chapter  1
34 Pages

Characteristics of the Airline Industry and Alliances

The airline industry has traditionally been characterised by a high degree of regulation, not only on the technical, but also on the economic side. On international routes, airlines mostly operated within a very rigid framework set by air services agreements (in short ASAs), which are intergovernmental agreements concerning traffic rights between two countries. The regulation of air traffic stems from the Paris Convention of 1919, where it was recognised that each state is sovereign over the airspace above its territory and thus responsible for defining the nature and extent of air traffic serving it. In addition to heavy domestic regulation of air traffic in most countries, ASAs between nations regulated the international market in terms of fares to be charged, frequencies to be flown, and capacities to be offered. In practice, two countries that decided to set up air services between each other were to designate a specific airline (the so-called 'flag carrier') each to serve that particular market from their side. Except for the case of the United States of America, most flag carriers were government-owned. An airline enjoying flag carrier status was provided with route rights by its government, and did not face any competition except from the designated flag carrier of the country at the other end of the route. Even that competition was usually quite limited, since capacities and fares (and at times even the standard of in-flight services offered to passengers) were defined in the ASA. At the same time, flag carriers were not free to enter or exit routes on economic or operational grounds, because their status often dictated operations to serve public convenience and political considerations. Similar regulations governed the domestic services operated by airlines. This system did not encourage airlines to operate efficiently, but it assured a fairly stable and predictable operating environment.