LIBERALIZATION OF INTERNATIONAL AIR TRANSPORTATION MARKETS: THE EFFECT OF TERRORISM ON MARKET TRENDS

INTRODUCTION According to the World Investment Report 2001 published by the United Nations Conference on Trade and Development, global foreign direct investment rose to a record US$1.3 trillion dollars in 2000. Contributing to this increase was the number of cross border mergers and acquisitions, which were up nearly 50 percent to US$1.1 trillion (UNCTAD, 2001). In addition to the growth in FDI, world merchandise and service exports have continued to post significant gains. World Trade Organization figures indicate that merchandise exports rose to US$5.47 trillion dollars in 1999 while service exports rose to US$1.35 trillion for the same period. Travel services accounted for $440 billion of these dollars (World Trade Organization, 2001). The latest estimates from, the International Air Transport Association are that the total economic output of the air transport industry is over US$1.3 trillion. In the United States alone, the airline industry contributed nearly $273 billion dollars to the total economy, including $109.1 billion in direct expenditures (salaries, purchase of equipment, etc), $109.1 billion in indirect benefits (airports revenue, travel agency), and $54.6 billion in visitor spending and conference revenues (Air Transport Association, 2000). While the international air transport industry has played a significant role in globalization of economic activity, the industry itself has remained firmly rooted in the domestic market. Governments around the world have treated airlines like a public utility whose service is said to be in the public interest. The public interest argument is based on three areas: national security and use in national defense under programs like the U.S. Civil Reserve Air Fleet program, postal air delivery, and contribution to commercial activity (Kane, 1999). International airlines also "carry the flag" and represent the national achievement and pride of their home country. This latter role is not to be underestimated. When the bankruptcy and subsequent grounding of the Swissair fleet forced the Swiss football team to fly Aeroflot to a qualifying match in Moscow, one article reported this as a "further humiliation for the Swiss flag carrier" (Hall, Grant, Done, Cameron, and Dombey, 2001). Because of the special status accorded to air transport, governments have always taken an interest in promoting and protecting their national carriers. Directly or indirectly governments played an important role in shaping their national aviation systems. A tightly regulated international aviation market whose basic precepts were laid out even before the end of World War II insured protecting the national industry and its carrier(s). In recent years that regulatory regime has come under increasing pressure to liberalize. The terrorist attacks of September 11, 2001 have called this trend into question as governments worldwide now struggle with issues of security. Many of these governments are also faced with an aviation system on the verge of collapse. The purpose of this paper is fourfold. First, the regulatory development of the air transportation system will be reviewed, including the rationales for treating air transport as a special case in international business. Second, the forces leading to liberalization of this market will be examined. Third, the progress in air liberalization will be discussed prior to the recent terrorist attacks. Finally, the impact of these attacks on the transportation industry and liberalization will be assessed. REGULATORY DEVELOPMENT The development of a regulatory regime for the international air transport industry can be divided into four phases. Phase I witnessed the birth of the industry and a philosophical struggle between freedom and tight regulation. Phase II began with the reluctant acceptance of a system of relatively tight regulation. Phase III saw deregulation of the U.S. air transport industry and renewed efforts for a more liberal international air transport regime. …