Should Foreign Carriers Be Allowed to Access US Market - Case Study Example

First Name Surname Instructor Course Date Foreign Carriers should be allowed to Access US Market Introduction Transportation sector in the United State comprises of air, maritime, and land transport services. In 1978, Americans passed Airline Deregulation Act that led to significant lower fares and multiple choices in transportation services. Even though the deregulation has shown valuable success as regard to domestic liberation in the United States and many other places, there is still strong regulation on the international air travel. Besides, the US domestic air travel market is still restricted to the foreign firms (“US International Trade,”13). The current regulation requires non-U.S. to control not more than 25 percent of the domestic carrier’s voting stock in the country while foreign-based carriers are restricted from carrying paying passengers between American Cities. Such regulations are not healthy to the service providers and even to the consumers and therefore there is a need for the foreign carriers to be allowed free entry into the US market. American Air Transport The current international air transport comprises of various local monopolies that are related to a section of protected international routes. Most of the markets around the world are controlled by known cartels that are mostly organized and to larger extent financed by governments. However, it is believed that the current global structure will most likely go through a dramatic change when the century ends, as the air services across the world are being provided by big multinational airlines that are currently competing at the global level. Some of these significant changes are likely to be triggered or induced by deregulation of the American domestic air services market along with the U.S. policy concerning competitive international aviation. Even though the United States has been seen to promote competitive aviation sector from the moment deregulation of its domestic airline industry was signed in 1978, the industry continues to face significant government regulation. For instance, the government is capable of disapproving prices for international air services. Some of the significant barriers to the internal air services in America can be categorized into four major groups (“US International Trade,”15). The first one is the presence of bilateral agreements that restrict entry or directly limit the competitiveness of the foreign carriers. Secondly, there are domestic regulations that help in restricting entry of foreign airlines. The third barrier is the restriction put on the ancillary domestic market that weakens the ability of foreign carriers to compete favorably in the market. Finally, there is the barrier on the subsidization along with the airlines owned by the state. There is a need for bilateral agreements for airlines so that there can be traffic from and to a nation's territory. Such arrangements on the routes are majorly carried out between the United States, the United States Department of Transportation, and finally the corresponding foreign transport ministry. The current regulatory policies in numerous countries have an exemption on foreign carriers from operating routes that commences and stops in the same state (Button 2). They, on the other hand, can restrict foreign carrier's capabilities of competing in such markets. When there are restrictions in markets that are related, competitiveness of international air services equally become impaired. For instance, sanctioned monopolies or government owned airport facilities, as well as computer reservations systems, have contributed to serious conflict between countries. Restraints in International Air services by the United States There are constraints in the international air services which have been instituted by the United States and some of which are in investment, ownership, and finally, control. For instance, the country has set a minimum ownership level and monitoring on the airlines that operate domestically and even flag carriers flying internationally (“US International Trade,”15). Air carriers that are not owned by the U.S. citizens are considered foreign air carriers. Currently, foreign air carriers do not have the right to operate within US cities unless it is on an incidental to private travel. A foreign air carrier, which is also referred to as air charter carrier will mostly operate from an internal point to the point that is served by the carrier only especially when the reciprocal right is extended to the United States carriers within respective foreign states. Fly America The government's employees in America are expected to use US flag carriers for international travel for as long as such services are available. Additionally, US flag carriers must equally be used when transporting any property of the US government. When carrying things such as surplus food, export-import bank cargoes, and military cargoes, it is required that the fifty percent of the cargo be reserved for US flag carriers. It is also needed of the Secretary of Commerce to encourage, widely, foreign tourists traveling from and to the United States to be transported by US flag carriers. Such directives and regulations ensure that foreign carriers are not capable of getting the business of transporting, government officials, food surplus, tourists, and properties of the state. Potential Effects of Removing restraints in American Air Transport Banning foreign carriers from taking part in the domestic flights majorly worked in the past generation when the industry was substantially regulated by federal government. However, in the contemporary world where there are only a few megacarriers remaining and the security issues about the Cold War being history, it is nearly impossible to justify the laws restrict foreign carriers from operating in the US domestic market. However, numerous barriers such as the opposition that comes from the unions who believes relaxing the law would easily endanger American jobs. There are the domestic airlines that also fear domestic competition and as such tries to oppose the removal of such restraints. It is, however, important to find out some of the potential impacts that can be caused by the removal of US restraints in its domestic air transport. Removal of restrictions will allow foreign carriers to achieve greater economies of scale and they will equally operate more efficiently within the market. In fact, access to local domestic traffic continues to gain popularity to support viable services with the international markets. It is significantly difficult to have a quantitative estimation of the decentralized system of bilateral agreements being witnessed in the international air services (Button 2). For instance, the current international air transport rule is not capable of fitting in the standard economic models as it happens with the tariffs and quotas. However, when free entry of foreign carriers is permitted into the American domestic air transport market, the international position will be strengthened in the long term and will result in a more competitive market, which will eventually increase the volume of traffic and lower of fares. There will be no much negative impact on the US domestic market since air transport industry in the country is already characterized by stiff competition. The industry has a colossal pool of potential domestic entrants and the attraction of more economic profits apparently, has ensured enough competition capable of reducing the excess benefit to nearly zero. Consequently, adding more foreign carriers in the industry will probably have very limited effect on the industry’s structure if they are unsubsidized by their governments. The impact is likely to be on the international flights that have U.S. as their endpoints. As such, there has been continued competition between foreign carriers and the American carriers for the same market. However, international carriers are mainly handicapped by the current bilateral agreements regime. In fact, a foreign carrier is capable of flying out or into a few gateway cities of United States based on the designation by specific bilateral agreement. Furthermore, the fact that they have no permission to fly within US cities, it has to rely on American carriers to connect flights from one gateway to far gateway cities. In as much as an entry to these connecting flights cannot be used to measure the competitiveness of carriers, the barriers on the foreign carriers have been highly binding from the 1978 deregulation. The deregulation gave permission for US carriers to fly without any restriction between US cities. The freedom saw a remarkable development in the US carriers resulting to large “hub-spoke” networks, which created an opportunity for large economies of scope through the intercity flights. Consequently, “on-line” service that requires passenger flies without necessarily switching carriers has considerably improved. In fact, the alternative practice of “interlining” has significantly gone down reducing the accessibility of connecting flights entryway to no gateway cities. The popularity of online service, with the current wave of mergers together with the relaxation of some of the restraints on some of the US carriers to domestic operations, has significantly strengthened US carriers that relate to foreign carriers (Button 14). In fact, the chances are high that the international market will, in new future, experience a heavy invasion of strong US airlines in the international market. Economic Effect Allowing Foreign Carriers into US Market The most immediate economic effect is the fact that foreign carriers will be able to attain greater economies of scale and be more efficient in the world air transport market. Accessing local domestic traffic is significant as it supports viable services in the international market. For instance, it creates more strain on the airport capacity that creates demand for expansion of the ability to accommodate the growing volume. Besides, various services that relate to the carrier activities get more demand and most of such amenities are increased, which promote other businesses within the country. Elimination of bilateral agreements regime and giving foreign carriers the same freedom based on US domestic routes like those of American carriers will significantly improve the competitive position of these foreign carriers on the international route to some extent. Besides, there will be increased competition from foreign carriers when many other factors are held constant. Consequently, downward pressure will be significantly felt on the prices of U.S (Elliott n.p.). Based international flights. When international flights in the market grow more competitive, and prices fall, quantity demanded the international flights continue, customers have a variety of choice. Most importantly, US Carriers are in a better position to compete with foreign carriers, and with such strength, the country’s balance of trade will be significantly improved. The country will earn higher revenues from the firms that operate within the state and eliminating some of the filtering resources inform of payment to other companies outside the country. When foreign carriers get access to the US market, the advantage spills over to the domestic market as most of the US firms would mostly prefer one-stop shopping and as such select their carrier in America due to the customer’s total calling needs, which results to international, global, and domestic interexchange. There will also be the increase in US bargaining leverage with other foreign countries. For instance, it will be possible for the state to bargain for the entry by its carriers to foreign markets. Consequently, US will easily have access to other companies through other services and expand its operations both in transportation and in telecommunication. The U.S. is the largest and highly lucrative market across the world and the largest economy globally (Elliott n.p.). Most of the countries across the world rely more on the international trade than the United States, which gives it more bargaining power compared to other nations. In fact, the existence of foreign impediments to the entry of foreign carriers causes the country to pay so much every year in the form of subsidies to foreign carriers along with the government. Consequently, US customers are denied the full benefits that come from competition in the international market and the limit of growth. Conclusion Numerous changes have been witnessed in air transport markets in the last 20 years, which have all been for the good of the public. The continued liberation in the United States has been at different perspective based on the location; however, air transportation has continued to have government regulations. Elimination of restriction for the foreign carriers into the US has numerous advantages to airline firms, government, and customers. For instance, removing controls on cabotage as well as foreign ownership has the potential of stimulating competition, which is crucial in enhancing innovation. It equally promotes downward pressure on fares and virtually eliminating some of the possible antitrust concerns concerning collusion and predatory pricing (Button 12). The opening of US skies will create global competition that would easily yield the greater choice of carriers and reduce fares, domestically and internationally. As such, the government needs to ensure that foreign carriers are given entry to the US market. Works Cited Button, Kenneth John. Opening US skies to Global Airline competition. Center for Trade Policy Studies, Cato Institute, 1998. Print. Elliott, Christopher. "Should Foreign Airlines Be Allowed To Fly Domestic Routes?". US Today. N.p., 2016. Web. 6 Nov. 2016. US International Trade Commission. "The Economic Effects of Significant US Import Restraints." (2011). Print. Read More