International civil aviation has been one of the most regulated industries. Since the 1970s

however, the airline industry has been gradually liberalized, with domestic deregulations

taking place in the United States, Japan, and other relatively developed parts of the world.

The United States and the European Union signed the EU-US Open Skies Agreement in

2007. This agreement, which took effect in March 2008, liberalized the airline industry in

the North Atlantic. This research aims to find the effect of the EU-US Open Skies Agreement

on the number of passengers flying between the United Kingdom and the United States. I

find that the open skies agreement did indeed increase passenger traffic between the

United States and the United Kingdom by an economically significant margin. This finding

helps demonstrate the positive impact on civil aviation of international bilateral

(International Civil Aviation Organization) was founded, established a relatively restrictive

structure of government regulation of commercial aviation and bilateral agreements

between two countries regarding air services. The concern motivating this structure is that

the United States, given its powerful economic position after the war with the largest fleet

in the world and abundant military surplus, would be in an unfairly dominant position if

the market was left with free competition, hence the need of restrictive government

regulations.

Airline Deregulation Act in 1978, withdrawing government control of route rights and

price setting over the domestic airline market. In the 1990s, the European airline industry

was liberalized with the founding of the European Union and European Single Market.

Comparatively, bilateral deregulation in international aviation experienced a slower

development as it required a mutual beneficial deal between two politically liberal

governments.

In March 2008, the EU-US Open Skies Agreement took effect, removing restrictions

on route rights and air fare, allowing any EU and US airline to fly between any EU city and

US city. The agreement effectively nullified the Bermuda II Treaty between the United

States and the United Kingdom, which permitted only four carriers (British Airways, Virgin

countries. This should have brought increased travel, trade, and faster growth of the

industry. I have chosen to study flights connecting the United States and the United

Kingdom for two reasons. First, the UK and US had a much more restrictive agreement

before this treaty was signed. Second, as the British public voted to leave the European

mean to the British aviation industry and even the economy as a whole.

An Open Skies agreement is, in general, a treaty between two governments. It

concerns international flights rather than domestic. It eliminates government interference

can now fly to a foreign country without government approval from either side. Open Skies

requires governments to lift restrictions in many aspects. Aside from no restrictions on

route rights, there can also be no restrictions on the number of airlines operating, flight

capacity, frequency, or type and size of the aircraft used. This is intended to expand

passenger travel and trade by eliminating the regulation barrier on multiple aspects. Open

Skies agreements are aimed at creating a more competitive market that would provide

more benefits for consumers and foster faster growth.

According to the US Department of State, the United States currently has Open Skies

agreements with 120 countries, and flights to these countries account for 70% of all

international departures from the United States. The agreement that this research is

concerned with, the EU-US Open Skies Agreement, is the most significant major agreement

United States are getting more direct connections to Europe and Japan such as Cincinnati,

Salt Lake City, and Minneapolis as they gain international flights to destinations like Paris,

Frankfurt, Amsterdam, and Tokyo. The Bureau of Public Affairs states that new connections

between a US city and Europe generates up to $720 million annually in new economic

haul low-cost airlines, such as EasyJet and Ryanair in Europe; Southwest, Jetblue, and

WestJet in North American; and Air Asia, Jetstar, and Scoot in East and Southeast Asia.

These airlines charge extremely low fares enabled by cost cuts from reduced staff and

services and from using secondary airports with lower landing fees. Low cost carriers have

cost airlines became possible. Trans-Atlantic air travel is one of the first beneficiary with

WestJet and Norwegian Air Shuttle providing low fare flights between North America and

Europe. More importantly, low cost airlines enable a large portion of the population who

could never afford a plane ticket to be able to fly on an airplane, indirectly elevating the

living-standard of a considerable portion of the world’s population. This phenomenon is

especially vivid in developing countries such as Indonesia, India, and Vietnam. They are not

only essential to the competitiveness of the industry, but have also brought enormous

Skies, which created a free, competitive, and newbie-friendly market.

Motivated by the controversial nature of airline deregulation in general and the

recent development of the United Kingdom’s referendum to leave the European Union, this

because there is reliable, precise, and accurate data on this value. It is also an excellent

indicator of the condition of the civil aviation industry and the economic condition of the

involved countries. It can properly demonstrate the economic impact of the EU-US Open

Skies Agreement not just on the industry, but on the economies of the EU and the US as a

whole. This study will help understand the direct effect of a bilateral open skies treaty on

airline deregulation in 1978 offers backgrounds and methods for this research.

One of the earlier and more comprehensive studies on deregulation’s effect on the

industry and passengers is “U.S. Airline Deregulation: Its Effects on Passengers, Capital, and

Labor.” (Moore 1986) The paper analyzes the effects of deregulation on passengers, both

business and leisure/personal, and on airlines’ capital and labor. Moore compares the

number of carriers, fare changes, capacity, passenger number and departure number

before and after deregulation. A regression analysis of fares is done on distance, major

cities, and the number of carriers in each sample route of year 1976 and 1983 to determine

which factor influenced fares more before and after deregulation. Moore finds that at the

point of available data, five years after deregulation, the effects appear to be “mainly

travelling on discounted fares. In terms of capital and labor, Moore finds that stock values

have gone up, more so for newly founded airlines than legacy ones, while total employment

in the industry has grown. Overall, Moore concludes that deregulation has made air travel

available to the greater masses and benefited passengers of lower and moderate income.

Moore’s paper is the basis of the methods for this research. Although Moore does not use

panel data, the characteristics and data he uses in his comparisons and analysis gives

insight to the basic appropriate method to evaluating the effects of airline deregulation.

profit maximize after deregulation. A study that focuses on impact of deregulation on

airline cost saving, done by Baltagi, Griffin, and Rich (1995), analyzes the changes in cost in

the US airline industry before and after deregulation, using a panel data set of airlines. The

paper examines industry trends in load factor, wages, and technological advances. It

analyzes the role of deregulation in supporting technical change. The study concludes that

deregulation has had a ‘pervasive’ effect on technical change and costs. The slow increase

in load factor and adoption of new aircraft is the cause of slow technical growth.

Meanwhile, 9.3% of cost saving for trunk airlines and 19.9% of that of regional airlines are

attributable to deregulation. The savings mainly come from higher load factor, reduced

Theory on market structure and contestability is very relevant to the study on the

impact of airline deregulation. In the book, Contestable Markets and The Theory of Industry

Structure by Baumol, Panzar, and Willig published in 1982, the authors propose the theory

that if there is no cost to potential competitors entering or exiting the market, or ‘perfectly

contestable,’ the firms will establish a price configuration that maximizes market welfare.

Baumol, Panzar, and Willig state that “it is highly possible that air travel provides a real

since small firms are almost always impractical and cannot survive due to inefficiency and

economics of scale, perfect competition is almost impossible to approximate for most

industries. However, perfect contestability suggests that an industry, even if it is

oligopolistic or monopolistic, as long as it maintains freedom of entry and exit, is still ideal,

because the absence of the entry barrier will prevent monopolists from making positive

profit and keep the equilibrium at optimal with maximum market welfare. For this to work,

there also cannot be sunk cost to enter or exit. Therefore, in theory, the police of this

market is potential rather than actual competition. In Baumol and Bailey’s paper

“Deregulation and the Theory of Contestable Markets” in 1984, the authors argue that the

of contestability, even when there is only one firm operating a route.

This theory of the airline market is tested by Morrison and Winston’s paper

“Empirical Implications and Tests of the Contestability Hypothesis” in 1987. If the airline

market is perfectly contestable, there should be no change in welfare in markets with at

least one potential competitor. The paper defines ‘potential’ competitor as an airline that

already operates flights at point A or B but does not fly between point A and B. Morrison

and Winston tests 769 randomly selected routes, each with at least one potential

competitor. The result shows that none of the 769 routes have zero welfare change and

and Japan. Open Skies cushioned the shock that the Financial Crisis had on UK-US air travel.

A statistically significant, albeit negative result came from the regression with the

control group of flights between the UK and China. The regression shows that flights to

China are actually growing faster relative to flights between to the US, with the statistically

significant coefficient of the interaction term being 145,050. The reason for this could be

that China is a growing market and flight capacity has been expanding since the late 2000s,

with new flights inaugurated and frequencies increased. Air China added more flights

between Beijing and London Heathrow while starting a new flight between Beijing and

London Gatwick. During this time, it also started replacing its Airbus A330s used on these

routes with new Boeing 777s which have much greater capacity. It makes sense that China

as an emerging and not-yet fully open market would experience higher-than-average

China would be growing faster relative to flights to the US.

This finding of an increase of passenger flow between the United Kingdom and the

United States relative to the UK Domestic and UK-Japan control groups in the face of the

2008 Financial Crisis suggests a considerable positive effect of the EU-US Open Skies

Agreement. While this study only shows the impact of Open Skies on flights between the

UK and the US, this agreement would likely bring similar growth and benefits for the

entirety of the North Atlantic air travel market between the United States and the rest of

the European Union, not only in terms of passenger numbers, but also cargo tonnage. The

results of this study demonstrate that a deregulated and liberalized airline industry with

United States and Europe.

In June 2016, 51.9% of voters in the UK voted to leave the European Union in the UK

EU Membership Referendum. If the United Kingdom were to leave the European Union, the

This study has proven a 10% increase of passengers travelling between London and

the US alone. If the United Kingdom were to exit the European Union, it is certain that there

will be considerable negative impact on air travel between the UK and the US. The damage

British airline, it has significant presence in the continent where it operates flights between

cities outside the UK, with Milan being the airline’s second largest hub. These are known as

eighth freedom traffic rights, which is currently only possible within the European single

aviation market. If the UK were to leave the EU, EasyJet can no longer operate within the

prerequisite for the free flow of people and goods. It is especially important for the United

Kingdom as its economy heavily relies on the financial industry. A more regulated and

restrictive legal framework would not only restrict growth of air travel and cargo flow, but

also hinder economic growth of a country as a whole. With protectionist, anti-free trade

right-wing politicians such as Nigel Farage, Marine La Pen, Geert Wilders, and Donald

Trump taking on ever more popularity in both continents, it is very uncertain whether a

new agreement will be a liberalizing one. It would certainly be a step backward, in practice

and in principle, if air travel between two of the world’s most developed countries was to