Time to reap the benefits from open skies

The spectacular performance of Irish aviation since its deregulation in 1986 has become a model for other markets. The effects on fares and numbers have been spectacular and unprecedented in any other market. The effects on other sectors have been marked.

Tourism into the Republic did not grow at all between 1966 and 1986, and then it became the fastest-growing tourism sector in the OECD. The Republic is one of the most open economies in the world and every sector benefits when competition reduces the cost of air access to an open island economy. Most of the large inward investments in employment-intensive projects come from the US.

While the Republic has chosen political integration with the EU, our labour market is heavily influenced by North America both as a source of new job investment and a job location for so many Irish people. Better access, both by air transport and telecommunications, to the source of so much of our inward investment in employment improves overall national competitiveness. Business at Irish airports in 1999 will be more than four times the pre-deregulation level in 1985.

TABLE 1

International Air Travel to and from the Republic 1985-1997

1985 3.3m

1990 6.6m

1997 12.1m

(Source: Irish Statistical Bulletin)

Since the rescue of Aer Lingus under the Cahill-Owen plan, the North Atlantic has become its best-performing sector. Yesterday, the airline announced its service to Los Angeles from May next. Chicago has been restored to the network and Newark added. A 20 per cent growth is predicted on the company's North Atlantic services in 1999.

The emphasis on full service appears to be the critical marketing decision in the company's success on the North Atlantic. The food and drink that add £200 to your London fare and £600 to your Brussels fare make the budget airline the attractive option. On longer journeys, however, service can be a significant plus factor and this is an area where Aer Lingus has traditionally achieved high ratings.

The structure of the Ireland/US air market has also changed to bring greater competition. Continental entered the market last year. Delta has announced its decision to compete with Aer Lingus rather than purchase seats on Aer Lingus flights to New York as it does at present in a joint marketing alliance.

Alliances are proposed as the solution to many problems in aviation but they frequently act against the public interest by restricting competition. I would regard the ending of the Delta-Aer Lingus alliance on New York as a gain for the consumer and would welcome an end to the Aer Lingus agreements with Sabena to Brussels and with KLM to Amsterdam. Happily the harm done by these agreements to the consumer is diminished by the arrival of non-colluding airlines such as Ryanair on the Dublin-Brussels route. If Aer Lingus is to have a "strategic partner" there must be no anti-competitive elements to the deal. Both the EU and US competition authorities must examine any strategic alliance strictly.

There was, for too long, a tradition of collusion in aviation which did too much harm to be allowed to resurface under the euphemism "strategic alliance".

The EU recently placed so many conditions on a proposed British Airways-American Airlines alliance that the airlines changed their minds.

The other obstacle to market contestability in Irish aviation on the North Atlantic is the Shannon half-stopover, the replacement under Cahill-Owen for the compulsory stopover.

Protectionism in other sectors was reduced steadily over a number of years. It is a flaw that the last reduction in protectionism was not accompanied by a timetable for its abolition. These restrictions raise costs, reward anti-competitive interest groups and divert trade elsewhere, as shown in the significant use of British air services by passengers flying between the Republic and North America.

Table 2

Overseas visitors to Ireland 1985-97

1985 1997 Index

(000s) (000s)

Total 1,912 5,164 270

US/ Canadian residents 404 764 189

Arrived on transatlantic 213 339 159

air services

(Source: Irish Statistical Bulletin)

The third column of Table 2 shows that the growth of tourism from North America has lagged significantly the growth from Britain and Europe since airline deregulation. It also shows the growth of North American visitors flying directly to Ireland has lagged behind the growth in that market.

The share of those flying to Ireland direct has fallen from 53 per cent in 1985 to 44 per cent in 1997.

In tourism terms this trend indicates that low fares between Britain and the Republic attract North Americans to combine both countries in a single holiday. It also indicates that air fares between North America and the Republic have to be competitive with those between North America and Britain.

A further challenge is to increase the number of gateways served in North America from the Republic. The traditional Aer Lingus destinations served, New York and Boston, are a declining proportion of total US traffic to Europe. Chicago and Los Angeles are welcome additions to the network and we should also anticipate that economic growth, both in the US and here, will create opportunities in markets such as Dallas, Denver, Phoenix, St Louis, Miami, Washington and other locations.

An open skies air agreement with the US was on offer in the early 1990s but was declined because of pressure from the Shannon lobby. No state has gained as much from open skies as the Republic since 1985.

To decline such an arrangement with the most developed aviation market in the world makes no economic sense. Some of our aviation regulators have looked this gift horse in the mouth for so long that they merit a Ph.D. in equine dentistry.

They were brought kicking and screaming into the deregulation era in 1986 after decades of operating as a downtown office of the old protectionist Aer Lingus. They should now complete their conversion to deregulation on the North Atlantic.

Sean Barrett lectures in economics at TCD