The last fifteen years has seen a proliferation of deregulation in transportation industries throughout the world; in the United States, Canada, Australia and Japan. While it is easy to view the European liberalisation of civil aviation as a latecomer to this trend, it takes place in by far the most difficult environment thus far. All previous deregulatory efforts have been solely domestic in nature. Even where trade between nations has been liberalised (such as in the North American Free Trade Agreement), transportation sectors have been explicitly excluded. While deregulation in individual countries has proceeded quickly, even though the various legislation provided for phased processes, the politics in Europe are likely to move the process along much more slowly. This expected sluggishness is due to two factors: the close association of the major European carriers with national governments, and differences in the competitive postures of these airlines. Historically, differences in competitive abilities of air carriers have led to restrictive competition rules. This is clearly evident in the unsuccessful attempts to reach a multilateral agreement on air transport at the I944 Chicago Convention. The United States with its large fleet of military transport aircraft, favoured a competitive 'open skies' international environment. Other industrialised countries, with their economies in near ruin, fearing that their aviation industries would be overwhelmed if they had to compete immediately with the American carriers, resisted. Less-developed countries, without any air transport at all, feared that they would be permanently excluded under an open skies policy. This failure to reach a multilateral agreement led to today's system of bilateral agreements, which specify the number of carriers, routes, capacities and fares for service between the two countries. Today, most countries have seventy or so of these agreements. This pattern of pursuing a pro-competitive multilateral agreement when possessing competitive advantage is also present among European countries. Those which have air carriers with high levels of productivity have pressed for such an agreement (British Airways and KLM). Those whose carriers are relatively poor performers have resisted (Alitalia, Iberia, Olympic). Even in the absence of differences in competitive advantage, countries will be reluctant to allow their national carriers to compete. Our discussion of European liberalisation begins with a description of the