Silviase/jgov_v1.4_full_ann huggingface dataset:
Table 2. Privatization and deregulation in the UK: chronology of main events.

1969 Edwards Committee recommends the creation of a second-force UK airline to compete with the state-owned BOAC and BEA.

White Paper endorses the Edwards Committee proposals, leading to the formation of BCal and limited route transfers to the new airline.

1972 Formation of BA through a merger between BOAC and BEA.

1976 White Paper concludes that there should be no competition between UK carriers on long haul scheduled services.

1980 Civil Aviation Act is passed, shifting policy to a more pro-competition stance. Among other things, the Act gives the CAA a direct duty to further the interests of users of airlines and to have particular regard to the benefits that might arise from licensing two or more UK airlines on the same route. The Act also gives the Government rights to sell shares in BA.

1981 Lord King becomes chairman of BA.

1982 Launch of an extensive cost cutting programme, including employment reductions, suspension of unprofitable routes and disposal of surplus assets.

1984 Publication of the CAA review of the industry and of the Government White Paper Airlines Competition Policy, leading to further deregulation of domestic markets.

British Airways is converted from a public corporation to a “public limited company” (i.e. a joint stock company) in readiness for privatization.

1985 Privatization is postponed pending settlement of US anti-trust litigation concerning operations on North Atlantic routes.

1986 Anti-trust litigation is settled.

1987 BA is privatized via an offer for sale and shares start trading on 11 February.

Announcement of merger between BA and British Caledonian followed by a Monopolies and Mergers Commission investigation leading to approval of the merger.

1989 BA attempts and fails to acquire 20% of Sabena World Airlines (the Belgian flag carrier).

1992 BA acquires 49.9% of TAT European Airlines (a French domestic carrier) and 49% of Deutsche BA (a renamed German domestic carrier).

1993 BA acquires 25% of Quantas (one of the two major Australian carriers).

Announcement of BA plans to acquire a 19.9% stake in USAir.
BA was allowed to retain its position at London Gatwick and at the various provincial airports. In this case the reasoning was that BA's presence at these airports enhanced their stature and thereby contributed to one of the objectives of government policy for airports. Independent airlines other than British Caledonian were, however, given funds by BA to help them develop up to fifteen new European routes from provincial airports. The CAA's suggestion that BA's service frequencies on major domestic routes might be reduced (item (iv) on the CAA list above) was also not taken up by the Government.

On the other hand, positive responses were given to a number of the CAA's other proposals (see items (v) and (vi)), including:

that domestic fares should cease to require specific approval by the CAA (domestic deregulation of prices);

that there should be a two-year experimental period of an area licensing facility which would allow airlines to fly between any two points in the UK (domestic deregulation of route licensing);

that the CAA should use its licensing powers to increase the range and market penetration of European scheduled services from Gatwick Airport.

As a result of these and other developments, there was considerable deregulation of UK air services in the mid 1980s, accelerating the trend established by the 1980 legislation. By the end of the decade many entry barriers into domestic services had largely been dismantled, albeit with the important exception of access to London Heathrow airport where congestion and the prevailing slot allocation system has made it difficult for new airlines to establish themselves. Indeed, until 1991 the traffic distribution rules specified that no airline that had not been operating from Heathrow before 1977 would be granted access. This ban was, however, lifted in 1991 and new operators have subsequently been granted slots at Heathrow, including the UK carrier Virgin Atlantic. Nevertheless, the allocation procedures continue to afford considerable advantages to incumbent operators.

### 3.2 European Community Policy

Although a Common Transport Policy has existed since the foundation of the European Community, the airline industry was initially excluded from the full application of this policy. As a result, Member States of the EC controlled their own domestic industries, and international agreements (including between Member States) evolved bilaterally under the Chicago Convention of 1944. Even today there is no single regulatory body governing inter-State air transport.

Policies toward scheduled air services during the 1950s, 1960s and 1970s were generally highly restrictive. Fares, service provision and market entry were all tightly controlled. For example, the bilateral agreements that developed frequently provided for only one airline from each country to operate on a given route, and the great majority of them also featured controlled
derives from the wider aims of the Community. This means, for example, that EC policy is likely to be particularly directed at practices which have the intention or effect of segmenting markets along national lines. There is also a resulting stress in EC policy on “harmonization” of policies and business practices, and specific regulations often combine liberalization and harmonization goals.

A good illustration of the working of European policy is to be found in the first airline merger to be examined by the European Commission, the merger between BA and BCal in 1987 (see above). Authority to act in this case derived from Article 86 on the basis of the dominant position that would be enjoyed by the enlarged BA in landing slots at London's main airports (Heathrow and Gatwick). The Commission used its powers to extract undertakings from BA to release a certain number of slots to new entrants wishing to establish services on European routes. A similar approach has been adopted in later airline mergers, including Air France/UTA, KLM/Transavia, Air France/Sabena and BA/TAT (the last two of which were handled via the new Merger Regulation).

In addition to the increasingly important application of the general competition rules and of Community policies on state aids, the development of EC sectoral policy toward airlines has occurred mainly via the introduction of three “packages” of regulations. The Commission published its first memorandum on the subject in July 1979 in an attempt to generate discussion between the interested parties on possible changes to the existing system of regulation. By 1983, the European Council had adopted a Directive for interregional air services which introduced some flexibility on routes outside the main hubs. This was followed by a second memorandum published in 1984 after further studies and consultations with the industry and users. This document set out two main objectives:

i. the creation of a Community framework for aviation to help the industry to reduce tariffs and improve the quality of its services; and

ii. the introduction of competition.

The trend of Community policy was accentuated in 1985/6 by the European Court decision in the Nouvelles Frontières case, which confirmed that the Treaty rules of competition applied to aviation and therefore that the Commission had significant, hitherto unused powers to act in the sector. In response the European Council requested that the Community take action on tariffs, capacity and access to the market. This request was reflected in the agreement of June 1987 between EC Ministers of Transport on a policy package covering tariffs, capacity, market access and rules of competition. It was this agreement, the culmination of discussions over a three year period, that six months later emerged as the first EC package on aviation policy.

The first package was adopted on 7 December 1987 and came into force on 1 January 1988. A regime was introduced for the approval of fares between Member States' airports. Discount and deep discount fares (to as low as 45% of economy class fares) were approved on
certain conditions. Allowance was also made for Community airlines to increase their capacity shares on a route, within specified parameters. Changes to access conditions allowed Member States to assign two or more airlines to provide scheduled services between two points ('multiple designation'), once certain thresholds had been reached. The new access conditions also gave airlines third and fourth freedom rights for services between main airports in a Member State and regional airports in another Member State. Where third or fourth freedom traffic rights existed, limited fifth freedom scheduled air services were also permitted. Two Council Regulations relating to the application of competition rules were also defined: the first set down procedures for the application of Articles 85 and 86 to international air services between Community airports and the second gave permission to the Commission to approve group exemptions for certain categories of agreement. Three implementing regulations laying down the conditions of exemption were adopted in July 1988.

The second aviation package adopted in June 1990 took the ethos of the initial package and, with a commitment to full liberalization by 1 January 1993 in mind, applied it further. This second package allowed more flexible conditions on fares, permitting discount fares as low as 30% of the economy rate without the need for government approval. A limited version of 'double disapproval' was also introduced (whereby a fare for a route within the Community is considered approved unless, within 30 days of its submission, both authorities have made their disapproval known to the air carrier in writing). Access to the market was further liberalized by weakening the conditions limiting multiple designation and third, fourth and fifth freedoms. The package also made provision for the gradual elimination of bilateral restrictions on capacity shares.

Between the second and final (third) packages of regulations, the Commission submitted a new proposal for rules on the allocation of slots at EC airports, in recognition of the fact that legal liberalization of entry conditions may not have significant economic effects where capacity is limited. In an attempt to reduce barriers against new entrants at congested airports, the Commission proposed that new entrants be given priority when new slots become available.

In June 1991 the European Council adopted three regulations that constituted the third and final phase in the liberalization of Community aviation. The first regulation sought to create legal and economic standards in the licensing of air carriers, including rules on effective control and majority shareholding.
### Table 3. Key features of European Community Third Liberalization Package, effective 1 January 1993

1. Free pricing regime for fares.

With “ex post double disapproval” for fully flexible fares only (i.e. only business class fares can be controlled in this way).

2. Open market access; i.e. the right to fly between any two points in different community states. But:

a) some restrictions may be imposed

if environmental or congestion problems exist

- to safeguard island routes

- to facilitate intermodal coordination

to maintain public service obligations on routes vital for economic development.

b) domestic cabotage only as an extension of “international” service; eg. London-Paris-Nice and only for 50% seats.

3. Common airline operators licence regulations in all Community countries: i.e. criteria for licences (AOCs) are harmonized. For new or renewed licence, carriers must:

a) show that they are Community based and controlled,

b) fulfil financial fitness requirements, and

c) fulfil national technical requirements until European Joint Airworthiness Requirements (JARs) are ready.

4. No distinction between scheduled and non-scheduled services: the same regulations apply to both.

Source: Rigas Doganis (1994).

solvency requirements, periodic financial monitoring and safety fitness. The second regulation, relating to market access, authorised cabotage (a fifth freedom right) and eliminated capacity sharing for airlines on routes between Member States. However, cabotage would be introduced in phases: until April 1997 airlines can only fill up to 50% of seats in a stopover in another
Member State. Provision was also made for the establishment of seventh freedom rights, allowing carriers to commence the transport of goods and passengers between two countries other than the country of establishment, with no requirement to provide other services. The third regulation related to fares, establishing evaluation criteria, defining the double disapproval system and stating the conditions under which it is to be used. From 1 January 1993, airlines have been free to set their own fares on inter-State routes, subject, of course, to normal considerations of competition policy such as the prohibition of predatory pricing.

The European Council has committed itself to full liberalization by the end of the transition period (April 1997). Member States, however, retain powers to regulate competitive conditions in domestic airspace and the right to regulate air traffic to and from non-Community countries. Key features of the third liberalization package are set out in Table 3.

### 4. Economic Performance

The performance of British and European airlines has been affected by wide range of factors over the last decade or more. Of particular interest here are the impacts of privatization, deregulation and/or regulatory reform, and liberalization. Airlines have, however, also been subject to sometimes sharp variations in market conditions which have had major implications for their performance. It is not therefore straightforward to isolate the impacts of any one factor, and the following outline of some of the major recent developments in airline performance is intended as only a first step in this direction.

### 4.1 Entry and exit

The early responses to liberalization in Britain and Europe have followed a pattern that is familiar from the earlier experience of deregulation in the US: the number of airlines operating on particular routes first increases as new competitors enter the market and then falls back to some extent as unprofitable operations are closed down. This is illustrated in Table 4, which shows changes in the number of airlines operating on the busiest routes between London and continental European cities. On average there were approximately two carriers per route in 1981 but, as liberalization progressed, that number increased to around three by 1985 and four by 1989 (despite the demise of British Caledonian in 1987). After 1989, however, the average number of operators per route fell back to closer to three in 1993.
Table 4. Number of airlines operating scheduled services on busiest intra-European routes.

From London to:	1981	1985	1989	1993
Paris	3	4	7	4
Amsterdam	3	5	7	5
Dublin	2	3	6	4
Frankfurt	2	3	2	4
Zurich	2	3	3	3
Brussels	3	5	5	4
Milan	2	2	2	2
Geneva	2	3	3	2
Dusseldorf	2	3	3	4
Rome	2	2	3	2
Madrid	2	2	3	3
Average	2.27	3.18	4.00	3.36

Source: Doganis (1994).

The Table indicates that the recent fall in the average number of operators is the result of exit from precisely those routes that had initially attracted new entrants, in particular the routes between London and Paris, Amsterdam, Dublin and Brussels. The first of these are the three busiest of the European routes, whilst the Brussels route -- connecting to the administrative capital of the European Community -- has both a high value customer profile and the potential for considerable growth. It is therefore easy to see why, other things equal, these routes would have been attractive to new entrants.

It is also relevant to note that new entry has been assisted to some extent by deliberate acts of regulatory policy. As in telecoms and other network industries, the UK's "multi-airline policy" initially sought to provide assistance to newcomers -- although, as noted above, the privatization of BA (and also of the British Airports Authority) led later to an unwillingness to implement policies that might have negative financial implications for BA (and for regional airports). Similarly, the European Commission's actions to require BA to surrender landing slots to new entrants at the time of the merger with BCal was a policy designed specifically to favour new, smaller airlines.

In the event the UK’s multi-airline policy and EC attempts to reduce market concentration by promoting new entry have partially unravelled. The financial collapse of British Caledonian was a major blow in this respect, and it has not been an isolated incident.
The chief beneficiaries of BA’s release of landing slots -- secured by the European Commission at the time of the BCal merger -- were two small UK airlines, Air Europe and Dan Air. Each subsequently ran into financial difficulties and went out of business, with BA acquiring part of Dan Air’s business (see also Table 11 below).

There are broadly two views of this outcome:

i. entry assistance programmes aimed at encouraging the development of new airlines are largely misguided because they ignore the realities of the marketplace and try to create non-viable industrial structures; and

ii. entry assistance programmes have been too weak in that they have failed to take sufficient measures to offset the market power of large, incumbent carriers, many of which enjoy (or in the past have enjoyed) very substantial state aid.

These views echo similar positions taken in policy debates in other network industries (telecoms, electricity, gas, and rail).

### 4.2 Prices

BA’s activities cover a wide variety of different routes and markets -- domestic, European and inter-continental; scheduled and non-scheduled -- some of which have become highly competitive and others of which remain highly cartelized. Nevertheless, the historical pattern of average prices is instructive and Figure 1 shows one measure of these, real revenues per passenger traffic kilometre.

As can be seen from the chart, there was a collapse in average revenues at the end of the 1970s which was a major factor in the financial crisis faced by the airline in 1981. The introduction of the new management team and the subsequent shift in the corporation's business strategy is associated with a recovery in average revenues in the pre-privatization period (and BA prices therefore exhibit a pattern, also to be found in other UK privatizations, in which prices are increased prior to flotation). The mid 1980s represents a turning point in prices, however, and since then average revenues have fallen steadily in real terms.

Table 5 shows estimates of changes in BA's real prices on scheduled UK and European services, and these are broadly similar to the changes implied by the data in Figure 1 for the airline's operations as a whole. Thus, following the financial crisis of 1981, there were substantial increases in prices on UK and European routes. However, scheduled domestic fares dropped sharply in 1985 (when other prices were still increasing on average), a fall that can be interpreted as a response to the liberalizing measures then being introduced by the UK Government. And, despite a blip in 1987, the trend in scheduled domestic and European prices has been firmly downwards throughout the period of increasing liberalization.
Table 5. Percentage changes in BA's real prices for scheduled UK and European services.

1981	1982	1983	1984	1985	1986	1987	1988	1989	1990
5	13	14	4	-15	-4	8	-9	-9	-1

Source: Galal et al (1994).

British Airway’s increases in prices during the early 1980s were not matched by other UK airlines. For example, whereas BA increased its average prices by about 46% between 1980 and 1984, the corresponding increase for BCal over the same period was only about 27.5% (see Table 6). This discrepancy is a reflection of the market positions of the two companies: BA had market power substantial enough to greatly increase revenues in the pre-divestiture period -- enabling it both to finance the considerable restructuring of its operations and to prepare its balance sheet for privatization -- whereas BCal was operating in markets where competitive pressures greatly constrained its ability to get out of difficulties by raising prices. Over the relevant period BA’s average costs rose by about 30%, compared with BCal’s 26%, and BCal’s unit costs were lower throughout.

Table 6. A comparison of BA's and BCal's average prices (pence per revenue tonne kilometre).

Year	BA	BCal
1980	33.0	33.5
1981	37.0	35.0
1982	39.1	35.5
1983	44.6	40.4
1984	48.3	42.7
1985	50.5	45.1
1986	50.0	45.8
1987	49.8	41.9

Source: Galal et al (1994).

#### 4.3. Employment and wages

Before privatization, BA's performance record in relation to its number of employees was
similar to that in some other state-owned industries such as steel and coal: in response to poor financial performance at the beginning of the decade, the corporation embarked upon a major restructuring of its operations that led to substantial reductions in the size of its workforce. $ ^{7} $ Thus between 1980 and 1984 the workforce of BA was reduced by over a third, from around 56,000 to around 36,000 (see Figure 2).

In the context of UK privatizations, what is more distinctive about the airlines case is that the employment reduction was accomplished without a major contraction in the long-term size of the corporation. Output did fall significantly -- for example, available tonne kilometres (ATKs) decreased from around 8,200 million to 7,200 million between 1980 and 1984 as operations were rationalised -- but on nothing like the scale that occurred in the steel and (later) coal industries. Moreover, after the initial re-adjustment of strategy in the pre-privatization period, BA's output started to grow quickly and steadily (see Figure 3). The take-over of BCal at the end of 1987 gave a major boost to output and, more obviously, to the size of the fleet (see Figure 4). As is clear from the charts, however, there were other major factors driving expansion of activities from the mid 1980s onwards.

Expansion of the size of BA’s operations fed through quickly into employment levels, with the result that, almost uniquely for a major privatized UK company, the level of employment rose back towards its level at the beginning of the 1980s, reaching over 54,000 in 1991. More recently, and apparently in response to greater competitive pressures in its markets, BA has engaged in a further phase of employment reduction, although the changes have been much less dramatic than in the early 1980s.

The general downward pressures on costs -- arising first from government pressures to reduce the burden of the airline on central government finances and then, later, from privatization and from the growing competitive pressures on BA in an increasingly liberalized market -- have served to hold back wages and salaries to levels well below those in comparable European airlines. Table 7 shows the position in 1991 and reflects the facts that, at that time, UK deregulation and liberalization had proceeded more quickly than elsewhere in the European Community and that whereas as a privately owned airline BA faced the disciplines imposed by capital markets, the state-owned airlines of continental Europe still faced the less rigorous financial disciplines typically associated with the public sector (notwithstanding attempts by the European Commission to prevent state aids that have the effect of distorting the single market). As the effects of deregulation and liberalization at the EC level begin to be felt, however, and as more European airlines come to be privatized, it can be expected that some of the differences in wage levels shown in Table 7 will start to erode.