1. The Economic Impact of Air Service Liberalization
Summary of the Results of Two Studies
Intro to IVC
Main offices in Washington, Boston, Vancouver, the U.K.
Chief Economist Mike Tretheway led these studies.
The first was published in June 2006,
Boeing, ACI-NA, Air Transport Action Group, European-American Business Council, GE, IATA, the Pacific Asia Travel Association, Pratt & Whitney, US-ASEAN Business Council, the U.S. Chamber of Commerce and the World Travel & Tourism Council.
The updated study was published 2 years ago, in June This 2015 update was sponsored by Boeing, GE, the Aerospace Industries Association (AIA), FedEx, the World Travel and Tourism Council, the National Association of Manufacturers (NAM), and ACI EUROPE (Airports Council International).

2. 2006 Study
Found extensive and significant evidence in support of the “conventional wisdom” that air service liberalization generates significant economic opportunities for consumers, shippers, and others.
Restrictive ASAs stifle travel, tourism, business, economic growth and job creation
Traffic grew much faster after liberalized agreement than before
Typically averaged 12-35%
with cases of 100%
Why was this undertaken?

3. 2006 Study – Case Studies
While econometric findings are a useful scientific tool, interpreting them is more powerful when complemented with case studies
EU 1993
growth rate doubled
1.4 mn person years employment
US-UK 1995
Some existing routes saw traffic double (ORD-LON)
9 routes to 17
Malaysia-Thailand
37% higher growth due to liberalization of routes, which also allowed new LCC entry

4. 2015 Updated Study
The 2006 study had found substantial gains, but nearly 10 years had passed, yielding more evidence and data on the impacts.
Debate had renewed as to whether liberalization creates benefits, whether they had been exhausted, or whether they turned negative.
Objectives for this study:
Validate previous results
Investigate whether liberalization gains have changed
In 2015, IVC re-examined the impact of liberalization. With an additional 10 years of experience, data, and academic papers – and with some in the industry beginning to question the underlying benefits, we believed it was time to see if the benefits still existed or had been exhausted.
Objectives:
Validate previous results
Test whether the gains from liberalization have changed in past decade
Three key parts to the study approach
1 .Literature Review: What have other researchers found in recent years? Are they any general conclusions? 2. Estimate the benefits from liberalization,
Our original study used data from 2005
Data is for traffic volumes for nation pairs. We use nation pairs, as that is the relevant measure for questions about bilateral air service agreements between nation.
We added data for The most recent year for which all the data we needed was available -- Top 1000 nation pairs
We believe the focus on changes at the nation-pair level is appropriate – the ASA are between governments, not points of service – and inherently conservative.
3. Case Studies: Complement the econometric findings with historical and forward looking case studies

5. Updated Empirical Findings on the Gains from Liberalization
Key Results
Liberalization increased traffic between nations by 16%
This is virtually identical to the 2005 results
The research validated the previous findings
Globally, if all markets had been fully liberalized:
500 million more passengers
Full liberalization would have increased employment by 1.4 million
Including supplier industries and aviation-dependent tourism, full liberalization would have added another 9 million jobs
Began with review of peer-reviewed academic literature – considerably more since the prior study was published, adding data on markets other than the U.S. Key results:
Almost uniform in finding liberalization produces major benefits for travelers and aviation dependent industries
Fares reduced 15-35%
Traffic increases 18-75%
Wider economic benefits to air transport-dependent industries and nat’l productivity
NO EMPIRICAL FINDINGS OF NEGATIVE EFFECTS. Emphasis on EMPIRICAL
Analysis controls for whether ASA is restrictive or liberal
Technical:
We used a “reduced form” equation, where quantity (traffic) is the dependent variable
We estimate by OLS, controls for GDP, distance, regional differences
There is some heteroskedasticity, but controlling for it produces same magnitude for results
We used data for 2005 (from prior study) and 2012 – the most recent available at the time
The results from the 2015 study validated and reinforced the earlier findings. The effect was 3% smaller than that found in 2006, but that difference is not statistically significant.

6. Case Study: ASEAN Example of progressive liberalization
2008, restrictions removed on 3rd/4th freedoms between capital cities
2011, full liberalization on 5ths between capital cities
Traffic increased over 115% from
Growth following the ASEAN-SAM agreement was significantly faster than prior to the agreement: 13% vs. 8%
LCCs led the growth during : flag carrier grew by 6%, LCCs by 22%
Growth was greater in secondary markets.
The 2015 report re-examined the case studies from the 2006 report and found that the findings were still valid
The 2015 report also expanded the number of case studies of passenger markets:
ASEAN
U.S. – Japan
India’s domestic market
The 2015 report also illustrated the importance of liberalizing 5th and 7th freedoms, so it included an example of air cargo services
Most of the empirical research has focused on passenger’s airfares as it was the primary focus of deregulation. However, air cargo is a critically important aspect of globalized economies. It represents an estimated 1% of the volume (tonnage) shipped but 35% of the value.

7. Case Study: U.S. - Japan
Between 2000 and 2009, total US-Japan traffic dropped by nearly 5 million, or 33 percent. JAL was failing financially; announced restructuring in Jan It lost 2.5 million pax to the U.S. (50%)
2010 Agreement created opportunities for new markets to be served
Despite remaining slot constraints and a global recession:
7 new non-stop routes
Frequency increased by 60 flights per week
Traffic rebounded to the highest level in 5 years

8. Role of 5th & 7th Freedoms Supporting Air Freight
Cargo airlines have used Open Skies 5th and 7th freedoms to open new hubs, decrease the cost of delivery, improve supply chain performance, and enhance global trade. Hubs include:
UPS – Cologne, Shanghai, Hong Kong
FedEx – Paris, Kansai, Guangzhou, and Dubai
DHL – Bahrain & 4 in Asia
Link markets around the globe to enable businesses to expand their product and service offerings more broadly

9. Thank you!