Introduction
A. Statement of the topic and question/issue to be analyzed
Open skies is simply a global policy concept that is aimed at liberalizing of the established laws and rules of the worldwide air transport industry, particularly commercial aviation with the aim of creating a free-market setting for the aviation industries. The objective of the essay is to assess the significant economic impacts of the US-EU Open Sky agreement to the member countries. This paper will extend previous research by investigating the effects of deregulation and improve airspace operations in all sectors of the economy, not just the air transportation sector.
B. Rationale for the choice of topic
The main reason for the liberalization of the rules for international aviation markets and at the same time reduces overall state interventions as far as cargo and passengers air carrier are concerned (Button, 2009). Since the emergence of the WWII, most countries saw the need to invest heavily in the development of airlines and further formulation of mechanism that would offer the defense to these airlines. In the year 2007, the US and EU agreed to sign a historic pact aimed at liberalizing the air travel and at the same time open the international transportation markets between EU and US over the Atlantic Ocean (Micco & Serebrisky, 2006). Research has established that the US-EU Open Skies agreement would deregulate air traffic over the Atlantic through the following: allow the carrier to transport the passengers between the partner states. Further, it would remove all the restrictions on the airfare, allow airlines to develop alliances and lastly and allow the air carriers to fly to any region within a partner state (Mayor & Tol, 2008). Therefore, it is evident that by the liberalization of the skies, a greater level of harmonization of the regulatory policies existing between the EU and US partner states would be attained. Research has shown that for the liberalization of the airline to be efficient, and then there is the need to adopt and develop an aviation agreement among several countries (Robyn, Reitzes & Moselle, 2005).
Delegate your assignment to our experts and they will do the rest.
The adoption and implementation of the Open Skies Agreement would greatly benefit the member states passenger and cargo air carrier. According to Micco & Serebrisky, (2006), most economies were forced to formulate and implement protectionism to protect the economy and infant industries. Therefore, with the liberalization of the airline services, countries will open up their economies for increased trading and exchanges benefiting the member partners. According to Micco & Serebrisky, (2006), due to the growing significance of air cargo, the impacts of deregulation and improved operations will affect industries that rely on air freight services to get their products to consumers. There the effect of deregulation and an improved process will go beyond the aviation industry (Micco & Serebrisky, 2006). The emissions of CO2 and other greenhouse gasses from the airline industry are becoming a growing concern within the EU. Around 1990 and 2004, the total emission of CCO2 from the international aviation in the EU rose significantly by 86%, from 63.6 MT (million tons) to 118.4 MT.
It is important to consider the environmental impacts of the US-EU Open Skies deal and the FAA/ NAT EFG working group. If deregulation leads to increased competition and lower fares, this may lead to a rising number of trans-Atlantic flights and CO2 emissions (Robyn, Reitzes & Moselle, 2005). However, improved flight operations and the adoption of larger aircraft due to flight capacity constraints at major airports could help offset some or all of effects of an increase in demand for CO2 emissions.
C. Organization of the remainder of the paper
The essay will analyze the impact of Open Skies agreements in the member countries. Therefore, to precisely evaluate and understand this concept, it is important to organize the paper in a way that would be easy to comprehend. After introducing the concept of Open Skies agreements and its possible impact, the paper would go on to focus on the background information. The background information would critically analyze the existing literature related to the research question and provide a clear direction of the study. The paper would move on to focus on the analysis of the research question using various applications of managerial economics concepts. In the analysis section, the paper will deeply analyze and evaluate the impacts of Open Skies agreements. Lastly, the paper would be concluded by focusing on significant aspects that were raised in the paper.
Body of the Paper
A. Background
According to Micco & Serebrisky, (2006), in the year 2007, the EU and the US, came to an agreement to develop a complex aviation system transport deal among the 27 EU states which was later signed in the year April 30, 2007, at the US-EU Summit in Washington. Studies have established that the agreement would massively transform the economics of the member countries by improving their air travel and trade throughout the Atlantic (Pitfield, 2009). The relationship between the EU and US has been shown to be of greater significance benefiting both sides of the Atlantic by enhancing investment, improved mobility through the adoption of Visa Waiver program and promoted commerce throughout the region (Micco & Serebrisky, 2006). Both the EU and US-led the liberalizations effort in the WTO and had continued working together with an aim to eliminate the current trade and economic barriers. Research has shown that the EU and US aviation relationship has not been very successful as is the case with economic ties (Robyn, Reitzes & Moselle, 2005).
The two are the largest air transport market globally, therefore, by working together, they will account for the largest (more than half) global scheduled passenger traffic. The US and UK have been argued to have had the most restrictive aviation relationship (Robyn, Reitzes & Moselle, 2005). Therefore, the agreement to liberalize their skies is a historical event that would increasingly support the international trade growth. The aviation industry has played a significant role regarding propelling economic growth and trading across the world. Further, it has been one of the major forces behind globalization, bringing people together, driving high value and further contributed to the development of tourism and travel. According to Micco & Serebrisky, (2006), the agreement to liberalize the sky would eliminate possible regulatory barriers throughout the carriers that might be existing in a country, the total number of flights and the type of aircraft to be used. In addition to this, liberalization agreement in this industry would allow for unlimited flights operating between various member partners and allowing their carriers to extend their flight throughout several developing economies (Pitfield, 2009).
Numerous case studies included air traffic estimates on US-UK air traffic flows, Germany to the UK to United Arab Emirates air traffic flows, Intra-Europe routes, Malaysia-Thailand routes, and routes between Australia and New Zealand (Button, 2009). Using these case studies, they estimate that full liberalization-both stages of the agreement adopted-between US and EU result in a 29 percent rise in air traffic. The increase is attributable to lower fares and that any US city can fly to the UK (Robyn, Reitzes & Moselle, 2005). Some studies have been focused on the potential impact of antitrust and the code sharing in relation to the Open Skies agreements taking into consideration their impact on the on price, output, in addition to capacity using a panel data of the US and EU (Mayor & Tol, 2008). Most of these studies established that the capacity expansion related to the Open Skies is entire as a result of the increase by immunized airline carriers on the routes between hubs and not the actual agreement.
According to Micco & Serebrisky, (2006), fares dropped from 14 to 22 percent under-immunized alliances, and passenger demand increased by 51 to 88 percent. Code-sharing agreements between air carriers resulted in fares falling between 14 and 23 percent and capacity increasing by 22 to 45 percent. According to Micco & Serebrisky, (2006), under Open Skies agreements, the economists estimated that fares increased between 3 to 5 percent increase without any capacity increases. His research concludes that Open Skies agreements might not necessarily result in lower prices on the connecting routes. The estimate used for this analysis only looked at the Open Skies agreement between the US and Germany; additional analysis may provide different answers. It was also indicated that the Department of Transportation has requested an Open Skies agreement to exist between two countries before granting antitrust immunity to airline alliances and those two effects may be difficult to separate apriori (Button, 2009).
B. Analysis using Applications of Managerial Economics Concepts
The liberalization agreement was applied in the year March 30, 2008, and resulted in the development of an open sky principle among 11 states in the EU especially when the US experienced strict agreement as far as aviation was concerned among them including the UK, Greece, and Spain (Mayor & Tol, 2008). Further second stage negotiation has been carried out throughout the EU which resulted to the liberalization of the airline within a period of 60 days. The US policy was aimed at liberalizing the airline with other partners in various parts of the world (Button, 2009). Currently, there are approximately 80 members’ countries, and among them, 27 are in the EU who have liberalized their airline.
Economists have adopted the economic impact analysis to effectively and efficiently evaluate the economic consequences of open skies agreement (Fu, Oum, & Zhang, 2010). In a more general view, air service liberalization has been shown to have the potential to propel employment in the member states particularly in the aviation industry and other supporting sectors (Fu, Oum, & Zhang, 2010). Studies have shown that majority of the companies have been able to enhance their competitiveness, expand their regional expansion, widen their market across the world and attract global investors. According to Micco & Serebrisky, (2006), liberalization agreement would give the member countries an opportunity to compete favorably and at the same time enable consumers to access various products at an affordable price. Therefore, it is evident that the adoption of the open sky agreement, countries would greatly benefit economically where it would impact prices, the traffic volume and other sectors of the economy (Fu, Oum, & Zhang, 2010).
According to Micco & Serebrisky, (2006), the significant benefit that would Open Skies agreements is the reduction in airfares. It would be achieved through an increasing level of competition in addition to the enhancements in air operations, for instance, efficient coordination of the flights and the utilization of larger airplanes (Alford & Champley, 2007). Since it is not possible to investigate the potential impacts of increased competition using an entirely competitive model, we will focus on the effects of greater efficiency. Better flight coordination and the use of larger planes would potentially lead to being able to fly more passengers with less than a proportional increase in input costs (Button, 2009). Because greater efficiency would only account for a portion of the total potential reduction in air fares, we assume the agreement would lead to a 10 percent neutral technical change in the sector.
Studies have established that by developing a highly reliable and efficient airline system, the member state would experience a global productivity through the reduction of the distance between the clients, producers, and suppliers (Alford & Champley, 2007). In addition to this, it would also enhance the concept of the supply chain where the corporations would be able to operate just-in-time and lead manufacturing procedures (Mayor & Tol, 2008). With an additional cargo and passenger traffic in the member countries, there would be enhanced catalytic economic growth and development to the local communities. The US trade entirely relies on an efficient air transport, therefore; they stand to benefit greatly from the liberalization agreement since it would open more market to these firms (Robyn, Reitzes & Moselle, 2005).
A survey undertaken in the US established that approximately 25 percent of the business sales rely heavily on the air transport. In addition to this, in most sectors including the information technology, about 40 percent of the total sales volume heavily relies on airline transportation. More than 70 percent of the entire businesses in the US further reported having benefited intensively on air transport since it enables them to reach the market faster and access raw material required (Button, 2009). Based on this analysis, it can be argued that liberalization of the airlines would benefit all corporations and firms through enhancing their business efficiency and at the same time cut on their cost of operation. Before the agreement, approximately 27 States had a strict aviation regulation with the US airline sector. The deal would lead to about 26 million new passengers throughout the EU markets that currently might not be benefiting from the services (Fu, Oum, & Zhang, 2010).
Studies have also shown that the liberalization agreement would result in enhanced productivity benefits which will further rise the level of rivalry and at the same time reduce the airfares. Furthermore, job opportunities would be created which will help greatly in fighting the high unemployment rates. According to Micco & Serebrisky, (2006), product diversity would also be achieved where consumers would be able to access numerous products to meet their needs. According to Micco & Serebrisky, (2006), foreign direct investment would also be promoted among the member countries in the EU. Liberalization would also stimulate various sectors of the economy improving the country’s GDP. EU and US liberalization agreement is believed to be critical for other nations such as Canada in the regions would be encouraged to open up their skies hence improving efficient air transport (Pitfield, 2009). With the liberalization of the airline, member countries would adopt a unified set of rules that will efficiently govern their air travel throughout the EU (Robyn, Reitzes & Moselle, 2005). The US and other members would benefit greatly regarding having easy access to the entire UK market particularly the London’s Heathrow Airport, which is considered as one of the global busiest commerce point throughout the EU (Button, 2009).
According to Micco & Serebrisky, (2006), data link communication capabilities are one promising option to increase efficiency in the airspace compared to the voice communications currently supported. These abilities include fuel savings for air carriers, better communication between flight information regions within the North Atlantic, better flight planning for air carriers, increased safety, rerouting and steep climbs for more efficient flying, and increased utilization of airspace capacity. According to Micco & Serebrisky, (2006), other options being considered that would lower costs for air carriers include harmonization of charging schemes and harmonization of air navigation service providers (ANSP) systems throughout North Atlantic.
Conclusion
The essay has critically analyzed the possible impact of the of the US-EU Open Sky agreement. Based on the essay, it is clear that the liberalization of the skies would significantly improve operations throughout the North Atlantic Oceanic space which will result into massive befits to both the cargo and passenger air carriers. In the recent years, there has been a tremendous growth in the significance of the air freight, therefore; the impacts of deregulation and improved operations will significantly affect industries that rely on air cargo services to get their products to consumers. The essay has further established that the deregulation impacts as would be felt beyond the aviation industry to other core sectors in the country’s economy. Proponents of the agreement have come out openly stating that the partner members would greatly benefit from the liberalization of air travel between the U.S. and EU. The economic benefits would also accrue to both the air carriers’ consumers. There would also be the reduction of the international airline passenger which would help users in response to an increase in the flight’s frequency between the U.S. and EU city pairs. It is therefore; clear that that the liberalization of the skies between US and EU would greatly benefit various member states. The positive impact of liberalization would spread rapidly to the neighboring economies few years after the signing and adoption of the Open Skies agreement.
References
Alford, E., & Champley, R. (2007). The impact of the 2007 US-EU open skies air transport agreement. ITA Occasional Paper , (07-001).
Button, K. (2009). The impact of US–EU “Open Skies” agreement on airline market structures and airline networks. Journal of Air Transport Management , 15 (2), 59- 71.
Fu, X., Oum, T. H., & Zhang, A. (2010). Air transport liberalization and its impacts on airline competition and air passenger traffic. Transportation Journal , 24-41.
Mayor, K., & Tol, R. S. (2008). The impact of the EU–US Open Skies agreement on international travel and carbon dioxide emissions. Journal of Air Transport Management , 14 (1), 1-7.
Micco, A., & Serebrisky, T. (2006). Competition regimes and air transport costs: The effects of open skies agreements. Journal of International Economics , 70 (1), 25- 51.
Pitfield, D. E. (2009). The assessment of the EU–US Open Skies Agreement: The counterfactual and other difficulties. Journal of Air Transport Management , 15 (6), 308-314.
Robyn, D., Reitzes, J., & Moselle, B. (2005). Beyond open skies: the economic impact of a US-EU open aviation area. Deep Integration , 50-73.
