BOLETIN LATINOAMERICANO DE MEXICO BOLETIM LATINOAMERICANO DE COMPETENCIA CONCORRÊNCIA PRIVATIZATION, DEREGULATION AND COMPETITION: EVIDENCE FROM THE MEXICAN AIRLINES INDUSTRY
by Fabian Sánchez and Alejandro Somuano
[1]
e-mail: somuano@eco.utexas.edu
I. Introduction
Privatization has transformed the economies of Latin America. Governments throughout the region have dramatically reduced state ownership and control of industry, putting an end to four decades of state-led development. Along with privatization, governments have deregulated markets by eliminating entry barriers and removing price controls. It is generally believed that the restoration of economic decisions to private agents will enhance the efficiency of resource allocation, and ultimately, will lead to development and economic growth.
One consequence of privatization is that it has turned over to private hands industries that are highly concentrated .telecommunications, airlines, and banking, among others.. The existence of dominant firms would be less troubling if recent efforts to liberalize trade would have been extended to privatized industries.
This policy reflects concern about exposing newly privatized firms to foreign competition before they have had the opportunity to restructure their operations.
The present danger in the post-privatization environment is the formation of imperfectly competitive industries. Deregulation by reducing entry costs, ensures privatized firms face some competition, but this alone may be insufficient to prevent incumbent firms from exercising monopoly power. Dominant firms can use a variety of tactics to create artificial entry barriers and deter potential entrants from entering their industries.
Anticompetitive behavior could abrogate some or all of the benefits of privatization. In the event that private monopolies replace state monopolies, governments would only have traded the inefficiencies of state control for the inefficiencies of imperfect competition.
In this study, we discuss the recent experience of the Mexican airlines industry. The point we emphasize is that antitrust policies are an essential counterpart to privatization and deregulation.
In the last decade, the airlines industry in Mexico has undergone considerable changes: in the late
1980's, the government first privatized the two existing major airlines (Mexicana and Aeromexico), and then deregulated the entire sector.
In principle, the privatization was beneficial for two reasons: on the one hand, it allowed firms to internalize strategic decisions (like routes served, number of personnel, fares). On the other hand, through the sale of airlines the government was able to raise funds in order to cover other important social needs. The deregulation, meanwhile, reduced substantially the barriers to entry, allowing other firms to enter the market.
It turned out, however, that neither privatization nor deregulation themselves could ensure that private airlines would behave competitively. Once privatized, Mexicana and Aeromexico merged, and all the desired benefits of competition expected from "the market" vanished like smoke. We argue that due to the lack of a proper antitrust legislation, the monopoly power gained and exercised by the merged firms more than offset the benefits of the reforms, creating an even higher barrier to entry, with its natural impact on fares and output.
[2]
The aim of this paper is to show that in the absence of an effective antitrust law, privatization and deregulation may result in a greater social cost rather than in welfare improvement, at least in the short-run. We estimate a simple empirical model that shows that on routes where the unified firm was able to exercise its monopoly power, it did so. The rest of the paper proceeds as follows. Section II describes the events leading up to privatization. The processes and results of privatization and deregulation are discussed in
Section III; efficiency gains and social welfare are analyzed in Section IV. Finally, Section V offers some concluding remarks.
II. Background
In 1983, the Mexican government began to sell and to restructure public entities and parastatal firms.
Privatization was one of the main policies used to increase firms' productivity and to reduce the public deficit. It was argued that the State should be focused on social priorities, not on subsidizing inefficient and unprofitable enterprises. In (former Treasury Minister) Pedro Aspe's words:
"If the commitment of a country is to its people, why should the government maintain ownership of an airline and spend millions of pesos on it, if only 2% of the population has ever flown, and at the same time it is necessary to improve the quality of the transportation services?" [3]
It is important to recognize that the financial status of both airlines was not favorable at all. As of 1988, Mexicana had an accumulated debt of over 565 billion pesos, while Aeromexico was in such a critical situation that it declared bankruptcy in April of the same year.
One month later, the government published its intentions with respect to the airline industry in the Esquema Rector del Sistema Nacional de Transporte Aéreo, which addressed, primarily, the following three issues: 1) the increasing international trend was in favor of less State intervention in the airline sector; 2) the incumbent airlines had impeded the access of other participants to the market, especially at regional and local levels; and 3) the quality of the service of the incumbent firms was extremely low due to poor financial conditions and organizational conflicts (unions).
[4]
Under these circumstances, the government decided to restructure the whole industry, first privatizing Aeromexico and Mexicana, and then deregulating the market.
III. Privatization and deregulation in the airline industry
A. Privatization of Aeromexico
The first step towards the modernization of the airline industry was to privatize Aeromexico. Thanks to the bankruptcy, the new owners were able to weaken the unions, establishing new labor conditions. Aeromexico fired 9,000 of the 12,000 existing workers, and hired 3,000 new workers
[5]. This major reduction was immediately translated into higher productivity, as can be observed in Table 1.
Table 1. Indicators of productivity for Aeromexico (1987-89)
|
CONCEPT
|
1987
|
1989
|
Change
|
| Passengers per employee |
39.3
|
88.6
|
125.4%
|
| Passengers-kilometers peremployee (thousands) |
52.6
|
111.9
|
122.7%
|
| Seats-kilometers peremployee (thousands) |
87.1
|
159.0
|
82.5%
|
| Employees per plane |
282.2
|
127.8
|
-54.7%
|
Source: "El caso de Aeroméxico analizado por la Fundación Mexicana para la Calidad Total," Ing. Teodoro González, México, D.F., pp. 180.
B. Privatization of Mexicana
Until 1982 Mexicana was a private firm. However, due to the 1982 crisis, the firm faced a sharp contraction in demand and its financial position deteriorated dramatically. In order to prevent a collapse in the transportation system, the government took over the airline. In 1989, Mexicana was privatized. Here, unlike in Aeromexico, the new owners were able to reduce the number of employees by only 3,000 .from 14,000 to 11,000. mainly because of the clout of the unions. As a result, the productivity of Mexicana did not rise as
much as did Aeromexico's.
[1] Sánchez : Instituto Tecnológico Autónomo de México, sanchez@allesgroup.com.mx; Somuano: University of Texas at Austin, somuano@eco.utexas.edu. We thank Gordon Hanson, William Glade and Carlos Jaime for helpful comments.
[2] This problem was not exclusive to the airline industry; other highly concentrated industries in Mexico —such as telecommunications, banks, and ports— evolved in a similar way.
[3] Pedro Aspe, El camino mexicano de la transformación económica, Fondo de Cultura Económica, México, D.F., 1993, pp. 175.
[4] Esquema Rector del Sistema Nacional de Transporte Aéreo, Secretaría de Comunicaciones y Transportes, May 30, 1988.
[5] Gordon Hanson, "Antitrust in Post-Privatization Latin America: An Analysis of The Mexican Airline Industry", Quarterly Review of Economics and Finance, Vol. 34 (Summer 1994): 200.
Pdf completo:
boletin_9_3_es
