Innovation, Vol. 14, No. 3, 2001 Deregulation and Liberalization of European Air Transport Markets KENNETH BUTTON ABSTRACT This paper is concerned with the remaining limitations to full interoperability within the European Union (EU) air transport market. Twenty years ago the European air transport network was fragmented, with airlines being treated as public entities designed to serve largely national interests. Considerable progress has been made in recent years, notably the three ‘Packages’ of EU legislation, to remove such barriers. The situation still differs in several ways from the almost totally free market that has been in place in the USA since the 1980s but, within the EU, fares and market entry are independent of national frontiers. Some barriers remain, largely legacy effects that are gradually being tidied up, but with some signicant matters concerning routes outside of the EU and capacity constraints relating to the still largely publicly provided infrastructure still needing resolution. Backgound European Union (EU) air transport is largely international either between EU member states or with third-party countries. 1 While there has been a Common Transport Policy since the signing of the Rome Treaty in 1957, aviation was initially excluded from EU policies. Countries regulated their own domestic aviation and a bilateral system of agreements, evolved from the Chicago Convention of 1944, governed international air transport within the Union, as well as outside it. Policies were concerned with the regulation of scheduled fares, service provision and market entry. Coupled with this was the growth of a very large European charter market that met north–south tourist trafc demands. This market was less rigorously regulated and served by low-cost operators. The EU has also never had a single regulatory body with responsibility for inter- national air transport like the former Civil Aeronautics Board (CAB) in the USA. The international bilateral air service agreements that emerged after the 1944 Chicago meeting and covered services within Europe were piecemeal arrangements, although common motivations often led to standard features. They were generally restrictive and often allowed only one airline from each country to operate a route. While this was similar to the CAB’s entry policy to US inter-state routes prior to 1978, the European situation was more stringent; over 90% of bilateral agreements involved controlled capacity with obligatory 50:50 revenue pooling. Some 900 of the agreements excluded fth freedom rights. The two countries involved agreed on the air fare, and competitive pricing was excluded. Many of the airlines were state-owned ‘ag’ carriers and received substantial state subsidies. Within the EU, overlapping philosophies of economic regulation extended into the supply of aviation services and made the creation of a unied policy difcult. The ISSN 1351-161 0 print/ISSN 1469-84 12 online/01/030255- 21 Ó 2001 Interdisciplinary Centre for Comparative Research in the Social Sciences DOI: 10.1080 /1351161 0120102 619