WOULD U.S. TRAVELERS BENEFIT FROM ENTRY BY FOREIGN AIRLINES?

Professor (with tenure), Washington State University.

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We explore the potential benefits to U.S. travelers from granting foreign airlines cabotage rights. We design a new approach to obtain consistent estimates of the effect of Low-Cost Carrier (LCC) entry on fares in U.S. and EU markets, which addresses the endogeneity of entry. We then simulate the effect of allowing an EU LCC to serve U.S. markets and we find that U.S. travelers’ initial welfare gains would be modest because airline competition is already intense. However, travelers’ benefits are likely to grow significantly over time as all carriers develop their networks to offer seamless domestic and international travel.