s h a r i n g a l l o w s one a i r l i n e t o a d v e r t i s e a f l i g h t as i t s own when a second c a r r i e r i s a c t u a l l y o p e r a t i n g the a i r c r a f t . For a d i s c u s s i o n of i n t e r n a t i o n a l code s h a r i n g , see Feldman (1988). 9 7  A u s t r a l i a , f o r example, a p p r o v e d w i t h o u t e x c e p t i o n , t w e n t y - f i v e commercial agreements i n v o l v i n g i t s n a t i o n a l c a r r i e r QANTAS. See A u s t r a l i a , Trade P r a c t i c e s Commission (1985b). 9 8  201  In their This  developing  areas  of  inefficient carriers will  increase  likely  imply  an  the  world,  i n an e f f o r t increase  countries to c a p t u r e  i n regional  i n r e s t r i c t i v e measures a g a i n s t  202  "outside"  will  continue  to  protect  a " f a i r " share o f t r a f f i c . tariff  coordinating  carriers.  and  an  PART THREE: PRICING ON INTERNATIONAL AIR ROUTES  203  V.  PRICING ON INTERNATIONAL AIR ROUTES  A.  Introduction  Part  Two  international chapter  o f the t h e s i s p r o v i d e d  explanations  a i r transport  since  o f the t h e s i s ,  industry  an a n a l y s i s  will  f o r regime changes i n the  the Second World War.  be  conducted  In this  as t o the e f f e c t on  a i r l i n e p r i c e s o f one regime change - the movement t o a l i b e r a l regime i n the late  1970s.  The major q u e s t i o n  t o be a d d r e s s e d i s , " D i d the l i b e r a l i z a t i o n  o f r e g u l a t i o n s on i n t e r n a t i o n a l a i r r o u t e s  The in  t o lower p r i c e s ? "  a n a l y s i s o f the e f f e c t o f l i b e r a l i z a t i o n on i n t e r n a t i o n a l a i r f a r e s  this  thesis  theoretical  i s important  reason.  liberalization provide  contribute  for at  First,  d i d indeed  result  least  i f the i n lower  two  policy  analysis airline  shows prices,  the impetus f o r the l i b e r a l i z a t i o n o f r e g u l a t i o n s  reasons that then  and one the  this  U.S. could  i n other  regions of  liberalization  initiative  the w o r l d .  Second,  i f the a n a l y s i s  shows t h a t  the U.S.  d i d n o t lower p r i c e s , then t h i s would i n d i c a t e t h a t s t e r n e r a c t i o n would have to  be  undertaken  industry. lower  Possible  airline  competitive  to  prices  a  more  competitive  reasons f o r the U.S. l i b e r a l could  practices  a i r l i n e s by n e g a t i n g  create  of  be the c o n t i n u i n g governments  204  initiative  strength  seeking  the e f f e c t s o f l i b e r a l  climate  airline  not r e s u l t i n g i n  o f IATA o r the a n t i -  to protect  agreements.  i n the  their  national  Third, approach prices from  from  a t h e o r e t i c a l viewpoint,  f o r developing  i n the  the  airline  industrial  models  to  industry.  the  analyze This  a n a l y s i s p r o v i d e s an  the  effect  approach,  organization literature,  o f regime  based  allows  on  changes  oligopoly  In order  and i n t e r n a t i o n a l p r i c e  to present  the a n a l y s i s  The  p r o v i d e s a review o f the methods t h a t have been used airline  prices.  Section C  develops  the  theory  be  used  prices,  this  data.  of international  c h a p t e r has been d i v i d e d i n the f o l l o w i n g way:  theoretical  airline  next s e c t i o n ,  S e c t i o n B,  to a s s e s s d i f f e r e n c e s i n model f o r the  chapter.  S e c t i o n D p r e s e n t s the models used f o r e s t i m a t i o n and d e s c r i b e s the d a t a to  estimate  the  models.  Section E presents  w h i l e S e c t i o n F draws c o n c l u s i o n s from the  B.  R e s e a r c h Methods f o r Comparing A i r l i n e  Five broad of  prices  informal;  between simple  e q u a t i o n ; and,  I.  Informal The  (1983b;  approaches have been used air  routes.  The  regression; single  on  f o r a r i g o r o u s economic  t h e o r e t i c a l j u s t i f i c a t i o n f o r the c h o i c e o f e m p i r i c a l models, and may to a n a l y z e b o t h domestic  improved  the r e s u l t s  used  o f the e s t i m a t i o n ,  analysis.  Prices  by  five  equation,  r e s e a r c h e r s f o r the  comparison  approaches  following:  are  the  multiple regression; multiple  cost-based.  Approach  i n f o r m a l approach to the comparison o f a i r l i n e 1984c), T a n e j a  (1983) and  fares,  used by  the Canadian T r a n s p o r t Commission  IATA  (Canada,  Canadian T r a n s p o r t Commission, 1985), c o n s i s t s o f o b t a i n i n g a sample o f f a r e s  205  and  comparing  the f a r e s  on a p a i r  generally  made  between  passenger  density  with  (e.g. The  Europe)  routes  basis.  Paired  of approximately  one r o u t e i n each  and the second  researcher  by p a i r  r o u t e from  may then c o n c l u d e t h a t  pair  comparisons a r e  t h e same  d i s t a n c e and  one p a r t  o f the w o r l d  from  another r e g i o n  (e.g. the U.S.A.).  o f the n comparisons  conducted,  inm  cases f a r e s were h i g h e r i n Region A w h i l e i n n-m c a s e s , f a r e s were h i g h e r i n R e g i o n B (assuming t h a t f a r e s were never i d e n t i c a l w i t h i n r o u t e p a i r s ) .  An example would be the p a i r e d comparisons  found i n IATA (1984c, p.19).  E i g h t p a i r e d comparisons were made on a range o f f a r e s between r o u t e s i n the U n i t e d S t a t e s and Europe.  The r o u t e s were p a i r e d based on s i m i l a r  U s i n g the study, one c o u l d c o n c l u d e , f o r example,  that  distances.  i n seven o f the e i g h t  p a i r e d comparisons, the U.S. r o u t e had the lowest a v a i l a b l e normal  The using  major  advantage  the i n f o r m a l  readers  approach  with  this  insufficient  to allow  of  This  routes. to  populations, differences  the r e s u l t s  First,  i s simplicity.  methods.  a randomly  Second,  There  the sample  t o be g e n e r a l i z e d selected  s t a t i s t i c s , showing  i s not used.  i n prices  statistical  approach.  i s because  derive  approach  A study  i s easy t o conduct, and a l s o easy t o p r e s e n t to  not acquainted with  disadvantages  enough  o f the i n f o r m a l  fare.  size  a r e two used  i s usually  t o the t o t a l  population  sample  differences  o f routes,  i n prices  i t i s not possible  t o one o r more causes  major  (e.g. c o s t  to  large  between attribute  differences  between  r o u t e s ) , s i n c e t h e r e has been no a c c o u n t i n g f o r these causes i n the a n a l y s i s .  206  2.  Simple The  Jordan  Regression  simple  r e g r e s s i o n approach t o the comparison o f a i r f a r e s , used by  (1982) and the European C i v i l  collecting constant fares  Approach  a sample  plus  of fares  separately using  f o r a i r routes  an independent  c a n be c o l l e c t e d f o r each  computed  from  A v i a t i o n Conference  variable  and r e g r e s s i n g  (usually distance).  two o r more r e g i o n s ,  region.  Then,  regional regression  (1981), c o n s i s t s o f  predicted  Region A than  fare values  coefficients.  i n Region B, o r t h a t  f a r e s between the r e g i o n s  An Civil  example Aviation  Conference  variable. European  data  The r e s e a r c h e r s  data,  t o have  regression lines,  can then  i n length i s higher  and d i s t a n c e  been  although  made)  economy  routes. with  were  be seen  then  that  line.  t o conduct  fares  Separate fare  ( i n kilometres)  results  the European  The European  on normal  and U.S. r o u t e s  and i t c o u l d  below"  compared  i n the r e p o r t by the European  pp.29-30).  and 150 U.S. domestic  The r e g r e s s i o n  1  "consistently reported  (1981,  collected  variable  may be  i s no d i f f e r e n c e i n p r e d i c t e d  method can be found  r u n f o r the European  dependent  estimated  f o r a route o f that length.  Conference  (ECAC)  European r o u t e s were  of this  there  The sample o f  and r e g r e s s i o n s  conclude t h a t the p r e d i c t e d f a r e f o r a r o u t e k k i l o m e t r e s in  the f a r e s on a  intra-  regressions  per kilometre  plotted  as the  right-hand-side  f o r the U.S. and  regression  No attempt was made confidence  Aviation  f o r 560  simple  as the  the U.S.  Civil  line  was  (or at least  intervals  around the  t h i s procedure c o u l d have been undertaken.  A c t u a l l y , t h r e e s e t s o f r e g r e s s i o n s were r u n . The f i r s t s e t had d i s t a n c e as the independent v a r i a b l e . The second s e t had the l o g o f d i s t a n c e as the independent v a r i a b l e . F i n a l l y , the t h i r d s e t had the i n v e r s e o f d i s t a n c e as the independent v a r i a b l e . 1  207  The  major  possible, tests, of  when  using  o f the simple  the appropriate  t o g e n e r a l i z e the r e s u l t s  routes.  several  advantage  The major  r e g r e s s i o n approach statistical  sampling  from the sample o f r o u t e s  disadvantage  of this  f a c t o r s c o n t r i b u t i n g to p r i c e  approach  i s that  i t  techniques  is  and  t o the p o p u l a t i o n  i s that  there  d i f f e r e n c e s between r o u t e s ,  may be  and t h a t  o n l y one f a c t o r i s e x p l i c i t l y accounted f o r i n the model.  3.  Single  Equation,  This  approach,  (1985) and Moore airline the  routes  level  Multiple used  Regression  by K e e l e r  Approach  and Abrahams  (1986) i n v o l v e s r e g r e s s i n g p r i c e s c o l l e c t e d  on a number  of factors l i k e l y  o f f a r e s between r o u t e s .  p r i c e d i f f e r e n c e s across  t o account  A significant  f a c t o r i m p l i e s t h a t t h e f a c t o r i s an important  As  (1981),  Call  and K e e l e r  f o r a sample o f  for differences i n  coefficient  f o r a given  v a r i a b l e i n the explanation o f  routes.  an example o f t h i s  approach, Moore  (1986, pp.16-23) r e g r e s s e d  coach  a i r f a r e s f o r 134 U.S. domestic r o u t e s on the l e n g t h o f t h e r o u t e , t h e number of  carriers  structures,  competing  i n the market,  the p o p u l a t i o n  major d e s t i n a t i o n c i t i e s . v a r i a b l e s were e s t i m a t e d , determined. significant  Moore  o f the c i t y  dummy  variables  of origin,  The c o e f f i c i e n t s  f o r various  market  and dummy v a r i a b l e s  for  f o r each o f t h e r i g h t - h a n d - s i d e  and the e f f e c t s o f the v a r i a b l e s on t h e coach p r i c e  could  then  conclude  impact on p r i c e .  208  which  o f t h e v a r i a b l e s had a  The  major  approach,  over  variables,  remaining  bias  to  the  the  inclusion  variables  equation,  approach,  number  differences,  be  not  generally  formed  so  there  is  not  a  theoretical  treated  regression  major  may  is  of  two  of  model  set  however,  large  the  be  the  price  a  First,  given  cannot  that  regression  are,  principles a  of  is  multiple  There 2  of  of  single  explanation  model.  approach.  estimates  the  regression  maximizing  the  explanatory  of  simple  this  profit  for  would  into  with  economic  the  relevant  incorporated  basis  advantage  strong  variables.  properly  in  Second, the  coefficients  disadvantages  and  endogenous  model must  from  since  they  therefore  be  excluded.  4.  Multiple The  single  multiple  equation,  explanatory Kaplan first  Equation  and  squares  approach  multiple  regression  variables  regressing  fitted  equation  Sibley  variables,  and  values  properly  (1983)  the  one  method,  in  estimation.  Bailey,  Graham  price  endogenous  the  that  This and  other on  of  i t  i.e.,  on  by  consists  the  two  the  Graham, of  exogenous  variables a  of  endogenous  used  (1985),  price,  exogenous  variables;  treats  method,  Kaplan  than  the  shortcomings  and  stage  the least  procedure.  advantage  of  explanatory  variables  It  overcomes  variables,  other  estimation  simple  in  regressing  consistent  2  and  endogenous then  of  (2SLS)  A major  Approach  should  regression  be  this of  is  approach  the  itself  noted  that  is  that  regression endogenous.  these  approach. 209  the  2SLS p r o c e s s  coefficients A major  disadvantages  when  remaining  would  also  results  in  one  more  or  a  disadvantage  apply  to  the  i s t h a t the model i s s t i l l  f o r m u l a t e d w i t h o u t e x p l i c i t l y l i n k i n g the  neoclassical, profit-maximizing and  Kaplan  proposed  (1985),  model t o the e m p i r i c a l  f o r example, u s i n g  the f o l l o w i n g  three  U.S.  domestic  i)  P = M(Structure) x C  tests.  standard  B a i l e y , Graham  d a t a from 5053 U.S. domestic markets,  equations  f o r the e s t i m a t i o n  o f a i r f a r e s on  routes:  where:  P  =  average  price  o f t i c k e t s as measured by average  yield; M  =  mark-up o f p r i c e over c o s t and i s dependent on the s t r u c t u r e o f the market; and,  C  ii)  =  c o s t o f s e r v i n g the market.  C = f(DIST, PAX, TS, NEWC, CHI, NYC, WASH) where:  C  =  c o s t o f s e r v i n g the market;  DIST  =  distance  PAX  =  density  TS  =  time s e n s i t i v i t y o f p a s s e n g e r s ;  NEWC  =  whether market i s s e r v e d by new e n t r a n t ;  CHI  =  Chicago i s e i t h e r the o r i g i n o r d e s t i n a t i o n ;  NYC  =  New  o f market; o f market;  York  City  i s either  the o r i g i n or  d e s t i n a t i o n ; and, WASH  =  Washington i s e i t h e r the o r i g i n o r d e s t i n a t i o n .  210  iii)  PAX - f ( P , DIST, INC, POP, where:  TS)  PAX  =  density  o f market;  P  =  price of ticket;  DIST  =  distance  INC  =  measure o f income f o r t r a v e l l e r s i n a market;  POP  =  measure  o f market;  of  the p o p u l a t i o n  destination c i t i e s ; TS  As w e l l ,  BGK  =  equations  origin  both  and,  o r exogenous v a r i a b l e .  ways.  When  STRUCTURE = f(PAX, DIST, where:  and  time s e n s i t i v i t y o f t r a v e l l e r s .  market  BGK  structure  endogenous v a r i a b l e , a f o u r t h e q u a t i o n was a l s o  iv)  the  were not c e r t a i n as to whether market s t r u c t u r e  c o n s i d e r e d as an endogenous of  of  s h o u l d be  e s t i m a t e d the system  was  considered  as  an  estimated:  HUB)  PAX  =  density  o f market;  DIST  =  distance  HUB  =  whether or not one o f the c i t i e s  o f market; and, i n the market  i s a major hub.  Before estimating  the model, BGK  Computed l o g s  the  increase  f o r the time s e n s i t i v i t y v a r i a b l e .  timesensitivity as  steps:  f o r a l l the v a r i a b l e s , b u t the i n d i c a t o r v a r i a b l e s ;  Introduced proxies that,  took the f o l l o w i n g  income  increased,  than i n t o u r i s t markets.  of  passengers  market  and s h o u l d be h i g h e r  T h e r e f o r e , BGK  211  in a  BGK argued should  i n business  used an income  variable  and  tourist  indicator  variables  as  proxies  for  the  time-  sensitivity variable; Introduced  a  circuity  distance  t r a v e l l e d by  non-stop  distance.  travellers,  travellers;  and,  Introduced  a  CIRC,  set  variable  markets  variable,  was  used  INT,  serving  theoretical relationship  and  cost  equation  (i.e. P  major  that  to  by  and  empirical to  *  C) .  the  make  the  using  versions a  c o e f f i c i e n t s i n the  d i f f e r e n t model ( i . e . , empirical  with  the  average  account  account  BGK  for  the the  Instead,  problem  BGK  3  cost  two-fold.  as  to  the  the  use  of  price  structure equation. in  the  First,  signs  predictions  Second, the  interpret since  the  forms  are  model, based on  t h e o r e t i c a l model).  of  p r i c e , mark-up  estimated  functional  predictions  number  make e x p l i c i t  those drawn from the  the  empirical  to  the  independent v a r i a b l e s b e i n g  priori  model become d i f f i c u l t  for  multi-stop  connections.  d i d not  different  of  and  s p e c i f i e d , connecting  the H i r f i n d a h l Index) and  difficult  regression  model, was  M(Structure)  difficulties  theoretical becomes  the  i n l o g - l i n e a r form, w i t h  (represented The  =  to  one-stop  t r a v e l l e r s i n a market t h a t make i n t e r l i n e  the  to  i n p r i c e between markets s e r v i n g m a i n l y non-  and  However, when e s t i m a t i n g  equal  a l l passengers i n a market, d i v i d e d by This  possible differences stop  variable,  of  the  from  r e s u l t s from  expected  it  signs  a  the are  not known.  An e x c e p t i o n t r a n s f o r m a t i o n o f the 3  w o u l d be i f . the t h e o r e t i c a l model. 212  empirical  model  was  a  monotonic  5.  Cost-Based The  Keeler  cost-base  approach  to  the  comparison  of  (1972) to e s t i m a t e h y p o t h e t i c a l unregulated  domestic actual the  Approach  routes.  Keeler  compared  r e g u l a t e d f a r e s f o r each  estimated  and  actual  of  fares  the  estimated  a  unregulated A  route  fares  large difference  indicated  that  the  o p e r a t i n g t h a t r o u t e were not u s i n g " e f f i c i e n t " o p e r a t i n g p r a c t i c e s .  In to  order  estimate  substantial it  was  the  seating Keeler U.S.  to e s t i m a t e h y p o t h e t i c a l u n r e g u l a t e d cost  f u n c t i o n f o r the  international  thought  operating for  a  that  domestic  trunk  international Keeler  costs  were  (such  from  as  computed  the  "efficient"  U.S. to  the  between airlines  4  Keeler f i r s t (Airlines  from  a d j u s t e d the higher  d e n s i t i e s ) o f the non-CAB r e g u l a t e d C a l i f o r n i a (1972) then  by  had with  the a n a l y s i s because  different  (1972) next  operating practices  fares,  carriers.  o p e r a t i o n s were e x c l u d e d  routes.)  "efficient"  U.S.  used  f a r e s f o r regulated  the r o u t e s . on  a i r f a r e s was  the  of  cost function  load  factors  intra-state  long-run marginal  costs  and  carriers.  costs of  the  t r u n k c a r r i e r s f o r each market.  Keeler  assumed  t h a t the  efficient  long-run marginal  on a r o u t e s h o u l d approximate the p r i c e charged u n r e g u l a t e d market. fares,  By  comparing a c t u a l  K e e l e r c o u l d determine  competitive  on a r o u t e i n a c o m p e t i t i v e ,  f a r e s t o the  whether or not  cost of operating  trunk  estimated  carriers  competitive  were p r i c i n g a t  levels.  No attempt was made to determine f o r i t t o be s t a t i s t i c a l l y s i g n i f i c a n t . 4  213  how  l a r g e the  d i f f e r e n c e had  to  be  The  major  economic  advantage  theory.  r e q u i r e d the use or to e s t i m a t e , routes  within  The  of  major  of extensive and  Keeler,  routes  . C.  1.  (thus,  be  provides  Assumptions  this  section,  used  exclusion  for  this  of  carriers  assumption may  with  have been  study where c o s t  a summary o f the advantages and  it  extensive acceptable  uniformity  across  disadvantages of  the  c o v e r e d by  traditional  Traditional  a  is  model  and  developed  bilateral  of  the  Competitive that  for  may  differences  agreements, and  Agreements be  used  model  is  ( i . e . Bermuda  that  airlines  agreement  promotes and  behaviour.  in  as  The  prices  the  model  between  markets c o v e r e d  by  agreements.  agreement engage i n c o l l u s i v e  agreement  pricing  account bilateral  bilateral  agreement) t y p i c a l l y  in collusive  to  traditional  assumption  traditional  Comparing P r i c e s A c r o s s A i r l i n e Markets  r  Under the  formulated  l i b e r a l or c o m p e t i t i v e  capacity  the  b a s i s f o r e x p l a i n i n g p r i c e d i f f e r e n c e s a c r o s s markets.  specifically  An  that  assumed.  Pricing  markets  were  sound  approaches to the comparison o f a i r f a r e s .  theoretical is  approach  much o f which i s d i f f i c u l t  Although t h i s  A T h e o r e t i c a l Model f °  In  the  on  across  groups  c o s t data,  of  i t relied  t h a t i t r e q u i r e d the assumption o f c o s t u n i f o r m i t y  i t cannot  T a b l e 5.1 different  disadvantages  that  obtain  route  i s not  approach was  to  international operations). for  Keeler's  An  pricing or  the  under  behaviour.  pre-determination  often requires  example o f how  214  operating  airlines  a The of  to engage  t a r i f f clause  i n this  Table A d v a n t a g e s and Approaches to the  Approach  5.1  Disadvantages of Comparison of A i r  the Fares  Disadvantages  Advantages  Informal  simple t o conduct to a n a l y z e  and  sample s i z e u s u a l l y not sufficient to g e n e r a l i z e from the sample to the population cannot a t t r i b u t e p r i c e d i f f e r e n c e s to s p e c i f i c causes  Simple R e g r e s s i o n  a b l e to g e n e r a l i z e r e s u l t s from a sample to the p o p u l a t i o n  does not a s s e s s impact o f more than one f a c t o r on p r i c e d i f f e r e n c e s  Single Equation, Multiple Regression  a b l e to i n c o r p o r a t e a l a r g e number o f explanatory v a r i a b l e s i n t o the model  model does not a l l o w f o r the c o r r e c t t r e a t ment o f right-hand-side endogenous v a r i a b l e s  Multiple  can accomodate more than one endogenous variable  does not e x p l i c i t l y l i n k e m p i r i c a l to t h e o r e t i c a l model d i f f i c u l t to make a priori predictions and to i n t e r p r e t results  based on n e o - c l a s s i c a l micro economic t h e o r y  requires extensive data assumption t h a t a i r l i n e c o s t s are homogeneous a c r o s s routes w i t h i n route groups  Equation  Cost-Based  215  type  o f agreement  i s worded  i s taken  from  the Canada-Greece  bilateral  agreement (Canada, 1984c) and c i t e d below:  ... The t a r i f f s r e f e r r e d t o ... s h a l l be agreed upon between the d e s i g n a t e d a i r l i n e s o f the C o n t r a c t i n g P a r t i e s ; such agreement s h o u l d be reached, whenever p o s s i b l e , through the i n t e r n a t i o n a l t a r i f f c o o r d i n a t i o n mechanism o f the I n t e r n a t i o n a l A i r T r a n s p o r t Association.  The  agreement  aeronautical j it...".  further  stated  authorities  of either  In addition,  5  that,  "No t a r i f f  shall  Contracting  the t r a d i t i o n a l  airline  capacities  o p e r a t e each  The the  tariff  tariff  i f the  are d i s s a t i s f i e d often  contain  such as r e q u i r e d  with other  agreements  o r l i m i t a t i o n s on the number o f c a r r i e r s a l l o w e d t o  clause  rather  tariff  force  6  clause  competitive, liberal  route.  Party  bilaterals  measures d e s i g n e d t o ensure c o l l u s i v e b e h a v i o u r , on  come i n t o  in a liberal  in a  bilateral  traditional  than  clause,  agreement  agreement,  i n that  c o l l u s i v e , p r i c i n g behaviour. taken  from  t h e U.S.  i s d i f f e r e n t from  model  i t encourages  An example liberal  of a  agreement  (Bogosian, 1981, pp. 1030-1031), i s c i t e d below:  . . . Each P a r t y s h a l l e s t a b l i s h e d by each  a l l o w p r i c e s f o r a i r t r a n s p o r t a t i o n t o be d e s i g n a t e d a i r l i n e based upon commercial  An e x c e p t i o n was made i f b o t h c o u n t r i e s agreed to allow I n t e r n a t i o n a l C i v i l A v i a t i o n Organization to s e t t l e a t a r i f f dispute. . 5  For agreements agreements bilaterals 6  the  example, a study by Dresner and Tretheway (1987) o f b i l a t e r a l s i g n e d by Canada between 1978 and 1986 found t h a t 8 o f the 13 l i m i t e d each c o u n t r y t o one c a r r i e r p e r r o u t e and t h a t 7 o f the r e q u i r e d agreement on c a p a c i t y l e v e l s . 216  c o n s i d e r a t i o n s i n the s h a l l be l i m i t e d t o : (a)  (c)  addition,  allowing by  one)  liberal  the c a r r i e r s  allowing  Even liberal termed  any  though  airline  the  to  designate  liberal  markets  even  on  Although  an  with  cannot, n  in  small  liberal  the  collusive  of  carriers  encourage  (instead of  (on  competitive  operating  a route  by  on  each  route b a s i s ) ,  Therefore,  an  by and  just  could  sense,  route.  be The  rather  than  pricing  c o n d i t i o n s o f the l i b e r a l agreement, i s  to s i m u l a t e p r i c i n g p r a c t i c e s on l i b e r a l  argument  practices,  oligopolistic  be  made  that  prices (i.e.,  the  airlines  routes.  on  liberal  routes  Cournot duopoly model), i t  assumed f o r t h i s paper t h a t p r i c e s were the key  decision variables.  model used to s i m u l a t e p r i c i n g on l i b e r a l r o u t e s , t h e r e f o r e , was (or  practice  n e o - c l a s s i c a l economic  carriers  routes.  choose q u a n t i t i e s , r a t h e r than was  a number  bilaterals  model, which r e f l e c t s the c o m p e t i t i v e a p p r o p r i a t e f o r use  discourage  route.  industry i s o l i g o p o l i s t i c  competitive,  further  to f r e e l y determine c a p a c i t y l e v e l s on a i r r o u t e s ,  given  "competitive",  airline  bilaterals  governments  to operate  the P a r t i e s  p r e v e n t i o n o f p r e d a t o r y o r d i s c r i m i n a t o r y p r i c e s or practices; p r o t e c t i o n o f consumers from p r i c e s t h a t are unduly h i g h or r e s t r i c t i v e because o f the abuse of a dominant p o s i t i o n ; and p r o t e c t i o n of a i r l i n e s from p r i c e s that are artificially low b e c a u s e o f d i r e c t o r indirect government s u b s i d y or support.  (b)  In  I n t e r v e n t i o n by  marketplace,  the  The  Bertrand  Bertrand-Nash) model, which p o s t u l a t e s t h a t a company chooses p r i c e s i n a  competitive  environment.  The  Bertrand  217  model  was  chosen  because  i t is  appropriate  when m o d e l l i n g  a price-competitive  i n d u s t r y under  liberalization.  2.  Equation  The  Cost  B e f o r e p r i c e e q u a t i o n s can be cases, i,  stated.  be  Bertrand  A c o s t f u n c t i o n f o r an  airline,  s t a t e d as f o l l o w s :  i  (A,)  airline  and  ^ ( A ^ x . q , ) — FC (A ) + VC  where:  the  d e r i v e d under the c o l l u s i v e  a c o s t f u n c t i o n must f i r s t be  o p e r a t i n g on a g i v e n r o u t e , may  i n d u s t r y such as  A  (q  A  A  ,x)  (5.1)  the t o t a l  c o s t o f o p e r a t i n g on a r o u t e ;  the  or overhead c o s t o f  fixed  operations  on a r o u t e , dependent o n l y on the and not on the r o u t e , VC  L  the  (x, ) q i  variable  route,  cost  dependent  o f r o u t e and on  the  that  on  the  of a  operating  on  vector  route  of  (such as the  a  o f passengers route,  q  variable  increasing,  but  at  a  L  .  the  It  cost  a  distance  i n p u t p r i c e s on a r o u t e )  number  carries  itself;  on  c h a r a c t e r i s t i c s , x,  airline  and  airline  i s assumed  function  decreasing  rate  is in  quantity.  The cost  major  restrictions  i s decreasing  placed  i n quantity  and  on that  218  the  cost  f u n c t i o n are  f i x e d c o s t s do not  that v a r i a b l e  depend on  route-  specific with  factors.  the  The  findings of  first Caves,  restriction, Christensen  as  o u t l i n e d above,  and  Tretheway  i s consistent  (1984).  The  second  assumption would l i k e l y make t h i s c o s t e q u a t i o n more u s e f u l f o r m o d e l l i n g costs  of  a  large  carrier  (i.e.,  a  p o i n t s ) than f o r a s m a l l c a r r i e r .  carrier  that  The  Price  The  Equation  liberal  agreement  choose  prices  maximization can be  Under a Competitive  assumption,  as  to  engage  maximize  for airline  is  i n Bertrand  profits  i , on  l a r g e number  in  a route  of  fixed  served.  Agreement  o u t l i n e d above,  carriers  a  T h i s i s because f o r a l a r g e c a r r i e r ,  c o s t s would be l e s s dependent on any g i v e n r o u t e  3.  serves  the  a  that  under  pricing  competitive  behaviour.  competitive  segment w i t h  a  two  Airlines  manner. airlines  or  Profit  operating,  i l l u s t r a t e d as f o l l o w s :  Max  n  L  = p^CPi.Pj)  - V C ^ q ^ x ) - FC (A ) ±  (5.2)  A  Pi  where:  n  L  =  the p r o f i t s a i r l i n e i d e r i v e s from o p e r a t i n g on a g i v e n r o u t e segment;  i  =  the p r i c e chosen by a i r l i n e i ; and,  p  the  o t h e r v a r i a b l e s are  derivative  of  (5.2)  as  with  indicated  r e s p e c t to p  that A i r l i n e , j , holds i t s p r i c e  above. t  Profits  are maximized when the  i s s e t to z e r o , g i v e n the  assumption  constant:  V  dir. aq. 9q. T- * = q. + p. ~ - MC. -T^ - 0 ap i *i d? I ap 3  M  i  t  i  219  (5.3)  g i v e n t h a t the s l o p e o f the v a r i a b l e c o s t curve determines  Equation  (5.3)  can  be  rearranged  with  price,  marginal cost.  alone,  on  the  left  hand  s i d e as f o l l o w s :  p  The operating  same on  i -  M  C  i - < i S ^  analysis  the  may  be  route, with  the  ( 5  undertaken  for  outcome b e i n g  the  other  the p r i c e  airline,  -  4 )  j ,  shown i n E q u a t i o n  5.5:  a P. = MC. J J  U.  The  Price  As  outlined  agreement, Bresnahan the  (1987),  maximization  O  of  (5.5)  Under a Traditional  above,  airlines  profits  Max  Equation  P  - q. T~~^ J dqj  i t has  engage  in  been  Bilateral assumed  collusive  Agreement that  pricing  a  traditional  behaviour.  Following  when c h o o s i n g a p r i c e on a r o u t e , an a i r l i n e must c o n s i d e r i t s competitors.  For  the  two  f o r a i r l i n e i , g i v e n a i r l i n e j , can be  A  under  + 7T. )  =  Piq^Pi.Pj) - V C ^ . x )  airline  220  profit  i l l u s t r a t e d as f o l l o w s :  - FC  L  (A ) + A  Pi P j q j ( P i , P j ) " VCjCqj.x) -  case,  F C J ( A J )  (5.6)  Taking constant,  the  and  derivative  setting  the  of  (5.6)  derivative  with  respect  equal  to  zero  to  p  t  while  produces  h o l d i n g p^  the f o l l o w i n g  result:  3q. q. + p. T i * i 9p 1  M  i  The  dq. dq. - MC. -r- - + P. Tl ap j 8v± - - J 2  1  3p,  £  e x t r a terms i n E q u a t i o n  the e f f e c t  dq.  MC  5.7,  as  ~  (-)  0  5  compared t o E q u a t i o n  o f changes i n i ' s p r i c e on j ' s p r o f i t s .  5.3,  E q u a t i o n 5.7  7  reflect  can be r e -  arranged w i t h p r i c e on the l e f t hand s i d e to y i e l d :  3p.  dq.  dp.  A s i m i l a r e q u a t i o n to (5.8) can be w r i t t e n f o r the o t h e r a i r l i n e , j , i n the market, as shown i n E q u a t i o n  dp. - q. T j  p. - MC. J  5.  3q. 3p. - (P. - MC.) 7-^ Tj j  1  J  J  1  the  It  seen,  difference  be in  prices  (5.9)  1  q  Reconciling can  5.9:  1  P  q  Prices from  examining  charged  by  Equations  airline  5.4  i , between  and the  5.8, two  that  the  pricing  s t r a t e g i e s , depends on the f o l l o w i n g term:  3q. (p  j " "V  ap.  iij  < 5 1 0 )  221  The price  term shown i n E q u a t i o n  charged  in  the  is  because  by  airline  equation  output  under  react  represents  the  to  the  charged  traditional  changes  in  paribus.  i n the  e q u a t i o n d e f i n i n g the  bilateral  will  i's price.  prices  agreement, but  under a l i b e r a l agreement.  agreement  in Airline  difference  arrangements, ceterus  appeared  i under a t r a d i t i o n a l  d e f i n i n g the p r i c e  only  to  5.10  charged  Airline The  under  pj  - MCj  change i t s  term,  therefore,  the  I t i s p o s s i b l e to s i g n t h i s  subsidies  s h o u l d be p o s i t i v e  under  the  substitutability Finally,  of  model.  air  given p r o f i t Second,  two  regulatory  term i n o r d e r to  services  the e x p r e s s i o n dp /dq i  is  L  assumed  must be n e g a t i v e  i  maximization  dq^ /dp  must  between  This  j  determine under which b i l a t e r a l arrangement s h o u l d p r i c e s be h i g h e r or First,  not  lower.  and assuming no be  positive  airlines  i  and  if j.  g i v e n a normal demand curve  facing a i r l i n e i .  I f the e x p r e s s i o n s are m u l t i p l i e d t o g e t h e r , the term shown  in  positive.  (5.10) must be  A  single  expression f o r determining  the  price  charged by a i r l i n e i on a r o u t e can then be w r i t t e n as f o l l o w s :  a  P  p. = ^ [ N L I B ] + M C . ( , x ) - ^ qi  aq,  q. (5.11)  aq, ap. where:  ^  - -(p. - MC.)  In e q u a t i o n 5.11,  ^  ^  NLIB i s an i n d i c a t o r v a r i a b l e coded 1 when t h e r e i s no  l i b e r a l o r c o m p e t i t i v e b i l a t e r a l and 0 when t h e r e i s a l i b e r a l o r bilateral. s h o u l d be  If  the  pricing  scenario  positive.  222  described  above  holds  competitive  true,  then  0  X  One  important  passengers,  q , i  fact  t o note from E q u a t i o n 5.11 i s t h a t  enters  into  the e q u a t i o n  argument i n t h e m a r g i n a l c o s t f o r m u l a t i o n The  effects  represented passenger marginal markets  on p r i c e s .  by  the c o e f f i c i e n t  i  (i.e.,  firms  operating  Some r e s e a r c h e r s ,  average  costs  Using  the Model with  Researchers,  such  to higher  typically  found  Increasing prices.  industry  (i.e.,  as B a i l e y  Graham  marginal  of declining  To t h e e x t e n t  negative.  the  o f r o u t e - s p e c i f i c data requires airlines  explicitly  operating  outlined  on a  i n previous  c l e a r l y made from t h e model used the  Data and Kaplan  (1985),  have  estimated The  a number o f assumptions t o be made about  route. work. i n this  model has been an a i r l i n e - s p e c i f i c  f o r t h e purposes o f t h i s e x p o s i t i o n ,  that  7  t h e i r models w i t h r o u t e - s p e c i f i c r a t h e r than a i r l i n e - s p e c i f i c v a r i a b l e s . use  short  economies o f d e n s i t y ) and  d e c l i n i n g marginal costs.  Route Specific  The  i s p o s i t i v e i n most  evidence  t h i s i s t r u e , the m a r g i n a l c o s t e f f e c t on p r i c e may be  6.  on p r i c e , as  be p o s i t i v e .  paribus,  on p r i c e  however, have  with  o f passengers  i  ceterus  i  i n t h e range c h a r a c t e r i z e d by r i s i n g  i n the a i r l i n e  these may be a s s o c i a t e d  effect  i  e f f e c t o f passengers  an  e q u a t i o n c a n have b o t h c o s t and  -3p /3q , w i l l  leads,  places--as  and w i t h -d^> /dq as a c o e f f i c i e n t .  The demand  demand on a route cost  costs). run  i n two s e p a r a t e  i n c l u s i o n o f passengers i n t h e e s t i m a t i n g  demand  the v a r i a b l e f o r  These  assumptions  The assumptions, thesis since  n o t been  however,  can be  the s t a r t i n g p o i n t o f  profit-maximizing  that there  have  problem.  Assume,  a r e two c a r r i e r s i n a market,  D e c l i n i n g c o s t s pose a problem f o r m a r g i n a l c o s t p r i c i n g i n t h a t a s u b s i d y w i l l n o r m a l l y be r e q u i r e d . The a i r l i n e i n d u s t r y , however, has the a b i l i t y t o p r i c e d i s c r i m i n a t e , thus a l l o w i n g i t t o o p e r a t e i n the d e c l i n i n g range w i t h o u t need f o r subsidy. 7  223  Airlinei 5.11  and A i r l i n e j .  The p r i c e e q u a t i o n f o r A i r l i n e i  and a s i m i l a r e q u a t i o n c a n be w r i t t e n  was g i v e n  for Airlinej.  i n Equation  The two e q u a t i o n s  are as f o l l o w s :  p. = p  NLIB + M C . (  1  q i >  x) - —  q. 4  = a  P j  NLIB + M C ^ q j . x )  x  (5.12)  i  - ^  q  (5.13)  j  Assume t h a t the c o s t e f f e c t s o f passengers on p r i c e c a n be s e p a r a t e d other are  r o u t e - s p e c i f i c c o s t e f f e c t s and t h a t v a r i a b l e s r e p r e s e n t i n g  entered  i n t o the p r i c e e q u a t i o n s e p a r a t e l y .  from the  the e f f e c t s  The two e q u a t i o n s c a n then  be w r i t t e n as f o l l o w s :  p. = p  NLIB + p  Pj =  NLIB + c* x + a^q  x  where: -dpj/dqj specific  £  3  =  i  i  plus  respectively.  (5.15)  the c o s t e f f e c t s o f passengers on p r i c e and  the c o s t e f f e c t s .  cost  (5.14)  3  2  -d'p /d(\  plus  x + £ q.  2  variables  (other  fi  z  and a  2  than  represent  number  a  3  =  the e f f e c t o f the route  o f passengers)  on p  A  and pj  E q u a t i o n s 5.14 and 5.15 c a n be summed t o produce the f o l l o w i n g  equation:  P  t  + Pj =  <*-,_) NLIB + (P + 2  224  a) 2  x + 0 ^  + o^q..  (5.16)  if  i t i s assumed t h a t the r o u t e - s p e c i f i c  route-specific costs f o r A i r l i n e j . charged and  (i.e.,  Finally,  on the r o u t e by the two c a r r i e r s  that  the e f f e c t  o f passengers  /3 = O J ) , E q u a t i o n 3  3  costs f o r A i r l i n e  i  a r e equal to the  i f i t i s assumed t h a t the p r i c e s  a r e the same  on p r i c e  (i.e.,  i s the same  p  A  = Pj = p ) ,  f o r both  carriers  5.16 can be d i v i d e d by 2 t o produce the f o l l o w i n g  equation:  p - 0 [ NLIB + p'  x +  2  where:  B^ =  ?2  h  h  +  l  Q  a  ~  ;  2  a  +  2  =  B  ^3 =  3  +  a  2  3  '• '  a  n  d  '  Q = the t o t a l passenger  The  resulting  specific  equation.  Equation  5.17 a r e r e a s o n a b l e  for  airlines  availability  on  equation  a  o f data,  t r a f f i c on the r o u t e .  (5.17) i s a r o u t e  Although  the assumptions  route),  i t would be l e s s  author has l e f t  specific,  r a t h e r than  data.  they  are r e s t r i c t i v e .  restrictive  8  t h i s f o r future research. 225  carrier  t h a t must be made t o a r r i v e a t  ( i . e . p r i c e s and c o s t s s h o u l d be f a i r l y  particular  r a t h e r than r o u t e - s p e c i f i c  The  (5.17)  similar  G i v e n the  t o use a i r l i n e - s p e c i f i c  7.  Comparison The  work on  to Previous  Work  model shown i n E q u a t i o n  5.17  three  the  accounts.  maximizing equations.  First,  represents model has  an  improvement on  been d e r i v e d  T h i s means the v a r i a b l e s to be  previous  from the  included  profit  i n the model  have a l s o been d e r i v e d from the p r o f i t maximizing assumptions so t h e r e i s not the  uncertainty  under  the  model.  model  The  indicated  important  of  coefficient As  positive  to  "no  i t should  contains  include.  s i g n one  a  be  of  have,  Second,  the  bilateral" noted  positive in  that  key  should the  to  demand  f o r example,  past,  density  when  effect  of  the  i n t e r p r e t e d the correct  passengers  model  have  been  be  effect.  Finally,  a route-specific rather  outlined.  This  has  for  the  This  is the  B a i l e y , Graham  coefficient  price.  the  misinterpreted  i n t e r p r e t a t i o n must  on  of  p o s i t i v e , as  coefficient  demand-side the  i t is possible,  coefficients  f o r the passengers v a r i a b l e i n p r i c e models.  assumptions n e c e s s a r y f o r e s t i m a t i n g specific  to  liberal  researchers  (1985, p.165),  returns  for  well,  variable because  coefficient  which v a r i a b l e s  specification,  above.  passengers  Kaplan  over  as  a measure  include the  for  the  specific  than a  allowed  and  carriera  better  u n d e r s t a n d i n g o f the l i m i t a t i o n s o f the model.  D.  Estimation:  Model and  1.  The  Model  The  e m p i r i c a l model  model, shown i n E q u a t i o n price  v a r i a b l e , while  variable  to be 5.17.  the  i n d i c a t i n g the  Data  estimated The  of  from  the t h e o r e t i c a l  l e f t - h a n d s i d e o f the model c o n t a i n s  right-hand  absence  i s developed  a  226  side  of  liberal  the or  equation  contains  competitive  the  a dummy  bilateral  on  a  route,  a v a r i a b l e r e p r e s e n t i n g the c o s t o f o p e r a t i n g a r o u t e ,  indicating  the number  o f passengers  v a r i a b l e s w i l l be d i s c u s s e d ,  a)  i n turn,  carried  on a  and a v a r i a b l e  route.  Each  o f these  below:  Price As  illustrated  i n Equation  dependent  v a r i a b l e i n the model;  generally  a r e a number  class,  economy o r f u l l  5.17,  The f i r s t  i s the l e f t - h a n d - s i d e or  i . e . , the v a r i a b l e t o be e s t i m a t e d .  of prices  a v a i l a b l e on each  route,  such  as  of this  approach i s t o take a weighted average f a r e , weighted by  approach  r e g u l a t o r y agreement  first  There a r e two approaches t h a t c o u l d  the number o f passengers who have used each f a r e c l a s s on a r o u t e . advantage  There  f a r e , and a v a r i e t y o f e x c u r s i o n o r d i s c o u n t p r i c e s ;  The q u e s t i o n becomes, which f a r e t o use. be taken.  price  i s that  i t i s possible  The major  t o determine  i n p l a c e has a f f e c t e d the average t r a v e l l e r  how the  on a r o u t e .  The  second approach t h a t may be taken, and the one used i n t h i s paper, i s t o  use  actual  example,  fares  as l e f t - h a n d - s i d e v a r i a b l e s .  c a n then be  compared  across  r e g u l a t o r y change on n o n - d i s c r e t i o n a r y  The  routes  Changes  in full  t o determine  the e f f e c t  First,  a priori,  t h a t the change on some r o u t e s ,  agreement  would n o t have the same impact on a l l f a r e c l a s s e s .  may  have  benefit,  i t was thought,  from a t r a d i t i o n a l t o a  competitive  I f the l i b e r a l  c a r r i e r s more d i s c r e t i o n i n s e t t i n g p r i c e s , then the c a r r i e r s  resorted  travellers.  of a  travellers.  second approach was chosen f o r two r e a s o n s .  regime a l l o w e d  fares, f o r  This  as much,  to  greater  c o u l d imply from  price  d i s c r i m i n a t i o n between  t h a t the n o n - d i s c r e t i o n a r y  lower p r i c e s due t o a l i b e r a l  227  groups  of  t r a v e l l e r might not  regime,  as would the  discretionary traveller.  The second r e a s o n t h a t t h i s approach was chosen was  because o f d a t a a v a i l a b i l i t y .  The breakdown o f number o f passengers p e r f a r e  c l a s s , o r the weighted average f a r e on a r o u t e , were n o t p u b l i c l y  The and  prices  used  for this  the lowest a v a i l a b l e  return  trip.  sensitive  Full  travellers  advance-booking fares  thesis  were  discount price  fares  were  used  the lowest a v a i l a b l e  available.  full  to represent  (e.g., b u s i n e s s p e o p l e ) , who  to represent  fares  paid  9  t h a t may be used f o r a f o u r t e e n - d a y the p r i c e s  paid  by  time  c o u l d n o t t r a v e l under the  o r time l i m i t a t i o n requirements o f d i s c o u n t f a r e s .  were used  price  by d i s c r e t i o n a r y  Discount  passengers  (e.g.,  those t r a v e l l i n g on v a c a t i o n ) .  b)  No Competitive The  employed  Bilateral  t h e o r e t i c a l model ( E q u a t i o n 5.17) i m p l i e d t h a t a v a r i a b l e to i n d i c a t e  definitional competitive  the absence  problem  arises  bilateral,  competitiveness.  Routes  or l i b e r a l  i n determining exactly  i n that  there  are  degrees  regulated  encompassing  of  A  constitutes  a  " liberalness"  or  by bilaterals  the f o l l o w i n g types o f markets:  with  the following  C a r r i e r s are a b l e to f r e e l y determine c a p a c i t y  The f u l l p r i c e was a l l o w e d the f o l l o w i n g : 9  what  bilateral.  I t was d e c i d e d f o r t h i s paper t o use a b r o a d d e f i n i t i o n o f  a competitive b i l a t e r a l ,  i)  of a competitive  s h o u l d be  defined  as the r a t e  provisions: levels;  charged by an a i r l i n e  which  t i c k e t s t o be purchased w i t h o u t advance-booking r e q u i r e m e n t s ; i n t e r l i n e c o n n e c t i o n s ; and, stopover p r i v i l e g e s . 228  A i r l i n e s are f r e e to s e t p r i c e s w i t h o u t  the a p p r o v a l o f the  foreign  government; Additional  airlines  are  free  to  enter  routes  covered  by  the  agreement.  These  routes  are  the  truly  liberal  routes,  allowing  u n i l a t e r a l l y s e t p r i c e s and c a p a c i t y l e v e l s , w i t h o u t  ii)  U.S.-U.K. routes As  was  outlined  began on  the North  the  of  fall  scheduled  1977.  market  though  the  "Laker  routes"  Hi)  last  chapter  Atlantic  with  the  a was  between  the  l a r g e degree offered the  of  under  U.S.  of this  and  service price  the  thesis,  interference.  the l i b e r a l  to  open the  competition.  can  still  North  Bermuda be  diverted  are  but  competing  routes  diversion. to  classified North  Atlantic  Therefore, 2  even  agreement,  said  t o be  but  which  price-  not  routes  covered  by  liberal  bilaterals  "compete" w i t h l i b e r a l r o u t e s or w i t h the Laker S k y t r a i n i n o r d e r to traffic  regime  o f the S k y t r a i n s e r v i c e i n  non-liberal  U.K.  to  Skytrain  institution  first  government  carriers  1 0  Non-liberal These  to  by the Laker  i n the  T h i s was  service  competitive .  operated  for  These r o u t e s i n c l u d e markets where t r a f f i c  liberal as  America  routes  i f carriers  n o n - l i b e r a l but and  a continent  are  not  competing markets (or s u b - c o n t i n e n t  had  minimize  can e a s i l y  price-competitive.  to  be  Routes  i n c l u d e d a l l r o u t e s between i n the  case  o f A s i a ) where  S i m i l a r p o i n t s have been made by a number o f a u t h o r s . See: Adkins, e t . al. (1982, p.10); H a r b i s o n (1982, p.187); and Gomez-Ibanez and Morgan (1984, pp.114 and 120). 1 0  229  the  U.S.  had  signed  Skytrain service  The with  broad  c)  should the  evidence  economic prices  i n that  price  routes  appeared  reductions  were  observed  liberal  routes  as w e l l as on t r u l y  where  t o conform on  well "non-  and routes  Costs  theoretical  model  i n d i c a t e d that  be i n c l u d e d as a r i g h t - h a n d  cost  o f Europe,  by the Laker S k y t r a i n .  Route Specific The  ( o r i n the case  f o r competitive  b u t competing r o u t e s "  operated  bilateral  operated).  definition  empirical  liberal  a liberal  variable.  a route  theory,  f a c t o r s are g e n e r a l l y s p e c i f i e d  and an output  input  prices  price  of fuel  would  variable.  include  a  route  dependent on r o u t e - s p e c i f i c f a c t o r s .  With  respect  such v a r i a b l e s as  on a g i v e n r o u t e .  of operating  The model a l s o i n d i c a t e d t h a t  of operating these  was  the c o s t  The output  In  i n the form o f i n p u t  to the a i r l i n e the p r i c e  i n d u s t r y , the  o f labour  and the  f a c t o r can be thought o f as the  number o f passengers t r a n s p o r t e d by a c a r r i e r on a r o u t e .  Unfortunately,  r o u t e - s p e c i f i c input  prices  could  n o t be  Labour p r i c e s were n o t a v a i l a b l e on a r o u t e - s p e c i f i c b a s i s . available  on a r e g i o n a l b a s i s  by  basis,  route  but t h i s  only.  F u e l p r i c e s were  Landing f e e s were a v a i l a b l e on a route  v a r i a b l e was  difficult  t o employ  since  depended on the type o f a i r c r a f t used and o f t e n on a i r c r a f t l a n d i n g  Due  t o the d i f f i c u l t y  c o s t s were n o t d i r e c t l y  i n obtaining  employed  obtained.  route  specific  i n the e s t i m a t i n g  230  input  equations.  the  times.  costs, Two  fees  input  versions  of  the  empirical  variables  In  and  version  cost  classified  as  each  using  differences  proxies  or  instrumental  i n cost f a c t o r s across  routes.  o f the model t h r e e types o f v a r i a b l e s were used to  input  First,  price  an  indicator  differences  "competitive"  during  variable  was  used  differences, variables  rather  routes  than  were used to  on  routes  because o f the  between r o u t e s which were any  of  across  to  attributable the  account  regulatory for  input  time p e r i o d s .  the  time p e r i o d s  route-specific  effect.  price (Time  1 1  p a n e l d a t a used f o r the  to  study.)  shift  and  of  the  route,  than on  the  level  of  factor  factor  time  to  the  indicator  were needed  a distance  dependent on the  input  prices.  In  variable length  the  across  differences  differences  due  routes.  1 2  The  route  to b o t h v a r i a t i o n s  i n route length.  indicator  variables  i n factor costs  of  second  v e r s i o n o f the model, r o u t e i n d i c a t o r v a r i a b l e s were used to account f o r differences  cost  technological  variables  Finally,  employed to account f o r r o u t e c o s t d i f f e r e n c e s rather  Second,  changes due  was  cost  to  T h i s v a r i a b l e would account f o r p r i c e d i f f e r e n c e s between c o m p e t i t i v e  non-competitive  shifts  employed,  differences.  for possible  were not study.  first  for  account  were  to account f o r p o s s i b l e  the  account  model  cost  accounted  a c r o s s r o u t e s and  for to  Time i n d i c a t o r v a r i a b l e s were employed i n t h i s  I t s h o u l d be n o t e d t h a t the time s h i f t v a r i a b l e s would a l s o account f o r i n f l a t i o n a r y changes i n i n p u t p r i c e s . One would expect, t h e r e f o r e , t h a t a g i v e n t i m e s h i f t v a r i a b l e w o u l d a c c o u n t f o r p r i c e c h a n g e s due to technological s h i f t s as w e l l as p r i c e changes due to i n f l a t i o n . As an example, i f the time s h i f t v a r i a b l e was l a r g e r f o r March 1978 than f o r March 1977, the d i f f e r e n c e i n magnitude between the two s h i f t e r s would equal i n f l a t i o n a r y changes net o f p r o d u c t i v i t y improvements, over the one year period. 1 1  1 2  have an matrix.  I t s h o u l d be n o t e d t h a t when e s t i m a t i n g the model one r o u t e d i d not i n d i c a t o r v a r i a b l e , to a v o i d s i n g u l a r i t y o f the v a r i a n c e - c o v a r i a n c e  231  v e r s i o n o f the model, as w e l l ,  t o account f o r i n f l a t i o n a r y p r i c e changes and  t e c h n o l o g i c a l s h i f t s over time.  d)  Passengers The  the  final variable  theoretical  passengers  price,  model,  variable  demand e f f e c t s  will  (i.e.,  ceterus  t o be i n c l u d e d i n the p r i c e i s a passengers account  e q u a t i o n , as o u t l i n e d i n  variable.  for price  The c o e f f i c i e n t  differences  on a r o u t e  the g r e a t e r the demand f o r p a s s e n g e r s ,  paribus)  and t o c o s t  effects.  The  v a r i a b l e can thus be i n t e r p r e t e d as the t o t a l e f f e c t  due t o  the g r e a t e r the  coefficient  (i.e.,  o f the  f o r this  the demand e f f e c t  p l u s the c o s t e f f e c t ) o f t o t a l passengers on p r i c e .  e)  Form of  Estimation  The model c o u l d n o t be used t o produce u n b i a s e d and c o n s i s t e n t e s t i m a t e s of  the parameters,  variable  was  using  endogenously  ordinary  determined  i n f l u e n c e s p r i c e b u t the p r i c e a l s o two  s t a g e approach,  the  parameters,  least  squares,  (i.e.,  influences  because  the passengers  t h e number  of  the number o f p a s s e n g e r s ) .  A  on the o t h e r hand, c o u l d p r o v i d e c o n s i s t e n t e s t i m a t e s o f  and was  therefore  employed.  I n the f i r s t  stage,  e q u a t i o n was e s t i m a t e d w i t h passengers as the l e f t - h a n d v a r i a b l e . hand s i d e  passengers  o f the e q u a t i o n i n c l u d e d v a r i a b l e s  The r i g h t -  f o r population, route  and income, a l l o f which were exogenously d e t e r m i n e d .  13  a demand  distance  I n the second stage,  A number o f v e r s i o n s o f the f i r s t stage o f the model were t e s t e d . I t was s u s p e c t e d t h a t when time s h i f t and/or r o u t e s h i f t v a r i a b l e s were i n c l u d e d i n the f i r s t stage o f the model, t h a t t h e r e was c o l l i n e a r i t y between these v a r i a b l e s and the f i t t e d v a l u e o f passengers i n the second stage o f the model. A l t h o u g h the c o l l i n e a r i t y d i d n o t a f f e c t the major r e s u l t s o f the study, i t d i d a f f e c t the c o e f f i c i e n t s f o r the time, r o u t e and passengers variables. As a r e s u l t , the time and r o u t e v a r i a b l e s were n o t i n c l u d e d i n 1 3  232  price  was  regressed  with  the  fitted  on  the  value  explanatory  f o r passengers  v a r i a b l e s (as r e p l a c i n g the  indicated  above)  a c t u a l value  of  but this  variable.  The  first  stage o f the e s t i m a t i o n i s o u t l i n e d below:  PASS = . B  where:  PASS  =  +  0  B  POP  1  +  B  2  INC  +  B  t o t a l number o f passengers  (5.18)  DIST  3  c a r r i e d by s c h e d u l e d  airlines  on a r o u t e ; POP  =  the  mean p o p u l a t i o n  of  the  metropolitan  areas  of  the  o r i g i n and d e s t i n a t i o n c i t i e s ; INC  =  the mean income o f the o r i g i n and d e s t i n a t i o n c i t i e s ;  DIST  =  the  great  circle  destination c i t i e s ;  the B 's were the parameters to be L  The and  the  route of  second stage discount  price  The  the  the  origin  and  and,  estimated,  with both  left-hand side variables,  i n d i c a t o r v a r i a b l e s on  four estimations).  between  estimated.  o f the model was as  distance  right-hand  model, without  and  the f u l l  with  s i d e f o r each case  route  and  without  (for a  indicator variables,  price  total was  as  follows:  the f i r s t stage o f the e s t i m a t i o n . See Appendix D f o r the e s t i m a t i n g r e s u l t s under d i f f e r e n t v e r s i o n s o f the f i r s t stage o f the model. 233  PRICE = B  Q  + y^NLIB + £ D I S T + ^ P A S S F I T + /3 ATLPAC + £ ^ 2  4  T  I  t  M  E  t  ( 5  1 9  )  r  where:  PRICE  =  e i t h e r the  lowest  available f u l l  r o u t e , depending on the NLIB  =  an  by  a  f a r e , on  a  estimation;  indicator variable  regulated  or d i s c o u n t  coded  competitive  or  1  i f the  liberal  route  was  bilateral  not  and  0  otherwise; DIST  =  the  great  circle  destination PASSFIT  =  the  distance  between  the  origin  and  cities;  p r e d i c t e d value  f o r passengers from the  first  stage  o f the model; ATLPAC  =  an the or  i n d i c a t o r v a r i a b l e coded Atlantic  destination  These  were  period  of  t  When the model was were  removed  estimated  and  =  the the  competitive TIME 's  or P a c i f i c in  and  North  total sample,  bilaterals;  1 f o r routes  of  which had America  the  which  e i t h e r an  (including  routes  were r e g u l a t e d  crossed  which, at  origin  Hawaii).  during  the  some p o i n t  by  and,  i n d i c a t o r v a r i a b l e s f o r the d i f f e r e n t time p e r i o d s .  estimated replaced  i n b o t h l i n e a r and  with  by  the  route  i n d i c a t o r v a r i a b l e s , DIST and ATLPAC  route  log-linear  234  shift  forms.  variables.  The  models  were  2.  The  Data  a)  Routes Fifty-one unidirectional  international  r o u t e s were randomly chosen from  the r o u t e s f o r which the f o l l o w i n g c o n d i t i o n s h e l d : There  were  complete  study  - 1976-1981.  data  available  1 4  over  Data were c o l l e c t e d  the  time  period  f o r March and  of  the  September o f  each year; There were a t study.  least  This  monopoly"  four  flights  condition  routes,  and  eliminated  those  f l i g h t s per month o p e r a t e d The  routes  were over  eliminated  short  conditions, routes  as  the  routes  and  between d e v e l o p i n g  available  were  specified,  the  routes  thinly  which  medium h a u l  might  have  routes  requirements  countries.  chosen  an  "natural  one  or  two  This condition effort  from  those  to  the  which  selection  i n f o r m a t i o n was  i n developed  the  guard  competition.  precluded  Complete  in  of  and,  i n length.  to i n t e r - m o d a l  randomly  on r o u t e s between c i t i e s  travelled  f o r p o l i t i c a l purposes;  4,000 k i l o m e t r e s  a g a i n s t p r i c e e f f e c t s due  Although  per month i n the p e r i o d s  c o u n t r i e s , and  more  met  the  o f many readily  the sample o f  routes r e f l e c t e d t h i s b i a s .  b)  Prices Both f u l l  and  d i s c o u n t p r i c e s were g a t h e r e d  The a v a i l a b l e r o u t e s were l i s t e d from r o u t e s chosen u s i n g a random number g e n e r a t o r . 1 4  235  from the a p p r o p r i a t e i s s u e s  first  to  last  and  the a c t u a l  of  the  Official  available Airways the  Guide  Guide.  Extreme c a r e was  potential  problem w i t h  i n a l l cases, r e f l e c t  guides,  g u i d e s are  or  The due  second problem to  travel  since  however, savings  that to  The period  on  of published  the  discount  the  first  - that  prices  a f t e r the  -  is  and  shop  cheaper  prices  that  are  ticket prices  because  the  one  not  likely  can  exclude  by  on  may This  Since  i s not  a  do  to It  bucket  search  bigger  may  concern.  correct  of  for be  shops  costs  the  o f major  prices  should  of  the this  noted,  overstate  inherent  in  tickets.  changed d u r i n g This  they  i n many p a r t s  known.  offered  prices  which d a t a were c o l l e c t e d  created.  prices.  published  t r a v e l a g e n c i e s are p r e v a l e n t is l i t t l e  (based  p u b l i c a t i o n dates  published  prices  discounting  fares  not  World  travellers.  situation hopefully  actual  o f the ABC  i s that  t i c k e t f a r e s p a i d by  the  were  c h a p t e r ) were chosen.  p r i c e s chosen were those t h a t were i n f o r c e on  When p r i c e s was  use  actual  agency  there  bucket  consumers  f i n d i n g the  the  monthly,  Unfortunately,  problem,  the  changed t h e i r p r i c e s  "Bucket shops" or d i s c o u n t world.  When p r i c e s  1 5  taken to ensure a p p r o p r i a t e  i f t r a v e l agents d i s c o u n t e d  published  concern. differ  Edition).  i n the p r e v i o u s s e c t i o n o f the  might happen i f a i r l i n e s the  (Worldwide  from t h i s source, they were c o l l e c t e d from i s s u e s  c r i t e r i a stated  A not,  Airline  was  the  (i.e.,  March and  the  first  September,  month, a p o t e n t i a l e r r o r s  day  o f each  1976-1981).  in variable  problem  e s p e c i a l l y a problem f o r September when p r i c e s  often  A l l p r i c e s were c o n v e r t e d t o U.S. d o l l a r s on the b a s i s o f the exchange r a t e s t h a t e x i s t e d on the f i r s t working day o f the a p p r o p r i a t e month. 1 5  236  changed from the h i g h season r a t e s t o the " s h o u l d e r " the  month.  c)  r a t e s towards the end o f  16  Passengers Passenger  publication, scheduled  data  Traffic  were  By Flight  passengers  i n t e r n a t i o n a l routes,  The  major  scheduled  taken  from  Stage.  the a p p r o p r i a t e  issues  This p u b l i c a t i o n l i s t e d  travelling  during  a  given  o f the ICAO the number o f  month  on  non-stop  or route-legs.  omission  from  this  o r c h a r t e r passengers.  data  Charter  source  was  the number  o f non-  data were n o t a v a i l a b l e on a route  by r o u t e b a s i s , and t h e r e f o r e , c o u l d n o t be i n c l u d e d .  One might expect, would  a priori,  have had a downward  pressures. (larger  However,  influence  the European  than the scheduled  therefore,  numbers o f c h a r t e r  on scheduled  experience,  fares  with  due  a huge  to  assessment need n o t h o l d t r u e .  passengers competitive  charter  market  scheduled  S u f f i c e i t to  t h a t the d i r e c t i o n o f the b i a s , i f any, i n p r e d i c t i n g p r i c e ,  caused by the o m i s s i o n  d)  greater  market) and some o f the world's h i g h e s t  f a r e s , shows t h a t t h i s a priori say,  that  o f a c h a r t e r passengers v a r i a b l e , i s n o t known.  Distance Route  Manual.  6  distances  were g a t h e r e d  from the IATA p u b l i c a t i o n , Air  A l t h o u g h the manual l i s t s g r e a t c i r c l e  d i s t a n c e s , r a t h e r than a c t u a l  The e r r o r s i n v a r i a b l e problem i s d i s c u s s e d 237  Distances  i n Appendix E.  flight  distances,  distance routes  e)  two f i g u r e s ,  on the l o n g small.  Routes  routes.  (1984) and Toh and Shubat September 1977. States  liberal 1979  these  i n d i c a t o r v a r i a b l e was used t o d i f f e r e n t i a t e n o n - c o m p e t i t i v e  competitive  United  between  i n c l u d e d i n the sample, s h o u l d have been r e l a t i v e l y  Non-Competitive An  from  discrepancies  on l i b e r a l  (1985).  Laker  and t h e Netherlands  non-competitive  i n March  routes  1984, Appendix until  were  September  3).  i n Haanappel  i t s Skytrain i n  States  the f i r s t  until  Pacific  and South Korea i n March  March  routes  were  coded  following that  date.  1979 and c o m p e t i t i v e  Other r o u t e s i n the sample were coded as n o n - c o m p e t i t i v e  competitive  t o note,  route"  This  competitive Pacific  1978, w h i l e  1977, and c o m p e t i t i v e  coded non-competitive  i s important  routes".  found  A l l North A t l a n t i c  e n t i r e time p e r i o d , s i n c e no c o m p e t i t i v e  It  were  Airways i n s t i t u t e d  agreement was s i g n e d by the U n i t e d  afterwards.  routes  The f i r s t N o r t h A t l a n t i c l i b e r a l agreement was s i g n e d by the  (Haanappel,  Pacific  Data  routes,  i s because  until  routes  does  until  therefore, that  n o t mean even  September March  agreements a f f e c t e d these  1979 (when  Atlantic  Atlantic  1977 (when Laker  routes.  the dummy v a r i a b l e f o r "non-  "non-North  t h e North  f o r the  routes  initiated  the Korean  or North were  coded  service)  liberal  Pacific non-  and  bilateral  the was  signed).  There  was a s e p a r a t e  N o r t h P a c i f i c Routes. for  cost  dummy v a r i a b l e used  to i n d i c a t e North  Atlantic/  T h i s v a r i a b l e , as d e s c r i b e d above, was used t o account  d i f f e r e n c e s between  these  238  routes  and o t h e r  routes  that  might  otherwise  be  attributed  to a r e g u l a t o r y e f f e c t .  i n d i c a t o r v a r i a b l e s were not  f)  Population  and  Population  and  stage  The  used when the  Income income  data,  r e q u i r e d f o r the  population  estimation of  from v a r i o u s U n i t e d N a t i o n s  v a r i a b l e was  computed  as  and  the  however,  were  not  variable,  d e s t i n a t i o n countries.  When p o p u l a t i o n o r  income data were  for  interpolation  used  e s t i m a t e s o f the m i s s i n g  g)  Descriptive Table  of  the  the  year,  provides  routes,  to  of  provide  data.  and  an  a summary o f the indication  I t can be  North  seen t h a t 37  Atlantic  routes  i n the sample,  o f whether o r not  influence of competitive b i l a t e r a l s  travelled  was  dollars)  Statistics  5.2  under study.  ( i n U.S.  specific  and  specific  income  income  the  the  a  capita  The  City  of  computed  available  mean per  income.  government  was  not  the  for  first  therefore, origin  as  available  the  mean  m e t r o p o l i t a n p o p u l a t i o n s o f the o r i g i n and d e s t i n a t i o n c i t i e s . data,  route  employed.  o f the model, were gathered  sources.  I t was  corridor,  these  d u r i n g the course  o f the five  51  were  routes  the  came under  o f the time p e r i o d  r o u t e s were on on  the d i s t a n c e  North  the h e a v i l y Pacific,  four  between N o r t h and South America, two w i t h i n A s i a , two between Europe and A s i a and one between Europe and South America.  Table model. full  5.3  provides  From t h i s  price  for  the  descriptive  t a b l e i t can be observations  statistics  seen,  was  239  for  f o r example,  $494, w h i l e  the  the  variables in  the  t h a t the mean one-way mean one-way  discount  T a b l e 5.2 D e s c r i p t i v e S t a t i s t i c s - Routes  Origin  Amsterdam Amsterdam Amsterdam Anchorage Anchorage Anchorage Bangkok Be I era Bombay Boston Brussels Chicago Chicago Edmonton Frankfurt Frankfurt Frankfurt Frankfurt Glascow Honolulu London London London London London London London London Miami Montreal Montreal Montreal New York New York New York New York New York Paris Rio Rio Rome San F r a n c i s c o Seattle Seattle Seoul Tokyo Tokyo Tokyo Toronto Toronto Washington  Destination  Anchorage Chicago Montreal Copenhagen Hamburg London Tokyo Miami Frankfurt Paris New York Frankfurt London London Boston Montreal New York Toronto New York Seoul Bombay Boston Calgary Chicago Montreal Seattle Toronto Washington Be