Description
Air transportation is a major industry in its own right and it also provides important inputs into
wider economic, political, and social processes. The demand for its services, as with most transport, is a
derived one that is driven by the needs and desires to attain some other, final objective. Air transport can
facilitate, for example, in the economic development of a region or of a particular industry such as tourism,
but there has to be a latent demand for the goods and services offered by a region or by an industry. Lack
of air transport, as with any other input into the economic system, can stymie efficient growth, but equally
inappropriateness or excesses in supply are wasteful.
Global Forum on Transport and Environment in a Globalising World
10-12 November 2008, Guadalajara, Mexico
The Impacts of Globalisation
on International Air Transport
Activity
Past trends and future perspectives
Ken Button, School of George Mason University, USA
2
NOTE FROM THE SECRETARIAT
This paper was prepared by Prof. Ken Button of School of George Mason University, USA, as a
contribution to the OECD/ITF Global Forum on Transport and Environment in a Globalising World that
will be held 10-12 November 2008 in Guadalajara, Mexico. The paper discusses the impacts of increased
globalisation on international air traffic activity – past trends and future perspectives.
3
TABLE OF CONTENTS
NOTE FROM THE SECRETARIAT ............................................................................................................. 2
THE IMPACT OF GLOBALIZATION ON INTERNATIONAL AIR TRANSPORT ACTIVITY - PAST
TRENDS AND FUTURE PERSPECTIVE .................................................................................................... 5
1. Introduction .......................................................................................................................................... 5
2. Globalization and internationalization .................................................................................................. 5
3. The Basic Features of International Air Transportation ....................................................................... 6
3.1 Historical perspective .................................................................................................................. 6
3.2 The modern industry .................................................................................................................... 8
4. The effect of globalization on airline markets ...................................................................................... 9
5. Implications of global air transport institutional changes in airline regulation .................................. 11
5.1 Fares .......................................................................................................................................... 11
5.2 Linkages between domestic and international air services ........................................................ 14
5.3 Airline profits ............................................................................................................................ 16
6. The Shifting Situation ......................................................................................................................... 24
6.1 The traffic forecasts that we have .............................................................................................. 24
6.2 Globalized labor markets, migration and international air transport ......................................... 25
6.3 The business models of airlines ................................................................................................. 31
6.4 Changing industrial needs ......................................................................................................... 33
6.5 Developments in emerging markets .......................................................................................... 34
7. Conclusions ........................................................................................................................................ 37
REFERENCES .............................................................................................................................................. 38
Tables
Table 1. The ten largest international airlines by scheduled passenger-kilometres ............................... 9
Table 2. The 20 largest international airports by passengers ................................................................. 9
Table 3. European low cost carriers that ceased to exist (2003 to 2005)............................................. 21
Table 4. Strategic Airline Alliances..................................................................................................... 22
Table 5. Scheduled freight tonne-kilometres flown............................................................................. 34
Table 6. Selected indices of China's Civil Air Transport System ........................................................ 35
Figures
Figure 1. Trends in World international trade, and airlines? revenue passenger kilometres ................. 10
Figure 2. Short-term links between World-trade in manufactures and air freight volumes .................. 11
Figure 3. The simple economics of Open Skies policies ...................................................................... 12
Figure 4. The implications of globalization on the various air transport markets ................................ 14
4
Figure 5. A „dog-bone? or „dumb-bell? international air transport network .......................................... 15
Figure 6. Operating margins of airlines ................................................................................................ 17
Figure 7. Airline profitability by global region ..................................................................................... 18
Figure 8. The alternative views of the implications of migration ......................................................... 27
Figure 9. The notion of gateways.......................................................................................................... 28
Figure 10. Impacts of opening more gateways on air transport networks and flows .......................... 29
Figure 11. Air travel between the UK and selected transition economies .......................................... 31
Figure 12. Throughput of freight at major Chinese cargo hub airports .............................................. 36
5
THE IMPACT OF GLOBALIZATION ON INTERNATIONAL AIR TRANSPORT ACTIVITY -
PAST TRENDS AND FUTURE PERSPECTIVE
1. Introduction
1. Air transportation is a major industry in its own right and it also provides important inputs into
wider economic, political, and social processes. The demand for its services, as with most transport, is a
derived one that is driven by the needs and desires to attain some other, final objective. Air transport can
facilitate, for example, in the economic development of a region or of a particular industry such as tourism,
but there has to be a latent demand for the goods and services offered by a region or by an industry. Lack
of air transport, as with any other input into the economic system, can stymie efficient growth, but equally
inappropriateness or excesses in supply are wasteful.
2. Economies, and the interactions between them, are in a continual state of flux, and although
economists? notions of equilibrium have some very useful intellectual content, and also validity in the very
short-run, in reality the world is dynamic. This dynamism, of which the particular thrust of globalization is
the concern here, has implications for industries such as air transport that service it. But there are also
feedback loops, because, developments in air transport can shape the form and the speed at which
globalization and related processes take place. In effect, while the demand for air transport is a derived, the
institutional context in which air transport services are delivered have knock-on effects on the economic
system. These feedback loops may entail direct economic, political, and social effects that, for example,
accompany enhanced trade and personal mobility, but they may also be indirect, as for example through
the impacts of air transport on the environment.
3. The analysis here is, by necessity, excessively simplistic given the multi-dimensional and
dynamic nature of globalization, and focuses on one small sector, international commercial aviation, and
on only one direction of causality, the implications of globalization for this sector. Some related
considerations are embraced where particularly important. For example, there is an increasing blurring of
international and domestic air transport as airlines form alliances and invest in each other to form global
networks; indeed, the domestic and international air transport market within the European Union (EU) is
de facto one market. Also, not all feedback loops are ignored, particularly when changes in air transport
facilitate global trends that then, in turn, feed back on the air transport industries; migration of labor is one
example of this.
2. Globalization and internationalization
4. Globalization, in its most literal sense, is the process of making, transformation of things or
phenomena into global ones. It can be described abstractly as a process by which the people of the world
are unified into a single society and function together. This process is a combination of economic,
technological, socio-cultural, and political forces. The idea of globalization is, however, also often used to
refer in the narrower sense of economic globalization involving integration of national economies into the
6
international economy through trade, foreign direct investment, capital flows, migration, and the spread of
technology.
1
Here much, but not all, of the focus is on the narrower perspective, although clearly the
increase in mobility and personal interchanges that air transport facilitates has broader socio-cultural and
political implications.
5. The reasons for the contemporary globalization processes from the latter part of the 20
th
century,
and their larger implications, are much debated. Thomas Friedman (2005) for example, suggests the world
is "flat" in the sense that globalization has leveled the competitive playing fields between industrial and
emerging market countries. The globalization of trade, outsourcing, supply-chaining, and political forces
have changed the world permanently, for both better and worse. He also argues that the pace of
globalization is quickening and will continue to have a growing impact on business organization and
practice.
This flattening is seen as a product of a convergence of the emergence of the personal computer
and the fiber-optic micro cable, combined with the rise of work-flow software. He calls this Globalization
3.0, which is different to Globalization 1.0 (when countries and governments were the main protagonists in
globalization) and the Globalization 2.0 (in which multinational companies led the way in driving global
integration). Cairncross (1997) looks at it from only a slightly different perspective. The growing ease and
speed of communication is seen as creating a world where miles have little to do with abilities to work or
interact together. Much work that can be done on a computer may be done from anywhere; workers can
code software in one part of the world and pass it to a company thousands of miles away that will assemble
the code for marketing. With workers able to earn a living anywhere, countries will find themselves
competing for citizens as individuals relocate for reasons ranging from lower taxes to nicer weather.
6. Much of these processes have been technology-driven, although facilitated by broad political
shifts, such as the demise of the Soviet system, the gradual emergence of international free trade bodies,
such as the EU and World Trade Organization, and reductions in global political tensions. Many of these
technical changes have been in transport. In particular, there have been massive developments in the
technologies that we use to transport information. While traditional transport analysts often see the
“telecommunications revolution” as somehow different and outside their field of study, it is, in fact, the
first major transport-change since the widespread adoption of mechanized transport in mid-19
th
century.
Air transport, although still a child of the mechanized age, has been closely linked with globalization and
the telecommunications revolution. It has been important in the opening up of labor markets, along the
lines indicated by Frances Cairncross, and in its role of role as a facilitator for the development of industry
allowing the production and maintenance of cheap telecommunications hardware. It has also, in turn,
benefited from the communications revolution in terms of air traffic control, navigation, and safety
enhancement, but also in making possible the airline logistics of bringing the elements required in moving
millions of people and tons of cargo across complex networks practical.
3. The Basic Features of International Air Transportation
3.1 Historical perspective
7. Air transport has always been seen to have an inherently strategic role. It has obvious direct
military applications, but it is also highly visible and, for a period, and in some countries still, was seen as
1 Strictly, there are differences between globalization and internationalization. Internationalization refers to
the importance of international trade, relations, treaties etc.; it refers to actions between or among nations.
Globalization means erasure of national boundaries for economic purposes; international trade (governed
by comparative advantage) becomes inter-regional trade (governed by absolute advantage). In practical
terms, internalization is technically what has largely been occurring in the World with the development of
agencies such as the World Trade Organization. Perversely, globalization has been more narrowly
geographically concentrated, for example within the EU area. We use the term „globalization? here in is
broader sense.
7
a “flag carrier”, a symbol of international commercial presence. From its earliest days, airlines were seen
as having potential for providing high-speed mail services, and subsequently medium and long-term
passenger transport. Technology now allows the carriage of much larger cargo pay-loads in a more reliable
way. These strategic functions were used to pursue internal national policies of social, political, and
economic integration within large countries such as Canada, the US, and Australia, but also took on
international significance from the 1930s within the Imperial geopolitical systems centered mainly on the
UK, France, Germany, and other European countries when technology allowed for intercontinental
services to be developed.
8. Air transport was highly regulated and protected in this environment with the intention of it being
used as a lever for larger political and economic objectives. But even in these roles, its importance, largely
because of the technology until after World War II, was small. British Imperial Airways, for example, only
carried about 50,000 passengers to the colonies in the 1930s; a figure hidden in the public media coverage
given to the importance of colonial air networks. Technology shifts as an offshoot of military
developments in World War II changed this with the introduction of planes with far longer ranges, faster
speeds, enhanced lift, and the increasingly ability to cope with adverse weather conditions. Air traffic
control, navigation, communications, and airport facilities have also improved considerably, and more
recently the underlying management structure of the supplying industries has enhanced efficiency.
9. The Chicago Convention of 1944 confronted the new international potentials of civil aviation and
initiated an institutional structure that laid common ground rules for bilateral air service agreements
(ASAs) between nationals. The result, however, while providing a formal basis for negotiation, was
essentially one of protectionism with pairs of countries agreeing on which airlines could offer services
between them, the fares to be changed and, often, how the revenues could be shared. Added to this, with
the major exception of the US, most international airlines were state owned flag-carriers that operated to
fulfill, often vague, national objectives of prestige, as well as linking colonies. Internal markets within
countries were regulated in similar fashions, and it was not uncommon for wealthier countries to have an
airline to provide primarily domestic and short haul services, and one for long-haul, international markets.
10. The breakdown of the domestic regulatory structure within the US from the late 1970s (Morrison,
and Winston, 1995) provided both a demonstration for other countries to follow in deregulating their own
domestic regimes, but also the US?s, initially unsuccessful, initiatives from 1979 to liberalize international
services on a bilateral basis based on a common “Open Skies” recipe began to bring about pressures to
wider reforms. This was coupled with more generic moves towards a withdrawal of government in market-
oriented countries such as New Zealand and the UK that saw airports and air traffic control being
privatized, or at least operated on a more commercial footing. The move to a Single European Market
within the EU from 1992 represented a broader trend, both in terms of the sectors and the geography
involved, towards market liberalization of air transport infrastructure, as did the collapse of the Soviet
economic system. Not all countries moved completely in this direction, the US for example, rather
perversely, continued with its traditional, strongly socialist policy of air traffic control being a state owned,
tax financed monopoly and airports, with few exceptions, being owned by local governments (Button and
McDougall, 2006).
11. Where there have been almost universal tightening of regulations that run counter to the market
liberalizations, have been in what the US calls „social regulation” and Europe calls, “quality regulation”.
This concerns such matters as the environment, safety, security, and consumer and labor protection. These
are areas that have been traditionally dealt with at the international level by the International Civil Aviation
Organisation (ICAO) set up under the Chicago Convention, and in accord with some peculiar international
accords such as the Warsaw Convention that dates back to 1929 and deals with liabilities in the case of
8
accidents
2
. More recently, regional or national actions have also taken international significance; e.g. the
extension of carbon trading within the EU to embrace all air transport, and the US?s introduction of stricter
security measures, such as the provision on passenger information, for all flights into the country.
3.2 The modern industry
12. The modern air transport industry is thus one that increasingly operates within a liberal market
context. While government controls over fares, market entry, and capacity continue in many smaller
countries, they are gradually and almost universally being removed or relaxed. International controls under
the bilateral ASA structure are increasingly moving towards broad Open Skies formulations, allowing free
provision of services between the countries involved, although progress on open market, whereby
nationality of ownership of airlines is unrestricted, is coming more slowly. The EU area
3
has effectively
been the largest international free market in air transport services in the world since 1997, and this has
grown as the Union has expanded geographically. The supply and operation of air transport infrastructure
is also becoming more market driven with on-going privatizations of airports and air traffic control
systems, or the use of franchising mechanisms to involve private capital and expertise (Button, 2008). It is
also becoming more coordinated.
4
13. The air transport industry is now large – it accounts for about 1% of the GDP of both the EU and
the US – and is vital in many industries such as tourism, exotics, and hi-technology
5
. It is an important
transporter of high-value, low-bulk cargoes. International aviation moves about 40% of world trade by
value, although far less in physical terms. The market is served by a diversity of carriers, some specializing
in long-haul international routes and others in short-haul markets
6
. Table 1 offers some indication of the
scale of larger airlines involved. To handle the interface between land and air transport the world?s major
airports have grown to handle millions of international passengers (Table 2) and tonnes of cargo
7
each
year, and many have been significant catalyst facilitating, in particular, the growth of modern hi-
technology industries and tourism about them. In 2008, passenger air services globally link around 15,500
airports; with the fastest growth in air services over the past two decades being in the Europe-Asian Pacific
markets.
2 The air transport industry itself has established international bodies to both interact with national
governments and institutions such as the ICAO; e.g. the International Air Transport Association (IATA)
was established to assist airline companies to achieve lawful competition and uniformity in prices
3 Norway and Switzerland are also included in most of these agreements.
4 E.g. in October 2001, the European Commission also adopted proposals for a Single European Sky, to
create a Community regulator for air traffic management within the EU, Norway and Switzerland
5 One US survey has shown that hi-technology personnel fly about 60% more than their counterparts in
traditional industries. A broader econometric analysis indicates that the location of a city with a hub airport
in the US in the 1990s enjoyed some 12000 more high technology jobs than a comparable city without a
hub (Button et al., 1999Source). Analysis of transatlantic routes shows that enhanced numbers of links and
service frequencies lead, albeit at a declining rate, to more hi-technology employment (Button and Taylor,
2002).
6 In terms of total passengers, because length of trips not included the ranking of airlines is somewhat
different; e.g. according to IATA, Ryanair carried 40,532 thousand passengers in 2006; Lufthansa, 38,236;
Air France, 30,417; British Airways, 29,498; and KLM, 22,322
7 For example, Airports Council International data shows Memphis International Airport handled 3,840,491
metric tonnes of cargo in 2007; Hong Kong International Airport New Territories, 3,773,964 tonnes; Ted
Stevens Anchorage International Airport, Shanghai Pudong International Airport, 2,559,310 tonnes;
Incheon International Airport, 2,555,580 tonnes.
9
Table 1. The ten largest international airlines by scheduled passenger-kilometres
Airline
Scheduled passenger-kilometres (million)
Air France 112,689
British Airways 111,336
Lufthansa 109,384
Singapore Airlines 87,646
American Airlines 81,129
United Airlines 74,578
Emirates Airline 74,578
KLM 71,761
Cathay Pacific 71,124
Japan Airlines 59,913
Source: International Air Transport Association
Table 2. The 20 largest international airports by passengers
Airport International passengers
London Heathrow Airport 62,099,530
Charles de Gaulle International Airport 54,901,564
Amsterdam Airport Schiphol 47,677,570
Frankfurt Airport 47,087,699
Hong Kong International Airport 46,281,000
Singapore Changi Airport 35,221,203
Narita International Airport 34,289,064
Dubai International Airport 33,481,257
Suvarnabhumi Airport 31,632,716
London Gatwick Airport 31,139,116
Incheon International Airport 30,753,225
Madrid Barajas International Airport 29,339,784
Kuala Lumpur International Airport 26,938,970
Chatrapati Shivaji International Airport 25,360,860
Munich Airport 23,988,612
Dublin Airport 22,339,673
John F. Kennedy International Airport 21,521,711
London Stansted Airport 21,201,543
Taiwan Taoyuan International Airport 20,855,186
Malpensa International Airport 20,627,846
Source: Airports Council International
14. If one looks at the basic aggregate data there is clear general link, although causality is another
matter, between the growth in global GDP and international trade and air transport. Figure 1 provides
aggregate information on the trends in world trade, and international air transport from the mid-1990s. A
similar picture emerges if one plots world GDP against air traffic. In each cases air volumes have risen
albeit it slightly less rapidly than GDP. Figure 2 gives detail of the shorter-run tends in growth in world
trade and air freight traffic volumes, and shows the common cyclical effects. While the ups and downs
broadly coincide, little by way of a consistent lag structure emerges.
4. The effect of globalization on airline markets
15. The implications of globalization in its many manifestations have been profound for the
international air transport industry, not just on the demand side, where the scale, nature, and geography of
demand in global markets has led to significant shifts, but also on the supply side, where implicit and
explicit international coordination of policies by governments (e.g. regarding safety, security, and the
environment) and the private sector (e.g. the internationalization of airframe and aero-engine production)
have affected the institutional and technological environment in which air transport services are delivered.
We address some of most important of these interactions.
10
Figure 1. Trends in World international trade, and airlines’ revenue passenger kilometres
Note: RPK are revenue passenger kilometres
11
Figure 2. Short-term links between World-trade in manufactures and air freight volumes
Source: Boeing Commercial Airplane
5. Implications of global air transport institutional changes in airline regulation
5.1 Fares
16. The restrictive bilateral ASAs that typified the institutional structure of international airline
markets before the advent of Open Skies manifestly had a number of adverse effects on the efficiency of
supply and, specifically, on the levels of benefits society could reap from air travel. These effects are not
easy to isolate and to completely quantify in a simple way, but Figure 3 offers a general representation of
the issues that are involved. In particular, it highlights the potential fare- and output-implications of the
various types of regulatory regimes that have been common in the past and are gradually emerging as
globalization is taking place
8
.
17. The initial position of the demand curve for international services between two countries, A and
B, under the pre-1980s regulatory regimes that typified international trade in air services is assumed linear
and shown as D
1
in the figure, and the average cost curve per passenger, which for simplicity is assumed to
8 The treatments of elements in the figure are static in the sense that technology is held constant. Modern
economic theory holds that at least part of technical change is endogenous and thus a function of market
and institutional structures.
12
rise more than linearly with quantity, as C
1
.
9
Market forces, however, because of the institutional
interventions in place, did not determine fares and capacity in these regulated markets. Capacity under this
system was limited (seen as the “capacity constraint” in the figure) and fares were regulated. If we assume
that the terms reached under the bilateral agreement between A and B regarding fares allowed for at least
cost recovery by the partners? airlines, this implies a fare level up to F
1
.
10
The removal of both this capacity
constraint and of negotiated pricing, as happens under a typical Open Skies arrangement, results in
competition for air services, and a move toward cost-recovery pricing strategies by the carriers. This would
reduce fares to F*
1
.
Figure 3. The simple economics of Open Skies policies
18. Open Skies policies, coupled with the permitting of strategic alliances, not only remove the
capacity constraint but also affects both the demand and supply curves for international air travel between
9 This particular approach to examining the implications of international deregulation of air transport
markets was developed in the specific context of transatlantic routes, but the arguments are general
(Button, 2009a). That paper also assesses the quantitative analysis that has been done on the implications
of a US-EU Open Skies agreement.
10 In practice, fares tended to reflect the bargaining power of the parties and the objectives of the countries?
overall approaches to the airlines market. Continental European countries have had a long tradition of
supporting their flag-carriers for a variety of reasons that are linked to their perceptions of their national
interest. In some cases, the fares may have been below the level required for cost recovery, whilst in others
it may have been higher if, for example, one partner sought to cross-subsidize domestic services.
13
A and B. The ability of airlines to more effectively feed their transatlantic routes and coordinate their
activities, through the restructuring of their business and networks, will reduce the average cost of carriage
to C
2
in the figure. The effect is often reinforced due to downward pressures on costs because, although not
strictly part of the Open Skies framework, the wider competitive environment within Europe, and the
privatization of many carriers, by heightening commercial pressures, reduces the amount of static and
dynamic X-inefficiency in the airline industry. In other words, there is the combined pressure of both free
airline markets across the Atlantic and within the two feeder markets at either end.
19. The Open Skies policy also has stimulation effects on the demand side. By allowing more
effective feed to the long-haul stage of transatlantic services through the concentration of traffic at
international hub airports, it increases the geographical market being serviced and also generates
economies of scope and scale. The larger physical market demand, combined usually with the improved
quality of the “product” that accompanies more integrated services, such as code sharing, interchangeable
frequent flier programs, common lounges, and through baggage checking, pushes out the demand for
international air services to D
2
in Figure 3.
20. The outcome of the lowering of costs and the outward shift in demand is that the number of
passengers traveling increases to Q
2
and, because Open Skies allow price flexibility, the fare falls to F
2
in
the way our example is drawn. It should be noted that fares might not actually fall; indeed, they may rise as
the result of the freer market conditions. The reason for this is that the outward shift in demand reflects a
better “quality” of service – e.g., more convenient flights, transferability of frequent flier miles, and
seamless ticketing – and that, on average, potential travelers are willing to pay more for this than the
generic portfolio of features that were found under the old bilateral ASA structure. (In Figure 3, the shift
out in demand may counteract the fall in costs resulting in F*
1
Air transportation is a major industry in its own right and it also provides important inputs into
wider economic, political, and social processes. The demand for its services, as with most transport, is a
derived one that is driven by the needs and desires to attain some other, final objective. Air transport can
facilitate, for example, in the economic development of a region or of a particular industry such as tourism,
but there has to be a latent demand for the goods and services offered by a region or by an industry. Lack
of air transport, as with any other input into the economic system, can stymie efficient growth, but equally
inappropriateness or excesses in supply are wasteful.
Global Forum on Transport and Environment in a Globalising World
10-12 November 2008, Guadalajara, Mexico
The Impacts of Globalisation
on International Air Transport
Activity
Past trends and future perspectives
Ken Button, School of George Mason University, USA
2
NOTE FROM THE SECRETARIAT
This paper was prepared by Prof. Ken Button of School of George Mason University, USA, as a
contribution to the OECD/ITF Global Forum on Transport and Environment in a Globalising World that
will be held 10-12 November 2008 in Guadalajara, Mexico. The paper discusses the impacts of increased
globalisation on international air traffic activity – past trends and future perspectives.
3
TABLE OF CONTENTS
NOTE FROM THE SECRETARIAT ............................................................................................................. 2
THE IMPACT OF GLOBALIZATION ON INTERNATIONAL AIR TRANSPORT ACTIVITY - PAST
TRENDS AND FUTURE PERSPECTIVE .................................................................................................... 5
1. Introduction .......................................................................................................................................... 5
2. Globalization and internationalization .................................................................................................. 5
3. The Basic Features of International Air Transportation ....................................................................... 6
3.1 Historical perspective .................................................................................................................. 6
3.2 The modern industry .................................................................................................................... 8
4. The effect of globalization on airline markets ...................................................................................... 9
5. Implications of global air transport institutional changes in airline regulation .................................. 11
5.1 Fares .......................................................................................................................................... 11
5.2 Linkages between domestic and international air services ........................................................ 14
5.3 Airline profits ............................................................................................................................ 16
6. The Shifting Situation ......................................................................................................................... 24
6.1 The traffic forecasts that we have .............................................................................................. 24
6.2 Globalized labor markets, migration and international air transport ......................................... 25
6.3 The business models of airlines ................................................................................................. 31
6.4 Changing industrial needs ......................................................................................................... 33
6.5 Developments in emerging markets .......................................................................................... 34
7. Conclusions ........................................................................................................................................ 37
REFERENCES .............................................................................................................................................. 38
Tables
Table 1. The ten largest international airlines by scheduled passenger-kilometres ............................... 9
Table 2. The 20 largest international airports by passengers ................................................................. 9
Table 3. European low cost carriers that ceased to exist (2003 to 2005)............................................. 21
Table 4. Strategic Airline Alliances..................................................................................................... 22
Table 5. Scheduled freight tonne-kilometres flown............................................................................. 34
Table 6. Selected indices of China's Civil Air Transport System ........................................................ 35
Figures
Figure 1. Trends in World international trade, and airlines? revenue passenger kilometres ................. 10
Figure 2. Short-term links between World-trade in manufactures and air freight volumes .................. 11
Figure 3. The simple economics of Open Skies policies ...................................................................... 12
Figure 4. The implications of globalization on the various air transport markets ................................ 14
4
Figure 5. A „dog-bone? or „dumb-bell? international air transport network .......................................... 15
Figure 6. Operating margins of airlines ................................................................................................ 17
Figure 7. Airline profitability by global region ..................................................................................... 18
Figure 8. The alternative views of the implications of migration ......................................................... 27
Figure 9. The notion of gateways.......................................................................................................... 28
Figure 10. Impacts of opening more gateways on air transport networks and flows .......................... 29
Figure 11. Air travel between the UK and selected transition economies .......................................... 31
Figure 12. Throughput of freight at major Chinese cargo hub airports .............................................. 36
5
THE IMPACT OF GLOBALIZATION ON INTERNATIONAL AIR TRANSPORT ACTIVITY -
PAST TRENDS AND FUTURE PERSPECTIVE
1. Introduction
1. Air transportation is a major industry in its own right and it also provides important inputs into
wider economic, political, and social processes. The demand for its services, as with most transport, is a
derived one that is driven by the needs and desires to attain some other, final objective. Air transport can
facilitate, for example, in the economic development of a region or of a particular industry such as tourism,
but there has to be a latent demand for the goods and services offered by a region or by an industry. Lack
of air transport, as with any other input into the economic system, can stymie efficient growth, but equally
inappropriateness or excesses in supply are wasteful.
2. Economies, and the interactions between them, are in a continual state of flux, and although
economists? notions of equilibrium have some very useful intellectual content, and also validity in the very
short-run, in reality the world is dynamic. This dynamism, of which the particular thrust of globalization is
the concern here, has implications for industries such as air transport that service it. But there are also
feedback loops, because, developments in air transport can shape the form and the speed at which
globalization and related processes take place. In effect, while the demand for air transport is a derived, the
institutional context in which air transport services are delivered have knock-on effects on the economic
system. These feedback loops may entail direct economic, political, and social effects that, for example,
accompany enhanced trade and personal mobility, but they may also be indirect, as for example through
the impacts of air transport on the environment.
3. The analysis here is, by necessity, excessively simplistic given the multi-dimensional and
dynamic nature of globalization, and focuses on one small sector, international commercial aviation, and
on only one direction of causality, the implications of globalization for this sector. Some related
considerations are embraced where particularly important. For example, there is an increasing blurring of
international and domestic air transport as airlines form alliances and invest in each other to form global
networks; indeed, the domestic and international air transport market within the European Union (EU) is
de facto one market. Also, not all feedback loops are ignored, particularly when changes in air transport
facilitate global trends that then, in turn, feed back on the air transport industries; migration of labor is one
example of this.
2. Globalization and internationalization
4. Globalization, in its most literal sense, is the process of making, transformation of things or
phenomena into global ones. It can be described abstractly as a process by which the people of the world
are unified into a single society and function together. This process is a combination of economic,
technological, socio-cultural, and political forces. The idea of globalization is, however, also often used to
refer in the narrower sense of economic globalization involving integration of national economies into the
6
international economy through trade, foreign direct investment, capital flows, migration, and the spread of
technology.
1
Here much, but not all, of the focus is on the narrower perspective, although clearly the
increase in mobility and personal interchanges that air transport facilitates has broader socio-cultural and
political implications.
5. The reasons for the contemporary globalization processes from the latter part of the 20
th
century,
and their larger implications, are much debated. Thomas Friedman (2005) for example, suggests the world
is "flat" in the sense that globalization has leveled the competitive playing fields between industrial and
emerging market countries. The globalization of trade, outsourcing, supply-chaining, and political forces
have changed the world permanently, for both better and worse. He also argues that the pace of
globalization is quickening and will continue to have a growing impact on business organization and
practice.
This flattening is seen as a product of a convergence of the emergence of the personal computer
and the fiber-optic micro cable, combined with the rise of work-flow software. He calls this Globalization
3.0, which is different to Globalization 1.0 (when countries and governments were the main protagonists in
globalization) and the Globalization 2.0 (in which multinational companies led the way in driving global
integration). Cairncross (1997) looks at it from only a slightly different perspective. The growing ease and
speed of communication is seen as creating a world where miles have little to do with abilities to work or
interact together. Much work that can be done on a computer may be done from anywhere; workers can
code software in one part of the world and pass it to a company thousands of miles away that will assemble
the code for marketing. With workers able to earn a living anywhere, countries will find themselves
competing for citizens as individuals relocate for reasons ranging from lower taxes to nicer weather.
6. Much of these processes have been technology-driven, although facilitated by broad political
shifts, such as the demise of the Soviet system, the gradual emergence of international free trade bodies,
such as the EU and World Trade Organization, and reductions in global political tensions. Many of these
technical changes have been in transport. In particular, there have been massive developments in the
technologies that we use to transport information. While traditional transport analysts often see the
“telecommunications revolution” as somehow different and outside their field of study, it is, in fact, the
first major transport-change since the widespread adoption of mechanized transport in mid-19
th
century.
Air transport, although still a child of the mechanized age, has been closely linked with globalization and
the telecommunications revolution. It has been important in the opening up of labor markets, along the
lines indicated by Frances Cairncross, and in its role of role as a facilitator for the development of industry
allowing the production and maintenance of cheap telecommunications hardware. It has also, in turn,
benefited from the communications revolution in terms of air traffic control, navigation, and safety
enhancement, but also in making possible the airline logistics of bringing the elements required in moving
millions of people and tons of cargo across complex networks practical.
3. The Basic Features of International Air Transportation
3.1 Historical perspective
7. Air transport has always been seen to have an inherently strategic role. It has obvious direct
military applications, but it is also highly visible and, for a period, and in some countries still, was seen as
1 Strictly, there are differences between globalization and internationalization. Internationalization refers to
the importance of international trade, relations, treaties etc.; it refers to actions between or among nations.
Globalization means erasure of national boundaries for economic purposes; international trade (governed
by comparative advantage) becomes inter-regional trade (governed by absolute advantage). In practical
terms, internalization is technically what has largely been occurring in the World with the development of
agencies such as the World Trade Organization. Perversely, globalization has been more narrowly
geographically concentrated, for example within the EU area. We use the term „globalization? here in is
broader sense.
7
a “flag carrier”, a symbol of international commercial presence. From its earliest days, airlines were seen
as having potential for providing high-speed mail services, and subsequently medium and long-term
passenger transport. Technology now allows the carriage of much larger cargo pay-loads in a more reliable
way. These strategic functions were used to pursue internal national policies of social, political, and
economic integration within large countries such as Canada, the US, and Australia, but also took on
international significance from the 1930s within the Imperial geopolitical systems centered mainly on the
UK, France, Germany, and other European countries when technology allowed for intercontinental
services to be developed.
8. Air transport was highly regulated and protected in this environment with the intention of it being
used as a lever for larger political and economic objectives. But even in these roles, its importance, largely
because of the technology until after World War II, was small. British Imperial Airways, for example, only
carried about 50,000 passengers to the colonies in the 1930s; a figure hidden in the public media coverage
given to the importance of colonial air networks. Technology shifts as an offshoot of military
developments in World War II changed this with the introduction of planes with far longer ranges, faster
speeds, enhanced lift, and the increasingly ability to cope with adverse weather conditions. Air traffic
control, navigation, communications, and airport facilities have also improved considerably, and more
recently the underlying management structure of the supplying industries has enhanced efficiency.
9. The Chicago Convention of 1944 confronted the new international potentials of civil aviation and
initiated an institutional structure that laid common ground rules for bilateral air service agreements
(ASAs) between nationals. The result, however, while providing a formal basis for negotiation, was
essentially one of protectionism with pairs of countries agreeing on which airlines could offer services
between them, the fares to be changed and, often, how the revenues could be shared. Added to this, with
the major exception of the US, most international airlines were state owned flag-carriers that operated to
fulfill, often vague, national objectives of prestige, as well as linking colonies. Internal markets within
countries were regulated in similar fashions, and it was not uncommon for wealthier countries to have an
airline to provide primarily domestic and short haul services, and one for long-haul, international markets.
10. The breakdown of the domestic regulatory structure within the US from the late 1970s (Morrison,
and Winston, 1995) provided both a demonstration for other countries to follow in deregulating their own
domestic regimes, but also the US?s, initially unsuccessful, initiatives from 1979 to liberalize international
services on a bilateral basis based on a common “Open Skies” recipe began to bring about pressures to
wider reforms. This was coupled with more generic moves towards a withdrawal of government in market-
oriented countries such as New Zealand and the UK that saw airports and air traffic control being
privatized, or at least operated on a more commercial footing. The move to a Single European Market
within the EU from 1992 represented a broader trend, both in terms of the sectors and the geography
involved, towards market liberalization of air transport infrastructure, as did the collapse of the Soviet
economic system. Not all countries moved completely in this direction, the US for example, rather
perversely, continued with its traditional, strongly socialist policy of air traffic control being a state owned,
tax financed monopoly and airports, with few exceptions, being owned by local governments (Button and
McDougall, 2006).
11. Where there have been almost universal tightening of regulations that run counter to the market
liberalizations, have been in what the US calls „social regulation” and Europe calls, “quality regulation”.
This concerns such matters as the environment, safety, security, and consumer and labor protection. These
are areas that have been traditionally dealt with at the international level by the International Civil Aviation
Organisation (ICAO) set up under the Chicago Convention, and in accord with some peculiar international
accords such as the Warsaw Convention that dates back to 1929 and deals with liabilities in the case of
8
accidents
2
. More recently, regional or national actions have also taken international significance; e.g. the
extension of carbon trading within the EU to embrace all air transport, and the US?s introduction of stricter
security measures, such as the provision on passenger information, for all flights into the country.
3.2 The modern industry
12. The modern air transport industry is thus one that increasingly operates within a liberal market
context. While government controls over fares, market entry, and capacity continue in many smaller
countries, they are gradually and almost universally being removed or relaxed. International controls under
the bilateral ASA structure are increasingly moving towards broad Open Skies formulations, allowing free
provision of services between the countries involved, although progress on open market, whereby
nationality of ownership of airlines is unrestricted, is coming more slowly. The EU area
3
has effectively
been the largest international free market in air transport services in the world since 1997, and this has
grown as the Union has expanded geographically. The supply and operation of air transport infrastructure
is also becoming more market driven with on-going privatizations of airports and air traffic control
systems, or the use of franchising mechanisms to involve private capital and expertise (Button, 2008). It is
also becoming more coordinated.
4
13. The air transport industry is now large – it accounts for about 1% of the GDP of both the EU and
the US – and is vital in many industries such as tourism, exotics, and hi-technology
5
. It is an important
transporter of high-value, low-bulk cargoes. International aviation moves about 40% of world trade by
value, although far less in physical terms. The market is served by a diversity of carriers, some specializing
in long-haul international routes and others in short-haul markets
6
. Table 1 offers some indication of the
scale of larger airlines involved. To handle the interface between land and air transport the world?s major
airports have grown to handle millions of international passengers (Table 2) and tonnes of cargo
7
each
year, and many have been significant catalyst facilitating, in particular, the growth of modern hi-
technology industries and tourism about them. In 2008, passenger air services globally link around 15,500
airports; with the fastest growth in air services over the past two decades being in the Europe-Asian Pacific
markets.
2 The air transport industry itself has established international bodies to both interact with national
governments and institutions such as the ICAO; e.g. the International Air Transport Association (IATA)
was established to assist airline companies to achieve lawful competition and uniformity in prices
3 Norway and Switzerland are also included in most of these agreements.
4 E.g. in October 2001, the European Commission also adopted proposals for a Single European Sky, to
create a Community regulator for air traffic management within the EU, Norway and Switzerland
5 One US survey has shown that hi-technology personnel fly about 60% more than their counterparts in
traditional industries. A broader econometric analysis indicates that the location of a city with a hub airport
in the US in the 1990s enjoyed some 12000 more high technology jobs than a comparable city without a
hub (Button et al., 1999Source). Analysis of transatlantic routes shows that enhanced numbers of links and
service frequencies lead, albeit at a declining rate, to more hi-technology employment (Button and Taylor,
2002).
6 In terms of total passengers, because length of trips not included the ranking of airlines is somewhat
different; e.g. according to IATA, Ryanair carried 40,532 thousand passengers in 2006; Lufthansa, 38,236;
Air France, 30,417; British Airways, 29,498; and KLM, 22,322
7 For example, Airports Council International data shows Memphis International Airport handled 3,840,491
metric tonnes of cargo in 2007; Hong Kong International Airport New Territories, 3,773,964 tonnes; Ted
Stevens Anchorage International Airport, Shanghai Pudong International Airport, 2,559,310 tonnes;
Incheon International Airport, 2,555,580 tonnes.
9
Table 1. The ten largest international airlines by scheduled passenger-kilometres
Airline
Scheduled passenger-kilometres (million)
Air France 112,689
British Airways 111,336
Lufthansa 109,384
Singapore Airlines 87,646
American Airlines 81,129
United Airlines 74,578
Emirates Airline 74,578
KLM 71,761
Cathay Pacific 71,124
Japan Airlines 59,913
Source: International Air Transport Association
Table 2. The 20 largest international airports by passengers
Airport International passengers
London Heathrow Airport 62,099,530
Charles de Gaulle International Airport 54,901,564
Amsterdam Airport Schiphol 47,677,570
Frankfurt Airport 47,087,699
Hong Kong International Airport 46,281,000
Singapore Changi Airport 35,221,203
Narita International Airport 34,289,064
Dubai International Airport 33,481,257
Suvarnabhumi Airport 31,632,716
London Gatwick Airport 31,139,116
Incheon International Airport 30,753,225
Madrid Barajas International Airport 29,339,784
Kuala Lumpur International Airport 26,938,970
Chatrapati Shivaji International Airport 25,360,860
Munich Airport 23,988,612
Dublin Airport 22,339,673
John F. Kennedy International Airport 21,521,711
London Stansted Airport 21,201,543
Taiwan Taoyuan International Airport 20,855,186
Malpensa International Airport 20,627,846
Source: Airports Council International
14. If one looks at the basic aggregate data there is clear general link, although causality is another
matter, between the growth in global GDP and international trade and air transport. Figure 1 provides
aggregate information on the trends in world trade, and international air transport from the mid-1990s. A
similar picture emerges if one plots world GDP against air traffic. In each cases air volumes have risen
albeit it slightly less rapidly than GDP. Figure 2 gives detail of the shorter-run tends in growth in world
trade and air freight traffic volumes, and shows the common cyclical effects. While the ups and downs
broadly coincide, little by way of a consistent lag structure emerges.
4. The effect of globalization on airline markets
15. The implications of globalization in its many manifestations have been profound for the
international air transport industry, not just on the demand side, where the scale, nature, and geography of
demand in global markets has led to significant shifts, but also on the supply side, where implicit and
explicit international coordination of policies by governments (e.g. regarding safety, security, and the
environment) and the private sector (e.g. the internationalization of airframe and aero-engine production)
have affected the institutional and technological environment in which air transport services are delivered.
We address some of most important of these interactions.
10
Figure 1. Trends in World international trade, and airlines’ revenue passenger kilometres
Note: RPK are revenue passenger kilometres
11
Figure 2. Short-term links between World-trade in manufactures and air freight volumes
Source: Boeing Commercial Airplane
5. Implications of global air transport institutional changes in airline regulation
5.1 Fares
16. The restrictive bilateral ASAs that typified the institutional structure of international airline
markets before the advent of Open Skies manifestly had a number of adverse effects on the efficiency of
supply and, specifically, on the levels of benefits society could reap from air travel. These effects are not
easy to isolate and to completely quantify in a simple way, but Figure 3 offers a general representation of
the issues that are involved. In particular, it highlights the potential fare- and output-implications of the
various types of regulatory regimes that have been common in the past and are gradually emerging as
globalization is taking place
8
.
17. The initial position of the demand curve for international services between two countries, A and
B, under the pre-1980s regulatory regimes that typified international trade in air services is assumed linear
and shown as D
1
in the figure, and the average cost curve per passenger, which for simplicity is assumed to
8 The treatments of elements in the figure are static in the sense that technology is held constant. Modern
economic theory holds that at least part of technical change is endogenous and thus a function of market
and institutional structures.
12
rise more than linearly with quantity, as C
1
.
9
Market forces, however, because of the institutional
interventions in place, did not determine fares and capacity in these regulated markets. Capacity under this
system was limited (seen as the “capacity constraint” in the figure) and fares were regulated. If we assume
that the terms reached under the bilateral agreement between A and B regarding fares allowed for at least
cost recovery by the partners? airlines, this implies a fare level up to F
1
.
10
The removal of both this capacity
constraint and of negotiated pricing, as happens under a typical Open Skies arrangement, results in
competition for air services, and a move toward cost-recovery pricing strategies by the carriers. This would
reduce fares to F*
1
.
Figure 3. The simple economics of Open Skies policies
18. Open Skies policies, coupled with the permitting of strategic alliances, not only remove the
capacity constraint but also affects both the demand and supply curves for international air travel between
9 This particular approach to examining the implications of international deregulation of air transport
markets was developed in the specific context of transatlantic routes, but the arguments are general
(Button, 2009a). That paper also assesses the quantitative analysis that has been done on the implications
of a US-EU Open Skies agreement.
10 In practice, fares tended to reflect the bargaining power of the parties and the objectives of the countries?
overall approaches to the airlines market. Continental European countries have had a long tradition of
supporting their flag-carriers for a variety of reasons that are linked to their perceptions of their national
interest. In some cases, the fares may have been below the level required for cost recovery, whilst in others
it may have been higher if, for example, one partner sought to cross-subsidize domestic services.
13
A and B. The ability of airlines to more effectively feed their transatlantic routes and coordinate their
activities, through the restructuring of their business and networks, will reduce the average cost of carriage
to C
2
in the figure. The effect is often reinforced due to downward pressures on costs because, although not
strictly part of the Open Skies framework, the wider competitive environment within Europe, and the
privatization of many carriers, by heightening commercial pressures, reduces the amount of static and
dynamic X-inefficiency in the airline industry. In other words, there is the combined pressure of both free
airline markets across the Atlantic and within the two feeder markets at either end.
19. The Open Skies policy also has stimulation effects on the demand side. By allowing more
effective feed to the long-haul stage of transatlantic services through the concentration of traffic at
international hub airports, it increases the geographical market being serviced and also generates
economies of scope and scale. The larger physical market demand, combined usually with the improved
quality of the “product” that accompanies more integrated services, such as code sharing, interchangeable
frequent flier programs, common lounges, and through baggage checking, pushes out the demand for
international air services to D
2
in Figure 3.
20. The outcome of the lowering of costs and the outward shift in demand is that the number of
passengers traveling increases to Q
2
and, because Open Skies allow price flexibility, the fare falls to F
2
in
the way our example is drawn. It should be noted that fares might not actually fall; indeed, they may rise as
the result of the freer market conditions. The reason for this is that the outward shift in demand reflects a
better “quality” of service – e.g., more convenient flights, transferability of frequent flier miles, and
seamless ticketing – and that, on average, potential travelers are willing to pay more for this than the
generic portfolio of features that were found under the old bilateral ASA structure. (In Figure 3, the shift
out in demand may counteract the fall in costs resulting in F*
1