This paper describes the main changes affecting the structure of the Spanish scheduled flights market and the companies competing within it, during the period 1993–1997. This is a time span that allows us to register the first effects of deregulation. The results reveal that when new private companies from the charter sector came into the open market, pursuing an initial strategy of price reductions, overall competition increased in the Spanish market, and particularly, in the domestic sphere. Secondly, they show that the reaction of the national company, Iberia, to the appearance of new competitors was slow to begin with, although it eventually reacted by lowering fares until on a par with those offered by competing companies. Finally, it is seen that deregulation has led to the consolidation of a competitive environment in the domestic Spanish market, with Iberia currently having less than a 50% market share.
Air transport deregulation in Europe was introduced relatively recently, taking its first timid steps on December 31, 1987 with the publication of four Council provisions in the Official Journal of the European Communities, comprising two Regulations concerning the defense of competition, a Directive on fares and a Decision on bilateral air transport agreements. This constituted the First Package of measures in what was known as ‘EEC air transport deregulation’. These provisions were later brought to completion with Commission Regulations governing the defense of competition in the field of air transport.
Two more sets of deregulation measures came into force between 1993 and 1997, after which any company from any Community country could apply for authorization to provide passenger transport services between any two destinations in the Community, with absolute freedom to determine their air fares. In general, these steps have brought about a substantial change in the way in which air companies operate. The former Spanish national company Iberia is no exception and deregulation had an effect on its prices and on the structure of the Spanish domestic market, as well as producing a real increase in internal competition.
Analysis of these changes is based on information supplied by the State Office for Civil Aviation (Ministry of Public Works and Buildings) covering twelve domestic market routes2 and relates to the number of seats offered by airlines. The information relating to fares was obtained from various sources. Some of it was taken from the publication ABC World Airways Wide, that has not supplied any information concerning the Spanish domestic market since 1994, while the statistics for Iberia's air fares are those published by the company for 1991 and 1992. Companies’ quarterly fare changes come form the computer reservation systems used by travel agencies.
Despite its limitation, air transport deregulation has
had clearly identifiable and positive effects on the
Spanish domestic market. New companies have secured
a share in the market, and, in spite of the fall
experienced in Iberia’s market share, its volume of
traffic continued to increase until 2001. Demand,
however, has experienced greater fluctuations that have
been reflected in volatile load factors. Second, Iberia’s
promotional fares, measured in real terms, have shown
an average downward trend on almost all routes.
Furthermore, the private companies established their
fares at around 90% of those of Iberia, to the
consequent benefit of consumers, although that relation-
ship has recently risen to 97%. The conclusion is that
there have been price reductions on nearly all the routes.
The most significant exceptions are those that have not
seen new competitors due to low traffic density and
where Iberia has maintained its monopoly—e.g., the
routes linking Madrid with Seville and Alicante. Both
cities are subject to fierce competition from alternative
means of transport by train and by road. The fall in
fares which has tended to become more pronounced the
longer deregulation has been in force, has exceeded the
most optimistic forecasts such as those of the Organiza-
tion for Economic Co-operation and Development in
1997 concerning the potential effects of deregulation inFrance and Germany, in where fare reductions of 6%
were predicted.
Last, the macroeconomic effects of deregulation have
been weaker than might have been expected and have
not yet been sufficiently quantified. A fall in air fares,
particularly for tourist destinations, such as the Canary
or Balearic Islands, opens the way for an increase in the
number of tourists with ensuing repercussions for the
economy as a whole.
Nevertheless, Iberia has been applying a complicated
Restructuring Plan for some years, leading to its recent
privatization. Until a short while ago, the company’s
strategy consisted in adapting its fares to those of its
competitors, although they were always kept higher. It
has also opted to prioritize quality, offering greater
flight frequency and punctuality. Lastly, Iberia has
chosen to increase in size as is evidenced by its recent
alliances with American Airlines and British Airways,
and by its integration within the Oneworld alliance, one
of the largest global airline grouping.
