Does privatisation cut costs for Europe's national airlines? Is it greater competition that does the
trick? Or are Europe's flag carriers beyond the reach of either so that only lean and hungry new
entrants can bring real gains to Europe's airline passengers?
In the latest issue of the Economic Journal, Paul Seabright and Charles Ng report the results of
their study of Europe's flag carriers, which shows how changing conditions are gradually cutting
the fat accumulated over years of state ownership and sleepy monopoly power. They find that:
l For years, Europe's airlines have operated at costs far higher than comparable airlines in the
United States, even allowing for the very different conditions of operating on the two
continents. Airline staff did well out of it: in the mid-1990s, European pilots were paid
37% more than their counterparts in the United States, and cabin staff 58% more, even
though American labour productivity was 45% higher. Seabright and Ng estimate that each
1% increase in airline profits led to a more than 3% rise in wages and salaries (adjusted for
productivity). But the passengers suffered - from higher fares and more restrictions on
travel.
l Now the good news is that costs are coming down in response to privatisation and greater
competition. These researchers find that a reduction of 10 percentage points in the share of
public ownership has been associated with a 6.5% reduction in airline costs. When airlines
face competition from new entrants, their costs decline - although simply losing market
share to existing competitors makes their costs rise.
l But the bad news is how long it has been taking. Simply liberalising the markets has had no
effect on costs in itself: it has taken privatisation - and actual market entry - to bring costs
down. Seabright and Ng estimate that European Union carriers' costs in the 1990s were on
average 26% above what they could have been if the carriers had been privately owned and
they had faced as much competition as there is in the United States. The discrepancy has
been falling, but there are likely to be significant gains still to come from the process of
European liberalisation.
Notes for Editors: 'Competition, Privatisation and Productive Efficiency: Evidence from the
Airline Industry' by Paul Seabright and Charles Ng is published in the July 2001 issue of the
Economic Journal. Seabright is at the University of Toulouse; Ng at the Civil Aviation Authority.
Their research has been financially supported by the Economic and Social Research Council and
the Leverhulme Trust.
For Further Information: contact Paul Seabright on 00-335-61128617 (email: seabrigh@cict.fr);
RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com); or RES Media Assistant Niall Flynn on 020-7878-2919 (email:
nflynn@cepr.org).